Econlib

Find the Contradiction, by David Henderson

In a Reason story about a humane man who tried to save a deer’s life and got nailed by the government for doing so, Pennsylvania Game Commission Press Secretary Travis Lau admits that there’s “a good possibility the deer would have been euthanized…because deer are poor candidates for rehabilitation.”

He also says, “all wildlife in Pennsylvania is protected—no one owns it.”

Find the contradiction in that last sentence.

(4 COMMENTS)

A Hearty Henderson Salute to John Bogle, by David Henderson

As is probably well-known by now, John Bogle, the man who started Vanguard Financial, died on Wednesday. He helped save millions of people like me thousands of dollars in fees. His basic insight was that it’s hard to beat the market and so the best idea is to have a broad portfolio of stocks that roughly matches the overall stock market. That means that you don’t have to hire high-priced stock pickers and you can pass the savings on to the investor. Much of my wife’s and my IRA savings are in the Vanguard Total Market Index and we are charged approximately 0.10 percent each year for Vanguard to manage our accounts. Some companies that hire stock pickers charge 1 percent or more. That difference over time doesn’t add up; it compounds up.

Workplace Challenges, by David Henderson

One of the panelists, Susan Athey, a Stanford economist, said she had bought “khakis and loafers” to fit in with the men in the lunchroom of her first economics department, at the Massachusetts Institute of Technology. She did so even though the department was the “most supportive environment” she has encountered in her career.

“I spent all my time hoping that no one would remember I was female,” said Ms. Athey, a past winner of a prestigious award for young economists. “I didn’t want to remind people that I’m a sexual being.”

This is from Ben Casselman and Jim Tankersley, “Female Economists Push Their Field Toward a #MeToo Reckoning,” New York Times, January 10, 2019. By the way, she’s not just some economist. She’s a heavy hitter in the profession, having won the John Bates Clark Medal, which is arguably on a par with the Nobel Prize, in 2007.

I don’t know how to interpret these comments. Of course, I’m assuming that the two reporters are quoting Professor Athey correctly, and I’m assuming that their words “even though” reflect what Professor Athey said. Those assumptions could be wrong.

Reflections from my Panama Cruise, II, by Bryan Caplan

[For Part I, click here.]

Our ports were Falmouth (Jamaica), Cartagena (Colombia), Gatun Lake (Panama), Limón (Costa Rica), and Grand Cayman.  Reactions to each:

1. Falmouth had the most lavish port shopping area; I’d compare it to Reston, Virginia.  The area beyond, though thinly inhabited, was fairly poor, but with quite a few middle-class homes mixed in.  Our tour guide said that many Jamaicans spend years building their own homes so they can live rent-free (but not property-tax-free) for life.  The many promising but half-built homes I saw seemed to confirm this.  All this made me wonder: If the American poor were allowed to build rent-free shacks on public lands, how many would?

No exit?, by Scott Sumner

James Hamilton provided one of my all-time favorite quotations:

You could argue that if the Fed is doing its job properly, any recession should have been impossible to predict ahead of time.

In many cases, the disasters that strike us are unexpected.  The 1973 oil embargo.  The 9/11 attacks.  The Lehman moment.

Many of the disasters that are anticipated, somehow fail to arrive.  I recall a feeling in 2015 that China was sliding into recession.  I recall that many experts expected the Syriza government to take Greece out of the euro (dubbed “Grexit”)–thereby triggering a loss of confidence in other Mediterranean countries.  Often (but not always) these expected crises don’t materialize.

So what is the prospect for a hard Brexit?  On one level, it’s hard to see how this outcome can be avoided.  The votes for Theresa May’s soft Brexit option are simply not there.  Indeed she just suffered the worst defeat by a sitting government in UK parliamentary history, by a margin of 230 votes.  So what will happen?

Mazzucato Missing on the Margins (Part 2), by Alberto Mingardi

with Terence Kealey

This is a continuation of our earlier post here, written in response to this recent EconTalk episode on which Mazzucato was the guest.

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Mazzucato’s key idea is that the government’s pockets are virtually inexhaustible: government “can print money”, as she explains to Roberts. When push comes to shove, the government isn’t bound to scarcity: it goes to Afghanistan, it bombs Iraq, it enters the space race no matter what. Is that supposed to be an argument for government spending? Does profligacy really imply a wise use of resources?

Does Losing Less Mean that You Are Winning?, by David Henderson

I started to write a blog post critical of an article by Lawrence Solomon, in Canada’s Financial Post,  titled “Remember Trump’s supposedly ‘lose-lose’ trade war? He’s winning, China’s losing.” (Financial Post, January 11, 2019.)

I thought he was making a basic mistake. I was wrong. It was my mistake. But you will see why the title above is not ideal, given the conclusion I’ve now come to.

Here’s what I wrote at first:

He’s half right.

China is losing. And Solomon gives the economic data to support that claim. We don’t even need to look at the data: the best the data can do is give us a better idea of the magnitude of the losses. But even without the data, we would expect a major exporter to lose when a major importer of its products imposes tariffs on its products. That’s basic economics. You don’t even have to understand international trade to understand this. All you have to understand is trade, period. Voluntary exchange benefits both parties. So when a government, whether the Chinese government or the U.S. government, taxes that trade, it makes both parties to the putative exchange worse off.

But notice what I just said: it makes both parties worse off. Who is the other party? American consumers.

I guess you could parse the title of Solomon’s piece and point out that he didn’t say that America is winning; all he said is that Trump is winning. But if you read the piece, you see that he clearly meant that America is winning. If you have any doubt, look at the last sentence of his article:

Contrary to the conventional wisdom, this trade war is anything but lose-lose. This one is a big win for the U.S.

So how does Solomon support that? How could it be that, in this case, tariffs actually help the U.S. economy? Solomon does a sleight of hand. He points to how well the U.S. economy is doing, giving correct data on the low unemployment rate and the increase in employment. That is good news. But it doesn’t address whether the Trump taxes on trade are helping the U.S. economy. It simply shows that despite those taxes, the economy is doing well.

And Solomon seems to know that. Otherwise, why would he write this?

While China’s demise and America’s rise can’t all or even mostly be attributed to Trump’s tariffs, the tariffs clearly hurt China’s economy more than America’s. For one thing, the “tax” that tariffs represent has mostly been paid by China. According to a recent policy brief from EconPol Europe, a network of researchers in the European Union, U.S. companies and consumers will pay only 4.5 per cent of the 25-per-cent tariffs on US250 billion of Chinese goods, with the other 20.5 per cent falling on Chinese producers.

Hurting “China’s economy more than America’s” is not the same thing as helping America’s economy. Someone gives you and me an option. I get to destroy 20.5 cents of yours and in return I destroy 4.5 cents of mine. How much am I helped?

To be fair, I should point out that he does immediately add the following:

The EconPol report found that the Trump administration selected easily replaced products, forcing China’s exporters to cut selling prices to keep buyers. “Through its strategic choice of Chinese products, the U.S. government was not only able to minimize the negative effects on U.S. consumers and firms, but also to create substantial net welfare gains in the U.S.,” the authors determined, adding that the tariffs will accomplish Trump’s goals of lowering the trade deficit with China.

 

OK. Got it? That’s what I wrote. Then I thought I had better check the policy brief from EconPol Europe. I’m glad I did. It has changed my mind.

I hasten to add that it has not changed my mind about whether tariffs on China are a good idea. But it has changed my mind about whether Solomon can say that the United States is a net gainer from those tariffs.

I thought about losses to U.S. consumers versus gains to U.S. producers. It’s clear that the losses exceed the gains.

But what entity did I leave out? The U.S. government, which gets revenues from those tariffs.

Here’s the key paragraph of the study, Benedikt Zoller-Rydzek and Gabriel Felbermayr,  “Who is Paying for the Trade War with China,” EconPol Policy Brief, November 11, 2018:

We compute the total economic effect of import tariffs as the sum of the red and green areas in Figure 1. This can be interpreted as the monetary value that Chinese firms and US consumers would be willing to (jointly) pay to avoid these tariffs. The aggregate welfare losses in China and the US are around USD 1.6 billion. Only about one third, or USD 522 million, of these losses are sustained by US consumers (green triangle in Figure (1), while the remainder falls to Chinese exporting firms. To evaluate the total welfare effects for US consumers and firms, we have to consider potential tariff revenues. Most of the tariff incidence falls on Chinese firms. It is their declining profit margins that would pay for a large share of the tariffs, i.e. the red rectangle in Figure 1. These tariff revenues can be used to compensate for the welfare losses of US consumers. In total, the tariff revenues of the tariffs introduced by President Trump amount to USD 22.5 billion, of which USD 18.9 billion are to be paid by Chinese firms. This implies net welfare gains of USD 18.4 billion for US consumers.

The authors, by the way, are following standard cost/benefit analysis principles plus using a national rather than international framework: adding up dollar gains and subtracting dollar losses, all for American residents.

Essentially what they have discovered is what in the economics literature is called an “optimal tariff.” It’s a tariff designed to make the residents of the country whose government is imposing it better off.

HT2 Janet Bufton.

 

 

 

 

 

(32 COMMENTS)

Reflections from my Panama Cruise, I, by Bryan Caplan

I just returned from my Panama Canal cruise.  Reflections:

1. As I’ve mentioned before, cruises are in one sense a great test case for open borders.  Workers from all over the world come together to run some of the world’s most sophisticated technology and please some of the world’s most demanding customers.  Most of the workers’ lives are harsh by First World standards but great by Third World standards.  And wherever they’re from, the staff work together like Prussian officers.  It’s a marvel of multinational management.

2. As I’ve also mentioned, though, the entire cruise industry also depends on immigration restrictions.  Cruising is affordable because labor costs are very low by First World standards.  Under open borders, these well-trained, highly motivated maritime workers would take advantage of the far better job opportunities available on dry land, drastically raising the price of cruising.

3. If you’ve ever wondered if capitalism is turning human beings into machines, taking a cruise will feed your fears.  The cabin stewards, for example, spend 10-12 hours a day making every room on their watch spotless.  Then they disappear into the lightness belly of the ship, reemerging the next day to begin their duties again.  An occasional shore leave aside, they work seven days a week.

4. If you’ve ever wondered if cosmopolitanism can really function, taking a cruise will feed your hope.  Filipinos, Mexicans, Ukrainians, Romanians, Jamaicans, Chinese, Brazilians, and dozens of other nationalities don’t just “get along.”  They show more team spirit than any American workforce I’ve seen.

5. Modern American politics vanish on a cruise ship.  There’s zero social justice rhetoric or attitude to be found; passengers and crew all take severe inequality for granted.  You might think that’s because the customers are demographically Republican, but there’s also zero nativist rhetoric or attitude to be found.  Elderly American Republican guests interact amicably with foreigners of every description.  There’s no sign that they’re “making an effort” to overcome their xenophobia; they just apolitically accept the cosmopolitan world that surrounds them.  The cruise culture runs on good manners and shared humanity, not identity politics.  And yes, you really can turn the identity volume dial close to zero – which is where it belongs.

6. What does the crew think about global development in general, or immigration restrictions in particular?  I didn’t want to make them uncomfortable, so I didn’t ask… but their actions speak louder than words.  I’d guess that 90% of the workers originate from the Third World.  The fact that they’ve left their home countries behind to serve spoiled First Worlders is a deafening vote of no confidence in their societies of birth.  And when I see this massive ship running like clockwork, embrace the wisdom of their decisions.  Business isn’t perfect, but it’s far more deserving of their admiration and loyalty than the demagogic governments they’ve left behind.

 

 

(2 COMMENTS)

Second thoughts on lead, by Scott Sumner

People sometimes ask me for examples of where I’ve changed my mind. One example is lead. I used to be skeptical of the claims that lead exposure had major effects on behavior and intelligence. I was exposed to lots of lead when I was young, much more than most other kids I knew. And I didn’t notice any ill effects.

Of course that sort of anecdotal evidence is not very persuasive, and I’ve come around to the view that lead exposure probably did do a lot of damage to earlier generations.

Noah Smith has an excellent twitter thread discussing the amazing decline in violence since the early 1990s. Some of his commenters mention the internet, but that can’t be the whole story. Much of the decline in violence occurred before 2000. I’m more persuaded by Smith’s pointing to the reduction of lead exposure. While this theory seemed implausible to me when I first heard it, today it seems like the explanation that best fits the facts.

As far as property crime, I think there are other factors at work. In 1990, I used to get 500 each time I went to an ATM machine, which I spent gradually over a few weeks. So on any given day I was usually carrying roughly 300 in my wallet. Now I tend to carry about 40 and I use credit cards for most things.

I used to worry that my expensive TV might be stolen by a burglar.  By 2017, that 52-inch Samsung TV was almost worthless, so much so that when I got a new TV last year I simply gave the Samsung to the deliveryman. I worry far less about theft than when I was in college, when I feared that my Pioneer stereo system might be stolen. The market for used electronics is no longer very robust. The same is true of antique furniture, and many other items. We are moving away from an economy based on things, and toward one based on experiences. The exception is real estate, but that can’t be easily stolen.  (Are iPhones another exception?)

So that’s my theory. Less violent crime because of the removal of lead, and less property crime because there is less stuff worth stealing.

PS. The Straussian reading of this post is me bragging about how spectacular a human specimen I could have been if not for all of that lead I ingested. As Simler and Hanson tell us, there’s always a selfish hidden motive for even idealistic statements, such as “I was wrong.”   

PPS.  I first noticed the strange calm and politeness of young people in the early 2000s, when I went to a rock concert after a long hiatus.  There was no longer the feeling in the air of imminent violence.  Everyone was so . . . chill.

And yet, the Economist points out that this amazing reduction is violence is associated with a move toward sheltering our children from the dangerous outdoors:

When I was a kid, we were out and about all the time, playing with our friends, in and out of each other’s houses, sandwich in pocket, making our own entertainment. Our parents hardly saw us from morning to night. We didn’t have much stuff, but we came and went as we liked and had lots of adventures.” This is roughly what you will hear if you ask anyone over 30 about their childhood in a rich country. The adventures were usually of a homely kind, more Winnie the Pooh than Star Wars, but the freedom and the companionship were real.

These changes also help me to better understand the “reactionary impulse”.  Even when changes are clearly for the good (less violence), my gut instinct is to miss the good old days.  I try to push back against that impulse when considering social change.

(21 COMMENTS)

The Reformer’s Plight in The Great Idea, by Bryan Caplan

I’m a fan of dystopian fiction, but I overlooked Henry Hazlitt’s The Great Idea (subsequently republished as Time Will Run Back) until last December.  I feared a long-winded, clunky version of Hazlitt’s Economics in One Lesson, but I gave it a chance, and my gamble paid off.  I read the whole thing (almost 400 pages) on a red-eye flight – feeling wide awake the whole way.

The book’s premise: Centuries hence, mankind groans under a world Communist government centered in Moscow.  People live in Stalinist fear and penury.  Censorship is so extreme that virtually all pre-revolutionary writings have been destroyed; even Marx has been censored, to prevent anyone from reverse engineering whatever “capitalism” was.  However, due to a marital dispute, Peter Uldanov, the dictator’s son, was raised in an island paradise, free of both the horrors and the rationalizations of his dystopian society.  When the dictator nears death, he brings Peter to Moscow and appoints him his heir.  The well-meaning but naive Peter is instantly horrified by Communism, and sets out to fix it.  In time, he rediscovers free-market economics, and sets the world to right.

Yes, this sounds trite to me, too.  But Hazlitt is a master of pacing.  It takes almost 200 pages before any of Peter’s reforms start to work.  Until then, it’s one false start after another, because so many of the seemingly dysfunctional policies of the Stalinist society are remedies for other dysfunctional policies.  Here’s Peter arguing with Adams, a reform-minded Communist minister.

“…The hard fact is that some people simply have to do more unpleasant chores than others, and the only way we can get the unpleasant chores done is by compulsion. Not everybody can be a manager, or an actor or an artist or a violin player. Somebody has to dig the coal, collect the garbage, repair the sewers. Nobody will deliberately choose these smelly jobs. People will have to be assigned to them, forced to do them.”

“Well, perhaps we could compensate them in some way, Adams—say by letting them work shorter hours than the others.”

“We thought of that long ago, chief. It didn’t work. It unluckily turned out that it was only the pleasant jobs, like acting or violin playing, that could be reduced to short hours. But we simply can’t afford to have people work only a few hours on the nasty jobs. These are precisely the jobs that have to be done. We couldn’t afford to cut our coal production in half by cutting the hours in half, for example; and we just haven’t got the spare manpower to rotate. Besides, we found that on most such jobs a considerable loss of time and production was involved merely in changing shifts.”

“All right,” agreed Peter; “so under our socialist system we can’t have freedom in choice of work or occupation. But couldn’t we provide some freedom of initiative—at least for those who direct production? Our propaganda is always urging more initiative on the part of commissars or individual plant managers. Why don’t we get it?”

“Because a commissar or plant manager, chief, is invariably shot if his initiative goes wrong. The very fact that he was using his own initiative means that he was not following orders. How can you reconcile individual initiative with planning from the center? When we draw up our Five Year Plans, we allocate the production of hundreds of different commodities and services in accordance with what we assume to be the needs of the people. Now if every plant manager decided for himself what things his plant should produce or how much it should produce of them, our production would turn out to be completely unbalanced and chaotic.”

“Very well,” Peter said; “so we can’t permit the individual plant manager to decide what to produce or how much to produce of it. But this is certainly a big disadvantage. For if someone on the Central Planning Board doesn’t think of some new need to be satisfied, or some new way of satisfying an old need, then nobody thinks of it and nobody dares to supply it. But I have in mind something different from that. How can we encourage individual plant managers to devise more efficient ways of producing the things they are ordered to produce? If these plant managers can’t be encouraged to invent new or better consumption goods, at least they can be encouraged to invent new methods or machines to produce more economically the consumption goods they are ordered to produce, or to produce a higher quality of those consumption goods.”

“You’re just back to the same problem,” Adams said. “If I’m a plant manager, and I invent a new machine, I’ll have to ask the Central Planning Board to get somebody to build it, or to allocate the materials to me so that I can build it. In either case I’ll upset the preordained central plan. I’ll have a hard job convincing the Central Planning Board that my invention or experiment won’t fail. If my invention does fail, and it turns out that I have wasted scarce labor and materials, I will be removed and probably shot. The member of the Central Planning Board who approved my project will be lucky if he isn’t shot himself. Therefore, unless the success of my invention or experiment seems absolutely certain in advance, I will be well advised to do what everybody else does. Then if I fail, I can prove that I failed strictly according to the rules…”

Finally Peter settles on a seemingly simpler radical reform:

“Well, I can think of one more kind of freedom,” Peter said, “and I am determined to create it. That is the freedom to criticize the government.”

Adams started. He seemed to waver between incredulity and alarm. “You mean that you would permit people to criticize the actions of the government, and perhaps even denounce the government, and go unpunished?”

“Exactly!”

“Why, chief, you and I would be destroyed in a few weeks! If we allowed people to criticize us with impunity they would lose all fear of us—all respect for us. There would be an explosion of criticism that would blow us out of our seats—out of Wonworld. And what would we accomplish? Our successors would, of course, immediately suppress criticism again, for their own survival. “

What happens surprises them both.

Peter eagerly looked forward to the results of his reform. There weren’t any. None of the things happened that Adams had predicted. On the other hand, none of the consequences followed that Peter had hoped for. There was simply an intensification of the kind of criticism that had already been going on. People in superior positions continued to criticize people in subordinate positions; they continued to put the blame for failure on people who were not in a position to protect themselves; they continued to accuse people in minor positions of being deviationists and wreckers.

This was what had always been known as communist self-criticism. Peter put out still another proclamation. He ordered a stop to this sort of criticism. For a while it greatly diminished. But still no subordinate criticized his superior, and no one criticized the Politburo, the Party, or the government itself.

“What happened, Adams? Or rather, why didn’t anything happen?”

Adams smiled. “I should have foreseen this, chief. It should have been obvious. All that happened is that nobody trusted your proclamation. They thought it was a trick.”

“A trick?”

“Yes—a trick to smoke them out. A trick to find out who were the enemies of the government, and to liquidate them. Everybody waited for somebody else to stick his neck out, to see what would happen to him. Nobody wanted to be the first. So nobody was.”

Much the same happens when Peter orders free elections.  Later, he launches a seemingly plausible experiment in worker management:

“One of our great troubles, Adams, is that we are trying to plan more than any human mind can hold. We are trying to plan every industry—and all their interrelations—and all the rest. Why not let the workers of each industry control and police their own industry? That would decentralize control and break up the planning problem into manageable units.”

“The idea has possibilities, chief . . . but it might lead to results we couldn’t foresee.”

“Precisely,” said Peter; “and that is why we ought to try it out.”

[…]

“Why not try it out, then, only on a small scale? Why not apply the idea, Adams, in only one province—far away from Moscow? Why not throw a censorship around that district, so that no news could get in or out until we were certain that the experiment was a success?”

“Have you decided, chief, who our guinea pigs would be?”

“How about the Soviet Republic of Peru? That’s certainly remote enough!”

Here’s what goes down in Soviet Peru:

At the very start he found himself confronted in Peru by a problem of unexpected difficulty. He wanted each industry to be self-governing and independent. But what was an industry? Where did each industry begin and end?… At the end, when the Peruvian commissars he had appointed had finished their work, they had named fifty-seven different industries…

A temporary head was named for each industry. Someone jokingly nicknamed these heads the industry “czars.” Each industry was told to organize itself in any way it thought fit, provided each worker was allowed an equal vote. The industry could fix its own production, its own prices or terms of exchange, its own hours and conditions of work, its own entrance requirements.

Some Peruvians called the new system “syndicalism”; others called it “guild socialism”; and still others liked the name “corporativism.”

Peter returned to Moscow, promising to be back in Peru in six months to see how the new system was working. He left a secret cable code with the three top commissars to keep him informed.

Before two months had passed he received urgent cables begging for his return.

He came back to find a chaotic situation bordering on civil war. The first thing the workers in each industry had done had been to exclude anybody else from entering the industry. Each industry had quickly discovered that it could exact the best terms of exchange for its particular product by rendering it relatively scarce. There had then developed a competitive race for scarcity instead of for production. The workers in each industry voted themselves shorter and shorter hours. Each industry was either withholding goods or threatening to suspend production altogether until it got the prices it demanded for the particular kind of goods it had to supply.

Peter was indignant. He called in the various syndicates of workers representing each industry and denounced them in blistering terms for the selfish and shortsighted way in which they had “abused” the privileges he had conferred upon them. But as he studied the matter further he cooled off, and took a more objective view. He was forced to acknowledge to himself that the fault was his own. It was inherent in the system he had set up. He had allowed each industry to become an unrestrained monopoly. The more essential or irreplaceable the product that it made, therefore, the more it could and would squeeze everybody else…

He dismantled the new system entirely, and ordered the restoration of the old centralized socialism under the Central Planning Board at Moscow.

In most literary dialogues, at least one of the characters has the answers.  (“Yes, Socrates, you are quite right!”)  What’s novel about Hazlitt’s dialogues is that all the characters are deeply confused.  Even when they sound reasonable, the Complexity of the World repeatedly makes fools of them.

The Great Idea was originally published in 1951.  Stalin was still alive.  Fifteen years later, Hazlitt wrote a new introduction with a grim forecast:

The Communist rulers cannot permit private ownership of the means of production not merely because this would mean the surrender of the central principle of their system, but because it would mean the restoration of individual liberty and the end of their despotic power. So I confess that the hope that some day an idealistic Peter Uldanov, miraculously finding himself at the pinnacle of power, will voluntarily restore the right of property, is a dream likely to be fulfilled only in fiction. But it is certainly not altogether idle to hope that, with a growth of economic understanding among their own people, the hands of the Communist dictators may some day be forced, more violently than Lenin’s were when the mutiny at Kronstadt, though suppressed, forced him to adopt the New Economic Policy.

Hazlitt was, of course, thoroughly wrong.  As far as we can tell, Gorbachev never had any intention of restoring capitalism.  But Yeltsin – a career Communist – did just that.  And despite all the disappointment Putin has provoked, the former Soviet Union has seen nothing remotely approaching the horrors of the Russian Civil War.  The actually-existing dystopia of the Soviet Union practically died in its sleep, proving Hazlitt’s fiction to be the opposite of wishful thinking.

 

(3 COMMENTS)

Stephen Kotkin on Solzhenitsyn

This week, historian and author Stephen Kotkin of Princeton University and Stanford University’s Hoover Institution talks with EconTalk host Russ Roberts about the historical significance of the life and work of Aleksandr Solzhenitsyn on the occasion of the 100th anniversary of Solzhenitsyn’s birth.

Ed Dolan on Employer-Sponsored Health Insurance

[Listener Survey of 2018: https://www.surveymonkey.com/r/TCWSC3J. Vote for your favorites!] This week, economist Ed Dolan of the Niskanen Center talks about employer-based health insurance with EconTalk host Russ Roberts. Dolan discusses how unusual it is relative to other countries that so many Americans get their health insurance through their employer and the implications of that phenomenon for the structure of the health insurance market. Dolan explores the drawbacks of this structure and makes the case for what he calls Universal Catastrophic Coverage.

This week's guest:

• Ed Dolan's Home page
• Ed Dolan at the Niskanen Center.
• Ed Dolan on Twitter.

This week's focus:

• "What’s Wrong with Employer Sponsored Health Insurance," by Ed Dolan. Niskanen Center, November 6, 2018.

Additional ideas and people mentioned in this podcast episode:

• COBRA [Consolidated Omnibus Budget Reconciliation Act]. U.S. Department of Labor.
• "We've become addicted to the income stagnation story. It's probably not true," by Robert J. Samuelson. The Washington Post, December 9, 2018.
• Ed Dolan and Chris Pope Debate the Future of Health Care Reform. Niskanen Center, November 20, 2018.
• Mark Warshawsky on Compensation, Health Care Costs, and Inequality. EconTalk.
• Robin Feldman on Drug Patents, Generics, and Drug Wars. EconTalk, June 2017.
• Vincent Rajkumar on the High Price of Cancer Drugs. EconTalk.

A few more readings and background resources:

• A little history, WWII, health insurance, Truman
• Christy Ford Chapin on the Evolution of the American Health Care System. EconTalk.
• Health Insurance, by John C. Goodman. Concise Encyclopedia of Economics.
• Price Controls, by Hugh Rockoff. Concise Encyclopedia of Economics.
• Niskanen Center.
• Quality-adjusted life year [QALY]. Wikipedia.
• Job Lock. Wikipedia.
• "Uwe Reinhardt, economist who diagnosed U.S. health-care ills, dies at 80," by Emily Langer. The Washington Post Obituaries, November 16, 2017.
• More related work by Ed Dolan
• UBI: Reply to Dolan, by Bryan Caplan. Inter-blog debate between Dolan and Caplan on Universal Basic Income [UBI]. EconLog, Feb. 7, 2017.
• "Austrian Economics as Extraordinary Science,", by Edwin G. Dolan. Part I, Essay 1 in The Foundations of Modern Austrian Economics. Available at the Library of Economics and Liberty.
• A few other health insurance proposals
• "Economic Research on Direct-Purchase Health Insurance: New Models for Real Health Care Reform,", by Linda Gorman. Library of Economics and Liberty, June 1, 2009.
• "A Cure for Our Health Care Ills,", by Charles L. Hooper and David R. Henderson. Library of Economics and Liberty, June 4, 2018.
• "A Cure for Our Health Care Ills: The Supply Side,", by Charles L. Hooper and David R. Henderson. Library of Economics and Liberty, October 1, 2018.

A few more EconTalk podcast episodes:

• Robert Aronowitz on Risky Medicine. EconTalk, November 2015.
• John Cochrane on Health Care. EconTalk, November 2012.
• Michael Munger on the Basic Income Guarantee. EconTalk, January 2017.

Time Podcast Episode Highlights

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0:33

Intro. [Recording date: December 10, 2018.]

Russ Roberts: My guest is Ed Dolan.... Our topic for today is employer-sponsored health insurance, and we're basing the conversation on a recent essay you've written that we'll link to called "What's Wrong with Employer Sponsored Health Insurance". And let's begin with some basic facts. How important a phenomenon is people getting their health insurance through their employer? How unusual is it compared to, say, other countries?

Ed Dolan: It's very important. In the United States very close to half of all people who have health insurance in the United States get it through their employer. And this is a system that as far as I know is unique in the world. Certainly unique among all other countries: there are no other major countries that I know of that tie health insurance to your job.

Russ Roberts: Which is crazy. Why do you think--I know there are some different theories about it--but why do you think we have this in America?

Ed Dolan: Well, there's a little bit of controversy about that, but the predominant theory is that this was an accidental outcome of a wartime policy during World War II. During WWII there were strict price- and wage-controls to prevent inflation; and there was also a labor shortage since all the men were overseas fighting. And, so, employers who wanted to attract extra workers couldn't raise wages to do it. So they started offering fringe benefits--like, health care being one of the main ones. At first, it was ambiguous whether or not the value of these fringe benefits would be taxed as income for income tax. But, after the War, there was a decision made that they would not be taxed: they would be exempted from taxation, because people didn't want these benefits--the benefit of the income taxation--taken away from them. Since they'd already become widespread. So, that basically just stayed. Then, also after the War, President Truman made a big push to get some kind of national health insurance; but that fell short. And by the time that happened, employer-sponsored health insurance as a tax deductible benefit was so well established that nobody has really challenged it since.

Russ Roberts: There have been some people, I'd say in the last 10 to 20 years, who have pointed out that it's not a very good way to get people to be insured. And, it's ironic, as you point out. Obamacare requires it, or at least makes it expensive not to provide it. What's wrong with it? Why not--isn't that a good thing? What's wrong with having your employer provide your health insurance?

Ed Dolan: Well, it has several defects. One of the ones that gets the most attention is what we call the phenomenon of Job Lock, which is that employer-sponsored health insurance isn't portable. If you change your job or lose your job, you lose your health insurance. If you are a highly paid professional, it's pretty certain that your next new job is going to have it. But if you are working class, and especially if you are a low-paid service worker, you may be stuck if you lose your employer-sponsored health insurance. So, there is a large academic literature, and also a lot of anecdotal evidence that there are a lot of people who have jobs that they don't like, that they would quit if they could do it without losing their insurance. So, that's the Job Lock problem.

Russ Roberts: That is somewhat mitigated by COBRA [Consolidated Omnibus Budget Reconciliation Act--Econlib Ed.], which is an acronym for something--I don't know what it stands for. But COBRA is a requirement that, even when you leave your job, your health insurance is extended for at least a temporary period of time. Correct?

Ed Dolan: COBRA was an attempt to mitigate. Most people regard COBRA as a failure, partly because of its short-term nature, and partly because it's very expensive. Typically, employers pay about 3/4 of the cost of health insurance. The average cost of employer-sponsored health insurance is about 20,000, of which employers pick up about 14,000 as annual costs. And, if you go onto COBRA, you have to pay the whole cost yourself. So, you can imagine the typical working class person going from a premium of out-of-pocket cost of 6000 to 20,000--would find that a pretty big shock.

5:42

Russ Roberts: Let's go back to that 20,000 number. And, of course, the payment--when you say the employer pays 14,000 and the employee pays 6,000, that's the money that gets sent in. It's not who really pays it, in the economic sense of what we would call incidence of who the burden falls on. Presumably much of it falls on the worker in the form of lower wages. So, the 6 understates the real cost to you as a worker. The idea, though, being that the 14--that if you paid it--if you got 20,000 in wages, you'd have to pay taxes on. So, it's only--a 20,000 salary increase is only worth, say, something between, I don't know, 13,000 and 15,000 to the average worker. So, better to give that in the form of health insurance where it's not taxable, and both the employer and the employee prefer that. But that's--well, talk about why that's a bad thing. It sounds like a good thing. Which, like you say, most people are--

Ed Dolan: Okay. Yeah. It sounds like it's sort of benign, at first, because you're right that the employee bears, indirectly bears the cost of employer-sponsored health insurance. Because from the employer's point of view, what they're interested in, if they are going to hire you or not, they are interested in the total cost to them--to the company--of hiring you. And the total cost includes wages and fringe benefits, both. There's no question about that. So in that sense, the employee bears the whole burden. But, because it's tax deductible, then, depending on what your tax rate is, you get a better deal by taking part of your insurance in a tax-deductible way. But, that brings up the second real big problem with employer-sponsored health insurance, is that it's quite inequitable. It's not worth much unless you have--it's worth a lot more if you have a high tax bracket. If you are in a high tax bracket. So, if you are a highly paid professional, you get much more bang for your buck therefore. If you are low paid and paying only payroll tax, it's not nearly as good a deal. So, as a result of that, plus the fact that many low-paid workers are not offered that at all, the amount of money you get--the amount of benefit you get--is a lot less. According to some data put out by the Social Security Administration and analysis of that, for workers in the bottom fifth of the income distribution, they get benefits of around 500 a year from employer-sponsored health insurance. While, workers in the top fifth of the income distribution get benefits of about 4500. So, this is definitely a benefit that's very much skewed toward high-skilled, high paid workers.

Russ Roberts: Of course, the other part of it, which I don't think you talk about in your article, but for me has always been the--an equally important problem with this system--is that, when you are spending other people's money, you spend it less carefully. And so, when I'm getting a 20,000--or, a better way to say it; that's problem Number One. Problem Number Two is that when other people pay for what I have, I want more of it. So, I want a bigger health plan than I would normally have if I had to pay for it myself. And we say--you say tax deductible. It's really tax exempt. Right? So, I get that, in that 20,000 plan that I get, say, 14,000 is "paid by the employer"; 6,000 is out of pocket by me. But the truth is, is that the whole cost of it, I'm spared, say, 5,000 of it in taxes, at a 25% tax rate. And, as a result I want a bigger plan than I would have if I had to pay for the whole thing myself. So, we've subsidized the generosity of health insurance in America over the last so-many years. And that encourages more generous coverage; which encourages more use of the health care system; which encourages higher prices; which encourages people to pay for things they don't necessarily value as much as they cost.

Ed Dolan: Um. Yes and no. This is a problem. But there's two things I would say about that. Number One is that this problem of third-party payment is not by any means unique to employer-sponsored insurance. That's true of any insurance, whatever its source--

Russ Roberts: correct--

Ed Dolan: But more importantly, that's offset to a considerable degree by the fact that the deductibles required for employer-sponsored health insurance have been going up very rapidly.

Russ Roberts: I've noticed that. Why is that?

Ed Dolan: For example, here I'm just looking at some data here, between 2013 and 2018, the percentage of workers that had a deductible of 1000 or more went up from 29% to 48%. So, high-deductible policies are becoming almost the norm in employer-sponsored health insurance. And that does take away this, sometimes they call, what you say, the skin-in-the-game argument: If you have skin in the game, that is, if you are spending your own money, you spend less of it. I'd like to come back to that skin-in-the-game argument, by the way, because spending less and spending more wisely turn out to be not quite the same. But that would be a bit of a digression at the moment. Maybe we can come back to that later.

12:04

Russ Roberts: The other point I want to mention--well, a couple of things I want to mention. One is, we talked about this in an episode with Mark Warshawsky: When you have this attractiveness of deductible health care insurance payments, you lower observed compensation. Which is crazy, but true. That, your full compensation is often not what you remember. You tend to look at your take-home pay, or your pre-tax income; but you don't always account for the fact, and the data don't always measure your in-kind benefits in the form of either health care insurance or subsidies that you get for that. Which--their change is how you perceive your economic progress and wellbeing. And as we've devoted more and more resources to health care in the United States, that becomes increasingly important. That's one thing I want to mention. The other thing I want to mention is--and this, I just have to say this, Ed, because it drives me nuts--this whole conversation is going to be about insurance. Most of what we care about, though, is health care. There is an issue of insurance: there's riskiness, and there's worries about catastrophic costs which we'll talk about later. But the truth is, I really don't care whether people have health insurance. I worry that they have health care. I worry that they are taken care of when they get sick or have trauma. So, our focus on insurance I think is a bizarre public policy phenomenon.

Ed Dolan: Yeah. You are right about that. What we are worried about is access to health care. Not whether you receive health care, because, you know, a lot of people have--more than half the population has almost no contact with the health care system from one year to the other because they are healthy. But, it's important even for healthy people to have access for peace of mind and so on. But yeah, you are right about that. But let me wind back. What was the first part of your comment?

Russ Roberts: The first part of my comment was about compensation--our perception of compensation is distorted.

Ed Dolan: Right. Compensation. You are absolutely right on that. The fact that people get a substantial part of their compensation in the form of fringe benefits, which health insurance is the largest one, does distort--it distorts information on how pay has changed over time. I was just reading an article--as a matter of fact, it was an article in this morning's Washington Post, op/ed by Robert Samuelson, where he emphasizes that--he's talking about this doctrine of wage stagnation, the fact that lower paid workers haven't gotten a raise in 30 years. And he says that, he points out that whether or not that's true depends a lot on whether you include fringe benefits. And he includes some links to some interesting empirical studies of that. So that's very much true. Of course, there's also an argument about the cost of health care in general. And you say, your employer is spending more in health insurance; but, is the value of the health insurance to you increasing as rapidly as the cost of the health insurance to your employer? That's a different question, a more controversial question.

15:44

Russ Roberts: Yeah--the employer--I've been thinking about this a lot lately. Obviously, the employer has an incentive to try to line those up. The employer doesn't want to give you something you don't value. They'd rather give you the money and let you spend it yourself. Even if it's tax deductible or tax exempt. If you don't value it, that's not good compensation. So, they don't want to do that. But the fact that there's this disconnect--it's hard to describe it accurately. I'll just put it this way: I've always assumed that health insurance companies--as you point out, any time you have a third party payment, these issues of moral hazard and care of how you spend your money come into play, whether it's subsidized by Federal tax policy or not. So, if I have insurance, I have an incentive to use it because it's paid for by somebody else. The insurance knows that; and they try to make sure that it's money well spent: that the things I ask for insurance to cover are good for my health, and not just self-indulgence, say, and certainly not an example of fraud on the part of my medical provider. But I've started to wonder about whether that's a very good system. In particular, say, a new treatment we've been talking about, pharmaceutical pricing on the program a little bit recently and I expect to do it some more--a new drug gets developed that extends life by 3 months. It's expected length is 3 months. It's a version of a patented drug that is now about to go off patent. So, the comparison is between a generic and a patented drug. The patented drug extends life 3 months more; and it's 50 times more expensive. Who wants that? Well, most people don't want it if they had to pay it out of their--well, they wouldn't almost certainly, if they had to pay it out of their pocket. They don't want their kids to pay for it, either, if they have any care or love for their kids. Usually, I think they'd say, 'I don't want them to pay for that.' And I would think the insurance company wouldn't want to pay for it. But the legal nexus of getting the best care, and then also the question of: Let's say they approve it as a covered drug and they raise their premiums? Now, is there going to be the care taken--I mean, it's really a complex system. Who is monitoring that to make sure that the insurance company is agreeing to things that are really of value? And the answer is the employer, to some extent. There's competition among the insurance companies, but not so much. So, anyway, I worry about all these things as driving up the price of health care and not getting our money's worth.

Ed Dolan: You're absolutely right to worry about those things. And, you're certainly right to say it's a very complex problem. If we want--a couple of remarks I'd make. First of all, if we want to stick to the problem of employer-sponsored coverage, people that study these things more carefully than I do--that is, people who are actually in the industry--say that employers have a reputation for not doing these things very well. Yes, of course they should have an incentive to monitor their insurance companies and make sure they are only paying for things of value. But, in practice, employers themselves don't have the expertise to do that--number one. So, they rely on middlemen. They go to--there's a whole industry of facilitators that stand between employers and the insurance companies. So, unless you are a really, really big employer--General Motors or something like that--if you have a couple hundred or a few hundred employees, to provide your insurance you go to one of these middlemen and you contract with them to manage your health insurance; and then they in turn go out and shop among actual health care insurance companies to select a package that they think will be beneficial for you. And they take a fee of maybe 10% of the whole thing; and then the insurance company, in turn, goes out and bargains with the providers. So, right away, employer-sponsored coverage includes an extra level of middlemen and extra separation between the person who is actually spending the money and the person who is making the decisions on things--you say, on whether a new drug actually has a reasonable benefit. You may have seen in the news: there was a recent case in which 3 really big companies--Amazon, J.P. Morgan, and Berkshire Hathaway--joined forces to establish a new health care company that would manage benefits for, I don't know, several hundred thousand employees of these three companies. And supposedly the stock prices of traditional insurers fell on this news. But, again, there's some skepticism as to whether or not this will really work. As one commentator said: Just because you know an industry is under-performing and you have a lot of money to solve the problem doesn't mean you have a successful strategy. So, anyhow, yeah: That is a problem. It's a specific problem with employer-sponsored insurance. But it's a more general problem, also, because insurance companies themselves, although we think of them as big, powerful giants--and some of them are very big and powerful--they actually are in an inferior bargaining position relative to health care providers. And so, even if as an insurance company you make your best efforts to provide the most cost-effective care, it's hard for the insurance companies to do it because very often the providers are more concentrated. For example, hospitals are a very important category of providers. And even in middle-sized or large cities, you've only got one or two hospitals to deal with. And, as you probably have read, there's a trend toward consolidation and concentration in hospitals. So, even where there's good will--and I'm not saying insurance companies always have good will--even when they do have good will, they're not necessarily in a very strong bargaining position.

22:53

Russ Roberts: Well, I've probably told this story before, but--I went in once to a doctor to find out whether I wanted to spend time with--to change doctors to this person. And we chatted for 5 or 10 minutes--I made an appointment with him; we chatted for 5 or 10 minutes. And then he said, 'Well, let's do some kind of test.' I forget what it was. And it was just a sham. He just wanted to be able to bill this 30 minutes to insurance so that he would not lose money from chatting with me. If he had said to me, 'I'd like to check up'--if I had said to him I want to find out whether I want to switch doctors to you, he said, 'Well, it will cost you 100, or 250 for my time to find out,' I probably would have said, 'Maybe I need to look at some more recommendations or references.' But instead he did a bogus test--I was incredibly uncomfortable, because I knew he was just using it to scam the--it wasn't literally bogus: he did the test. But, that kind of thing--and afterwards I wondered whether I should say anything about it. I didn't switch to him. But that kind of thing, it must happen "all the time." The ability of an insurance company to monitor the performance of the thousands of doctors that are, you know, on the ground is minimal. And as a result, there are all kinds of things that become, I think, culturally acceptable to bill for. And others that aren't, because that would be ridiculous, or embarrassing or unethical. But, there's got to be creep in that experience: that more and more things are like--I mean, if you ever look at your bill after you've had an exam or a treatment or some kind of experience in the hospital or in the dental office, the things that they claim to have done to you--the categories--they've checked all the boxes and filled in all the blanks. But if you were paying for it out of your own pocket, or if the insurance company had somebody alongside you at each of these experiences, it couldn't happen that way.

Ed Dolan: Yes. Well, we're getting into some really big issues in the whole health care system, here. A couple of comments I'd make on your experience there, which is very common. Number One, yes; often these tests are offered in, we might say, bad faith by the doctors, perhaps because they know that an office visit itself is going to be billed pretty low, so they want a little extra money on the side; and they may have a financial interest in the company doing the test, and so forth. There's another side to the coin, though, which is that when you ask doctors about this, they tell you that some of this excess testing is consumer-driven. That if people go to their doctor and they want these tests. And example is the so-called PSA [prostate-specific antigen] test for prostate cancer, which has been found to be practically worthless as a diagnostic tool. But when men go in to their doctors for a check, they ask for this. They say, 'Well, maybe it's not very good, but shouldn't you do it? I'm worried about this.' So, you got that.

Russ Roberts: Yeah. We've talked about that before, the evidence on it.

Ed Dolan: But it is a problem. One widely-recommended solution is to move away from fee-for-service medicine toward bundled payments, so-called, or sometimes called value-based care, where you pay for a whole package. If we're getting into personal anecdotes: A couple of years ago I had shoulder surgery, and I went to an excellent hospital in Seattle called Swedish Hospital. And I asked them up front: I said, 'How much is this going to cost me?' And I expected them not to be able to say, because that's often the case; because they are going to bill you for every saline bag and so forth. Somewhat to my surprise, Swedish Hospital, the receptionist whom I asked this of said, 'Oh, that will cost you' and then she gave me a number in the low--it was a high number--the low 7 figures. But, that was it. And that was the only thing that my insurance company was ever billed for--was that single lump-sum payment. More of that--

Russ Roberts: Well, there is a new phenomenon--

Ed Dolan: more of that would help control the type of things you're--[?] encouraged these unnecessary tests and overpriced sale on bags and things like that.

Russ Roberts: Yeah. There is--but, and some of them--I don't mean to suggest that it's fraud: literal fraud, like a lot for the saline back. A lot of times it's just an extra test. It's also a legal environment that encourages doctors to be more "thorough." My mom went to get some checkup after a heart procedure, and they gave her an EKG [electrocardiogram], and I said, 'Mom, why did they do that?' 'Well, they always do that when I go in.' 'You just had one three days before, when you had the surgery,' or when it was. 'Oh, yeah. They're just routine.' You know, and routine means: Yeah, there it goes, just check that box, that billing. And I'm thinking, 'That's not in your interest, and it is in theirs. So, just say no.'

Ed Dolan: Let me ask you a question. How did you even dream of the possibility of a thorough discussion of these issues in an hour?

Russ Roberts: Well, for our listeners who've heard dozens of hours on this before, this just enhances what we've already talked about.

Ed Dolan: Yeah, no. For one, it's a very complicated system that has so many different problems that a discussion of one inevitably leads to a discussion of another.

29:19

Russ Roberts: For sure. And we had an episode, which I'll recommend to listeners who may have missed it, with Christy Ford Chapin on the evolution of the health care system in the United States and some of the things that were done before the large role of government, which--it always drives me nuts when people say, 'You can't have a market-based health care system: look how bad our system is.' As if we have a market-based health system. We don't. The market force is in it, but it's heavily dominated by government in all kinds of subtle and not-so-subtle ways.

Ed Dolan: Yeah. Well, you know--I don't know how long you want to stick strictly to the employer--

Russ Roberts: You can talk about whatever you want, Ed. Go for it.

Ed Dolan: the employer-based health care system, but this broader question of, 'To what extent is it possible to have a market-based health care system?' is one that I've thought about, worried a lot about at the Niskanen Center. And, a position I've sort of come down to is that you should have a market-based health care system to the greatest extent possible; but it's clear that a 100% market-based health care system is not possible. And that's true for two reasons. And both of them have to do in one way or another with the insurability of health care. The first problem is that health care spending is very, very asymmetrically distributed, and it goes by basically a--some people call it the 80-20 rule, that 20% of people account for 80% of health care spending; and in fact the top 1% account for about 10% of health care spending. So, the result of that is that there are a lot of people for whom it is true that their health care spending needs exceed their income. In fact, exceed their entire lifetime income in a certain number of cases. Now, of course, it's also true that if your house burns down, the cost of rebuilding your house exceeds your income; and we solve that through insurance. But, health care needs are increasingly uninsurable, because in order to be insurable, a risk has to be fortuitous--it has to be due to random chance. But an increasing number of health care risks are predictable on the basis of pre-existing conditions or things that are determined, testing that's determined before you are born. So, we have this combination of catastrophic risks--which are risks that exceed your ability to pay, sometimes even on a lifetime basis, not just on current income--and we have uninsurability. Between those two, they mean that if we try to have a purely market-based health care system, some people are not going to have access to treatment for serious health care needs. So we have to find some solution to that, which we've been working on.

Russ Roberts: Well, let me disagree a little bit. Or at least point out something I think people often forget. I know you don't forget it, but people often do. Which is that, if the price of something exceeds everybody's income, that thing won't exist. It will only exist if we decide to subsidize it; and we might decide to, because it's so wonderful and so glorious. We've had episodes on pharmaceutical pricing: Many pharmaceutical treatments now for cancer and other illnesses are in the 7-figures per year--say, 100,000 per year or more. And 'Well, of course, who could afford that without insurance?' Very few. Which is why it wouldn't be 100,000 if somebody else weren't paying for it. We have this crazy system right now where pharmaceuticals--pharmaceutical companies--which I'm big fans of, by the way, for their innovation; they do wonderful things. But the current system incentivizes them to reach into the pockets of taxpayers to fund--well, all kinds of good things, which we get benefits from--but their worth is unclear. Meaning: if a drug costs a million dollars even if no one can pay for it, that's not the market price. There's sort of a market in that the government doesn't intervene in how it's priced unless it gets really outrageous. But, we have this crazy world right now where they can raise the price 10, 20% on existing drugs; and if they have a case to be made for its efficacy, or even if not--even if it's just a good drug that's working--I mean, it doesn't have to be getting better--they can pass that price on through Medicare, Medicaid; and through insurance companies are going to also pass on those premiums. Now, I want to make it clear: They are a very small part of the total burden; and they save money, too. So, it's not the biggest problem that our health care system has in terms of cost versus value. But it is an example of why the current system is nuts. The same thing is true of the hospital system, which you mentioned earlier. The hospital system, which is uncompetitive--partly because we've given existing hospitals the ludicrous ability in many states to restrain competitors from entering their market--which is just--it just drives me crazy. Literally: They can sign off and veto the arrival of a new hospital. So, strangely enough, they get more and more expensive. Much of that is not paid for by you or me the patient. It's paid for by the taxpayer, or the premiums imposed over a large sea of employees. That's a crazy system.

Ed Dolan: Yeah, it is a crazy system. I'm not quite sure where you're going with this, though, because the arguments you make and the facts you point to are often used by advocates of single-payer health care. Because, they point out that countries, other countries have systems for dealing with these, let's say, getting to some of the--let's say we just limit ourselves not to countries with national health care systems like United Kingdom, but to countries that have private health care systems with government payers, like Netherlands or Switzerland or Germany; or you have private insurance companies and private providers, but government is paying the larger share of health care costs directly instead of indirectly through employer mandates and stuff. So, if you go to those countries you find out that they are faced with these same problems; and what they have is they have professional associations that analyze treatment to see whether they are worthwhile. They'll look at a new cancer drug and evaluate it in terms of what people who study these things called QALYs--Quality Adjusted Life Years. And they'll say, 'Okay, here's this new drug. How much is it worth paying for? How many quality-adjusted life years does it offer compared to the old drug?' And they'll put a cut-off; and they just won't pay for it, or they won't pay more than a certain amount. We don't have those restraints in the United States. You would think that in the abstract that insurance companies ought to insist on not paying for drugs that don't give you the benefits; but that's not true. In our government sector notoriously in Medicare, we don't have any effective controls over this. So, it's something that somebody has to do. Somebody has to be able to look at this. And you can't expect the consumer to make this choice because obviously when you are faced with cancer, you are going to grasp at any straw no matter how expensive it is. Somebody has to say no.

38:13

Russ Roberts: Well, I actually don't agree with that. I don't think you'd grasp at any straw. You wouldn't impoverish your children. And one of the great things about our system is you don't have to face that ethical dilemma.

Ed Dolan: Stop right there. That's false.

Russ Roberts: Why?

Ed Dolan: And your children--and people do this. You say you won't impoverish your spouse, you won't impoverish your children; you'll just die. That is true of some people, but it's not true of all people. People burn up their entire inheritances, leave their wives in penury, because they want to get some last, desperate-hope treatment. It's a tough area to expect people to be rational decision-makers. Let me just go back, if I could, to go off at a right angle here.

Russ Roberts: Yeah; go ahead.

Ed Dolan: There's another topic we've talked about which complicates the situation for providing market-based health care, and that is this thing you say, 'Well, if people are spending their own money, they spend it more wisely.' But, there's not very much empirical evidence that supports that. There certainly is empirical evidence, and it's been very widely studied--there's quite a large literature on this--studying how people respond to high-deductible health care. And there is--it's definitely true that when people have high deductibles, they spend less on health care. What is not at all clear is whether they spend more wisely. And most studies conclude that people are about equally likely to cut back on their consumption of unnecessary, frivolous care, and to cut back on cost-effective, preventive care or on treatments that really work because it makes them--they do things that are unwise in their health care spending. So, consumers don't seem to choose as wisely in the health care world as they do in the supermarket. That's just a complicating factor. Because, that means that some of the apparently-obvious solutions like high deductibles and, you know, Health Savings Accounts [HSAs], and so forth are not perfect.

Russ Roberts: I agree with all of that. And I didn't mean to imply that everybody would spare their children or their spouse. It's certainly the case that many people don't.

Ed Dolan: It's their children, their spouse, often who are urging them to try these things--

Russ Roberts: Want them to spend the money. Yeah, I know.

Ed Dolan:'Don't give up, Pa!'

Russ Roberts: Yeah. Yeah. No, that's true, too.

Ed Dolan: Identified it [?].

Russ Roberts: Yeah. Well, one reason I think people don't react so rationally is obviously the emotional burden of death, mortality. That does make it hard to make decisions. Although the knowledge a man's going be hung in a fortnight concentrates the mind wonderfully. At least that's what Samuel Johnson thought. Of course, the other thing is we're not in practice. We don't have a lot of practice at making these kinds of decisions. We've evolved into a culture of trusting doctors as shamans and wizards and always looking out for us. There's a certain paternalism or nanny-statism, maternalism, to that relationship that I think is extremely unhealthy for adults. But it's certainly true that we struggle to make wise decisions. I wonder if that would be as true if we lived in a world where we had to make them more often. But, that's just an unanswerable question.

42:09

Russ Roberts: Let's turn to an idea that you've proposed in this article we've been talking about, which is Universal Catastrophic Coverage. Actually, before we do that, one thing we haven't talked about that we need to, which is: If I'm not going to get employer-sponsored health insurance, what are my options? How hard is it to buy insurance as a self-employed person? I don't know the answer to that.

Ed Dolan: I do. Because I've spent most of my career in self-employment. And, before I reached Medicare age or before the ACA [Affordable Care Act] came along, I depended entirely on individual health care insurance. I am very fortunate--in fact, my wife and I have both been very healthy. Even so, toward the end of that period, the early 2000s when I was relying on that system, it became the prices for the policies I was paying--and these were essentially perfect health records--were rising rapidly. People who study those things say if we went back to pre-ACA, that the individual--if we simply abolish the ACA as some people recommend--the market for individual health insurance would perhaps no longer exist. That it would simply be recognized as an essentially uninsurable risk, for individuals. It's still insurable to some degree for group policies.

Russ Roberts: So, is the problem simply that you can't be pooled together with other people for the insurance company to spread the risk across healthy and unhealthy people?

Ed Dolan: Yes. Basically. It's the increasing predictability of health care risk, so that--insurance companies are only willing to insure healthy people.

44:16

Russ Roberts: So, let's move to the Universal Catastrophic Coverage idea. How would that work, and why do you think it's a good idea?

Ed Dolan: Our philosophy--my philosophy, which is shared by many people at Niskanen Center--is that we promote a paradoxical-seeming idea, an oxymoronic idea, even, called the Free Market Welfare State, which is that we think that government does have an obligation or a useful purpose to serve--maybe I won't even say an obligation--in providing a robust social safety net; but that that ought to be made--that it ought not to displace the market to any greater degree than necessary. Which means that we are always looking for compromise solutions which don't completely eliminate either the market or the government from solution to difficult problems. And, in the health care area one way of doing that is to try to use a market-based health care system to solve the problems that it can solve. And one way to define the problems that it can solve is it can solve problems that are non-catastrophic. That, people should pay for their own health care to the extent that they are able to, financially able to; that the government should protect them only from financially ruinous health care spending. And when I say, 'They should,' that's for two reasons: it's both in a philosophical sense that the government is there only to do things that can't be done in any other way; and secondly because if we do them through the market it's not only philosophically better: there's a practical sense that is more efficient and works better. So, the way that we try to separate these things out is to say--one way to separate these things out is through the principle of Universal Catastrophic Coverage, the basis of which is that everybody has a backstop health care policy that covers, that operates with an income-based deductible, so that you never have to pay more than a certain percentage of your income. Low-income people might face--people below the poverty line might face no deductible at all, as is the case under Medicaid. High-income people would not only face high deductibles, but they might face very high deductibles: If you make a million dollars, your deductible under your government-sponsored universal health care policy might be 100,000 a year, so that it would exclude all but a very, very few people. This system, if we used a system that was based on 10% or 15% out-of-pocket maximum as a definition of catastrophic, people in the middle class would end up probably paying a comparable share of their income to what they pay now under employer-financed insurance or ACA policies.

Russ Roberts: And the idea would be that this would be given to you by government and covered by taxes for the part that wasn't covered by the deductible?

Ed Dolan: Yeah. Right now, if you look at where health care money comes from, the government sponsors, the government pays for about half of the national health care bill. Almost exactly half. Employers pay another 20% of that, which, to my way of thinking is largely also should be counted as part of the, as part of the government's share, since the employer mandate is essentially a tax in kind on employers and then indirectly a tax in kind on workers. So, you take this 50-20-30 spread; and so we're looking at the 30% share that households now get. So, a starting point for discussion of this problem would be, say, 'Let's maintain this balance between the government's share and the private share--maintain the household's share as a constant.' The 30% happens to be just about the average for OECD [Organisation for Economic Co-operation and Development] countries. If we maintain that as constant, what can we buy for that? What we can buy for that without raising anybody's tax bill is we can buy a policy that would cover catastrophic needs of the whole population under some configuration of Universal Catastrophic Coverage. So, that would be essentially what you might call a budget-neutral or revenue-neutral version. Then, by tweaking features of the Universal Catastrophic principle--that is, by raising the out-of-pocket maximum by raising the low-income cutoff below which people get first-dollar coverage by adding maybe in income-based premium in addition to the out-of-pocket cost: by manipulating all of these things we could adjust upward or downward any of the three components--the government, the employer, or the household's share of spending.

Russ Roberts: You know, that strikes me as a huge improvement relative to the current system. It would be a radical transformation, right? If we went to a market-based--the argument you are making implicitly is, if I'm understanding it correctly, is: you don't buy insurance for oil changes; you don't buy insurance for physicals and things that are expected. What you buy insurance for is unexpected risk, unexpected events that you can't anticipate or reduce the chances of. And, for that, people would like to have--they don't want to be bankrupted by those things, you don't sleep well at night. So you need some kind of system. And I don't have any problem with encouraging a market in that kind of universal coverage, and subsidizing--again, this would be so much better than what we do now--subsidizing poor people or [?] to rich people to pay for that privately-provided insurance coverage for catastrophic risks. The advantage of that over the current system is that a private entity, assuming there was competition--if there was no competition it doesn't help. But if there's competition, you'll at least have someone with an incentive to reduce innovation that is not productive and encourage innovation that is productive. I think the biggest--you talked earlier about that my argument was pushing toward a single payer. That's true. Really expensive health care, one of the arguments that you can conclude from that is that you should have a government that negotiates price that takes into account efficacy and so on. I don't think that works very well. I do want to encourage listeners to listen to the Vincent Rajkumar episode where he talks about qualities[?] and other ways of getting a fair price. I just think that's a Kafka-esque way to get there from here. It would be much better to have a more market-based system. And if I understand what you are saying correctly, this could help us get there.

Ed Dolan: Yes. It could. And, what it gets us is a system in which--you have part of the system running on a market basis and part running on not-a-market basis. But, in a sense, to the extent that you believe that the people who are spending their own money on health care spend more wisely, not everybody spends more wisely. And not everybody would be spending their own money in the system. But it's sort of like what happens--I use an analogy of what happens in the supermarket. In the supermarket, not everybody spends their money wisely. A lot of people pull stuff off the shelf without looking at the price stickers, or without reading the nutritional labels. But some people do. And the people that run the store know that a certain significant part of their clientele do watch the prices, do clip the coupons, and so forth. And even a minority of people putting market pressure on the providers has some beneficial effect on the efficiency of the system and helps curb some of the more obvious abuses.

53:32

Russ Roberts: Yeah; of course, when you have the crazy, hybrid patchwork system we have--and we haven't talked about the state-level restrictions on health care insurance, which some people argue add to the cost because it's hard to have a national health care insurance company: each state has their own rules and regulations. You know, when you have this crazy, patchwork system it's incredibly inefficient, to the point where there are providers out there now who run a cash-only business for surgery. They post prices, just the real world--just like the supermarket. They say, 'You want a knee? Here's the cost. You want a gall bladder taken out? Here's the cost.' And my impression is they are quite inexpensive. They're not cheap: they're quite inexpensive relative to the other system, either because of competition or complexity or paperwork--I don't know if anyone has studied this. But, do you have any thoughts on that?

Ed Dolan: Yes. Yeah, I know a little bit about these cash-based services, and they are not always even for procedures as extensive as a knee replacement, but even more minor things like doctors visits or, you know, getting your flu shot, or whatever. I think that things like cash-based clinics would flourish in the system of Universal Catastrophic Care. The other thing is that without going all the way to a single-payer system, which I'm not an enthusiastic of, if you mean by that a single system that pays everybody's health care for everything, like the [Bernie--Econlib Ed.] Sanders Medicare for All system. But a single payer in the sense of administratively simplification of the system would be a big benefit, because the United States has unusually high administrative costs for health care, which somehow, because we have 6 or 7 different health care systems, and we have Medicaid, Medicare, VA [Veterans Administration], ACA, employer-sponsored, and so forth. Another thing you mentioned that I think that would be improved under Universal Catastrophic Care would be the issue of portability, which is a big problem. And portability shows up in employer-sponsored compensation, employer-sponsored insurance in the phenomenon of Job Lock. Also true, you mentioned the diversity of systems among states. It also puts restraints on inter-state mobility. It used to be that people that defended the U.S. economy relative to, say, the European economy would say, 'Well, one of the great things about the American economy is that we have this single market for everything throughout the whole country; so we have this marvelous mobility of resources within this enormous economy on 300 million people and 3 trillion dollars.' We are losing that mobility, because health care is locking people into a single state: these programs you can't transfer from one state to another. And the data there, if you look at data on the interstate mobility of the labor market, it's plunging all over the place.

Russ Roberts: Yeah, we've talked about on this program before, that some of it's the fact that rents in urban environments have risen dramatically; it's very hard to move--

Ed Dolan: Occupational licensing--

Russ Roberts: Yeah. There's a lot of barriers that are sort of below the radar that are really interesting, and sad to me. I agree with you, though: We've lost a lot of the dynamism. At least, the data says we have. Maybe people just don't like to move as much as they used to. I find that very hard to believe. I think something else has changed, and these are some of the things that--

Ed Dolan: Listen, I have a son-in-law who is a college professor, in Michigan. And he has looked for jobs, responded to job offers in other states that look attractive to him. And in every case, he's eventually had to give up on that idea of moving to a better job because of health insurance problems, because they have a special-needs child who is getting some health assistance from the state of Michigan. And that's non-portable. No other state--they can't move to another state, because they would, at best have a long waiting period to get coverage for this child's condition.

Russ Roberts: Yeah. That's not ideal. And, as we're suggesting. There are a lot of factors interacting here. It's hard to know the magnitudes of any of them. But they are all reducing the flow of people. Goods flow pretty freely across state borders, but people don't so much any more, and that's probably not a good thing.

58:52

Russ Roberts: Let's close with the political reality that your ideal system, my ideal system, which would include a large role for private philanthropic efforts, which I consider part of the market, but some people don't. Some people mean 'market' to mean profit-based. I think that's not the right way to think about it. I think we should think about voluntary systems versus top-down, coercive ones. But, the political realities are so complicated. You know, you point out at the beginning of your article that most people are happy with their employer-provided healthcare. And I'm thinking, 'Well, sure they are. Somebody else is--a third of it is paid for by somebody else. Who wouldn't like that?'

Ed Dolan: Well, actually, a large part of the reason people are happy with it is because they are healthy. So they haven't used it.

Russ Roberts: Right. That's my ideal insurance, the one I haven't used. There's a paradox. But, yeah, if you're not going to use it--if someone else is paying for it, it's even better. What do you see as realistic or optimistic signs on the horizon that some change might happen? I see the system as so complicated that I often despair of any, of marginal improvement. And marginal improvement is complicated because it's not obvious that it's always a step in the right direction, given that complexity. I like to think that technology is going to help do a bit of an end-around, and maybe Amazon, that Amazon, J.P. Morgan, Berkshire Hathaway innovation will leverage technology in a way that's innovative. And that's something they do know a little bit about, at least. What are your thoughts on that?

Ed Dolan: Well, the political situation--you can look at it as either half full or half empty. There are some discouraging things about it. And the biggest discouragement is something I call Reinhardt's Law, which is named after the late Uwe Reinhardt, one of the leading health economists in the country. And he used to say over and over again in different words that the problem is that every dollar of health care waste is a dollar of income for some health care provider. And the health care providers, as a result, have such an army of lobbyists that it's hard to get anything done. So, that is discouraging. However, I've gotten some encouragement in the Universal, trying to promote Universal Catastrophic Care. One of the things that I find encouraging is the fact that this idea has been equally well received on the Left and the Right. I've published descriptions of this system in American Conservative, Washington Examiner, conservative outlets like this--I've published descriptions of it in the New York Times and on Fox and other more liberal outlets. And it gets good feedback in both cases. So, I think it's an idea that has some--at least on a philosophical or conceptual level has some actual, across-the-aisle appeal. Niskanen Center has good contacts on Capitol Hill, and they get, at least at the staffer level, some good feedback on this concept as well. Secondly, Universal Catastrophic Care is not any single plan in the detailed sense that, for example, the Sanders Medicare for All plan is. It's a set of--it's an approach to solving the problems. A set of parameters. But, depending on your politics and your philosophy and your empirical beliefs about how people respond to incentives, you can vary these parameters widely to achieve some different objective, whether it's budget neutrality or whether it's how you spread the burden between healthy and sick people, or what's the maximum percentage of people you can expose to a personal incentive. You can vary the formula to fit your needs there. So, I think it's--although there are barriers to do anything in politics--that the barriers may be lower for this than some more radical solutions.

(31 COMMENTS)

Sebastian Junger on Tribe

Journalist and author Sebastian Junger talks about his book Tribe with EconTalk host Russ Roberts. Junger explores the human need to be needed and the challenges facing many individuals in modern society who struggle to connect with others. His studies of communal connection include soldiers in a small combat unit and American Indian society in the nineteenth century.

This week's guest:

• Sebastian Junger's Home page
• Sebastian Junger on Twitter.

This week's focus:

• Tribe: On Homecoming and Belonging, by Sebastian Junger on Amazon.com.

Additional ideas and people mentioned in this podcast episode:

• D-Day Through German Eyes, by Holger Eckhertz on Amazon.com.
• Yoram Hazony on the Virtue of Nationalism. EconTalk.
• "America needs more patriotism," by Megan McArdle. The Washington Post, July 3, 2018.
• "The Lonely Man with a Gun," by Russ Roberts. Medium, Oct. 29, 2018.
• This Is Water: Some Thoughts, Delivered on a Significant Occasion, about Living a Compassionate Life, by David Foster Wallace on Amazon.com.
• Paul Robinson on Cooperation, Punishment and the Criminal Justice System. EconTalk.
• I Am My Brother's Keeper: American Volunteers in Israel's War for Independence 1947-1949, by Jeffrey Weiss and Craig Weiss on Amazon.com.
• Above and Beyond. (2014) Film. A group of Jewish American war pilots smuggle planes out of the U.S. and fly for Israel in its War of Independence. Amazon.com.

A few more readings and background resources:

• The Best Years of Our Lives. (1946) Film. IMDB.com.
• Evolutionary Parenting.
• Disaster and Recovery, by Jack Hirshleifer. Concise Encyclopedia of Economics.
• Adam Smith. Biography. Concise Encyclopedia of Economics.

A few more EconTalk podcast episodes:

• Russ Roberts on the Information Revolution, Politics, Yeats, and Yelling. EconTalk.
• Ran Abramitzky on the Mystery of the Kibbutz. EconTalk.
• John Gray on the Seven Kinds of Atheism. EconTalk.
• Jonah Goldberg on The Suicide of the West. EconTalk.
• Leeson on Pirates and the Invisible Hook. EconTalk, May 2009.
• Yuval Harari on Sapiens. EconTalk, October 2015.

Time Podcast Episode Highlights

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0:33

Intro. [Recording date: December 7, 2018.]

Russ Roberts: My guest is journalist and author Sebastian Junger.... His latest book, from 2016, is Tribe: On Homecoming and Belonging, which is the subject of today's conversation.... Now, it's fitting--this is probably going to be the last episode of 2018, and might end up being the first one of 2019--we'll see. But, I took a rough look and counted--I probably read 25 or 26 books this year for EconTalk, and as you may have noticed, many of them and many of my guests have been a little bit different than in years past, going outside of economics, at least narrowly defined. Tribe is a pretty powerful way to end this year. It's a very short book: it's 136 pages, and the print is pretty big and the margins are pretty large, also. But it really is an extraordinary book, and I recommend it to everybody. Part of me just wants to read the book out loud. That wouldn't be so interesting. But you'll see why, because it brings together many, many themes that we've been talking about and I've been thinking about this year as part of EconTalk. So, let's get to it. Sebastian, your book starts with a crazy bit of anthropology. When America was settled by white Europeans in the 17th century, going forward into the 19th century, a lot of folks found the life of American Indians appealing; and for a lot of reasons found themselves in American Indian society, in tribes. And decided to stay there, and not go back to so-called civilization. But, very few if any American Indians found civilization appealing. Describe that phenomenon and what you've learned from it.

Sebastian Junger: Yeah. I mean, it really rankled a conservative Christian society that what they called the 'heathens in the wilderness'--sort of Satan's territory--the heathen society seemed to be more appealing to young people from Christian culture than their own culture was. And we know that because people like Benjamin Franklin and other writers and thinkers of the time would comment on it, with some real consternation: 'Why is it,' basically, they'd ask, 'why is it that our young people keep absconding from the settlements along the frontier and running off to join the savages?' as they called them. And the reverse never happens. But more interesting in some ways, even people who are captured along the frontier--my family dates back, one line of it dates back to the Pennsylvania frontier--and their little cabin in the woods was attacked by Indians in the woods and their two teenage boys were killed on their doorstep. The mother got away with a 4-year old and an infant. Escaped into a cornfield. So my family is also from that era; and that kind of situation. Often, on these Indian raids, what they were doing was trying to get captives to replace casualties of war. So, the tribal societies were constantly looking for young people, particularly young women, to sort of replenish their ranks. And, what's really interesting is that when these people are captured, often as teenagers, boys and girls both, within a year or so, if they are not re-captured, within a year or so they are often so established in their adopted society, their adopted tribe, that they don't want to be repatriated back to white society, to European society. They want to stay with their tribe--the people that captured them, right? and often killed the rest of their family. And, that was really disturbing to thinkers at the time. And, one of the explanations--I think it was Benjamin Franklin who put this forward--one of the explanations was that the basic egalitarian nature of tribal society was what was appealing. Of course, European society is not at all egalitarian.

Russ Roberts: And, of course, we have to not just talk about the egalitarian nature--it was dramatically, or even then, in in the, I would say, late 1700s, early 1800s, the lifestyle of Americans was, I think, my understanding of it was it was better than many Europeans' standard of living; but certainly way above in terms of material wellbeing the standard of living of the American Indian. And yet, they prefer it.

Sebastian Junger: Yeah. I mean, the truth is that material wealth does not necessarily lead to happiness. Doesn't lead to a sense of living a meaningful life. People want autonomy. They want respect. And they want good relations with their community. I mean, those things impart an incredible sense of wellbeing. And if you are living in a--of course, not all the native tribes were sort of at the hunter/gatherer level. But they were pre-, sort of pre-technology in the sense that we mean it. I mean, they had no metal work. They had very, very limited agriculture. They lived generally in close-knit small communities where everyone depended on each other. And there were no--because there was no real accumulation of wealth, there were not hierarchical rankings in society. There was no one who was more, who had more authority than anyone else, who could impose their will. Leadership wasn't imposed. It was won by the leader. And that, that really makes people feel good.

6:15

Russ Roberts: You also talk about--and I found this really thought-provoking--this one, brief set of remarks you make at the end of the introduction of the book. You say,

Humans don't mind hardship. In fact they thrive on it. What they mind is not feeling necessary. Modern society has perfected the art of making people not feel necessary.

And certainly in that, "primitive society," less-developed society, everybody was pretty necessary.

Sebastian Junger: Yeah. And you can see that in modern Western societies that experience a crisis, a catastrophe. All of a sudden, the hurricane, the tornado, the 9-11 attack, whatever it may be: a few things almost always seem to happen. People very, very quickly come together and share their resources. They offer cooperation and help to the group. They depend on the group for their own survival. And they, they start, very instinctively, they start putting other people first. They stop thinking about themselves. And there's a very good evolutionary reason for that. Humans are a social--we are social primates. Humans do not survive alone in nature. They die. They die almost immediately. The reason that we survive, and the reason in fact we thrive, is because we work in groups where the individual contributes to the common good and the group ensures the safety of the individual. And that basic reciprocal arrangement has allowed humans to thrive for hundreds of thousands of years. So, in a crisis, whatever the crisis may be, in a crisis--and I would argue that hunter, the hunter/gatherer economy is an ongoing low-level crisis of survival--in a crisis, people--and I've seen this in combat with soldiers--people put others first because their survival depends on the good will of others. There is no survival without the group. And so, all of a sudden, everyone is thinking in group terms. And you can see that in crisis after crisis in this country: 9/11 in New York, white, black, rich, poor--all those distinctions fell away in Manhattan right after 9/11. As a result, the suicide rate went down; after 9/11, the violent crime rate went down. People really stuck together, and they stopped making those ghastly distinctions of affluence and race that are such a curse on our society today.

Russ Roberts: For some reason, I am reminded of Les Mis [Les Misérables], both the book and the musical. The characters of the Thénardiers, who is the "Master of the House," in that song--the comic relief of that. But he's also the nasty, grasping person who always looks for a chance to exploit an opportunity. And, we don't think of him as clever. He's despicable. And it's just interesting to me how those norms that you're talking about of putting the group first--and I would add, after reading your book--you didn't mention it, but taking a risk, physical risks, to enhance the group's security or the safety of individual members. Which economists might call irrational if they are bad at defining what rational really is; and I think that's a big problem for our profession. You know, acting in a self-interested way is often equated with rationality. And there are many times in life, as I like to point out, that doing what's self-interested is wrong. It might be better for you in the short run; it might even be better for you in the long run. But, it's immoral in certain settings--not all; many not. But I think ability to recognize that, especially in a crisis, and do what's "right" is--it's deeply fulfilling.

Sebastian Junger: Yeah. I think there's two--in evolutionary terms, two things going on here. It clearly is adaptive to think in group terms because your survival depends on the group. And the worse the circumstances, the more your survival depends on the group. And, as a result, the more pro-social the behaviors are. The worse things are, the better people act. But, there's another adaptive response, which is self-interest. Okay? So, if things are okay--if, you know, if the enemy is not attacking; if there's no drought; if there's plenty of food; if everything is fine, then, in evolutionary terms it's adaptive--your need for the group subsides a little bit--it's adaptive to attend to your own interests, your own needs; and all of a sudden, you've invented the bow and arrow. And all of a sudden you've invented the iPhone, whatever. Having the bandwidth and the safety and the space for people to sort of drill deep down into an idea--a religious idea, a philosophical idea, a technological idea--clearly also benefits the human race. So, what you have in our species is this constant toggling back and forth between group interest--selflessness--and individual interest. And individual autonomy. And so, when things are bad, you are way better off investing in the group and forgetting about yourself. When things are good, in some ways you are better off spending that time investing in yourself; and then it toggles back again when things get bad. And so I think in this, in modern society--in a traditional, small-scale tribal society, in the natural world, that toggling back and forth happened continually. There was a dynamic tension between the two that had people winding up more or less in the middle. The problem with modern society is that we have, for most of the time, for most people, solved the direct physical threats to our survival. So, what you have is people--and again, it's adaptive: we're wired for this--attending to their own needs and interests. But not--but almost never getting dragged back into the sort of idea of group concern that is part of our human heritage. And, the irony is that when people are part of a group and doing something essential to a group, it gives an incredible sense of wellbeing. And so what we're losing--and we have this great autonomy from the group and from the needs of survival; and that has a lot to say for it. But, what we lose is this basic human experience of, 'Wow, I'm needed. And I would do anything for these people. These are my people. I would do anything for them.' That--ironically, that feels very, very good. When you deprive people of the chance and the necessity of acting heroically and generously for other people, you deprive them of a fundamental part of what it means to be human, what it means to have a meaningful life; and a fundamental way of feeling content and happy in your life.

13:15

Russ Roberts: Yeah. I would phrase it as we have a longing to belong. And that--it's adaptive in crisis. Obviously, that longing. But it's still there even when there's not a crisis. And we ignore that, I think, at our peril. I think we'll talk later about the political implications of this, because I think there are quite a few. So, it's not just that in crisis people get along better. They have more meaningful lives. Which is ironic. I heard this great proverb recently: I'm not going to do it well in English. It's Chinese, evidently: 'No food, one problem. Lots of food, many problems.' And--

Sebastian Junger: [?]

Russ Roberts: that's our Western dilemma, I think, to some extent. I think we have lots of problems. That's the good news. But we don't have one problem. When you have one problem and it's food, it's--life's very hard. But it has a, a vividness, a crisis and challenge and hardship, to bring a vividness that we've lost. And of course we seek it in many ways, outside of our normal schedule of life, because we miss it.

Sebastian Junger: Oh, absolutely. And you can see that sort of grouping behavior in sports fans and in neighborhood communities, neighborhood watch groups. You know, whatever. I mean, people instinctively do it all the time. I mean, they long for it. And, you know, if you go to a coffee shop, the seats are not pointed towards the wall--that's where you can have your privacy. They are all pointed towards the middle. Because people go out partly to encounter other people and have even a fleeting sense of, 'Oh, okay, we are here right now. I don't know who these people are, but we're all having coffee in the same place. And maybe I'll meet someone nice.' You know, whatever. Like, that's just wired into us. And I've got to say, like, the most connected and, um, part of a group that I've ever felt was in the most dangerous circumstances I've ever been in, which was in combat. In war. I wasn't a soldier. I was a journalist. And I was with an American platoon of combat infantry in a remote outpost in Eastern Afghanistan called Restrepo, and, the closeness, both emotional and physical, in that little outpost--it was, you know, 20-odd men and we were in combat constantly--you were never further than a few feet from another human being. Ever. Right? So, it was this wonderful feeling of closeness and belonging and being needed, and needing, and all that stuff, and all that good human stuff. But, one thing I longed for in those circumstances was just to be alone for a while. Like, 'Just give me half an hour, guys.' But, of course, to be alone in that environment means you were in mortal danger. So, that's not--you just can't go for a nice walk up the mountainside.

16:01

Russ Roberts: Yeah. We want to be careful not to romanticize some of the nature of primitive crisis situations. We had Ran Abramitzky on the program talking about kibbutz life. And kibbutz life, in its heyday--less so now, it's not its heyday, and most of the kibbutzim that were purely egalitarian have stopped doing that. There are a few left. They tend to be religious rather than the secular, early days of the kibbutz movement. But, I think it was Ran's grandmother who said, after she left the kibbutz, when people would say, 'Where are you going?' and she has a modern life, when she'd say, 'None of your business. I stopped telling people that a long time ago'--

Sebastian Junger: Right. Right--

Russ Roberts: And there is an impressiveness[?]. The other example I would suggest is, you know, small-town life has that feeling of connection. The movie It's a Wonderful Life captures that beautifully. Most of us don't want to live there, or struggle to want to live there. And, small-town life can be oppressive. People know all your business. You don't have privacy. It can be very hard for certain types of people, and hard for lots of types of people.

Sebastian Junger: Right. Absolutely. Yeah. Let's not romanticize group life. My point is that, as a species, as social primates, our evolutionary heritage is that we evolved to live in small groups of 30, 40 individuals, exactly the size of a chimpanzee troop, by the way. And that we are clearly adapted to feel at our most safe and arguably most meaningful and content in the close proximity of others. That doesn't mean there isn't stresses that come with that. Of course there are. I would argue that there's even greater stresses that come with being isolated. And, we know that as affluence rises in a society, the suicide rate tends to go up; the depression rate tends to go up; PTSD [post-traumatic stress disorder] rates tend to go up; child abuse rates tend to go up; addiction rates tend to go up. And all these things that are bedeviling America right now, they all are partly a function of affluence. And affluence brings great things, too. So, the point is, you cannot actually have it all. That's the point. You have to be cognizant of what you are giving up and getting for whatever level, whatever kind of life in society that you're in.

Russ Roberts: You find it interesting how hard it is, though, for most people to make a different choice? So, the kibbutz movement is dying out. It's not growing in appeal as people become more isolated. I rode in on the Metro this morning: everyone is looking at their phones--no one's making eye contact, God forbid. It's frightening if someone makes eye contact with you. People aren't moving back to small towns. They are staying in them somewhat because rents are high in cities that don't allow more building to take place. But, I find it fascinating, but 'How're you going to keep them down on the farm after they've seen Paree?' is the modern dilemma. With a few exceptions. The Amish, which you mention in your book, being an exception. Most people find the seductiveness of that more isolated, more lonely life very appealing.

Sebastian Junger: Yeah. I mean, I think it's possible to have a collective life in an urban setting. There's an urban/rural split which is different from a community isolation split. And so, my first marriage, which ended a few years ago, my wife Daniela was from Bulgaria. And she grew up under Communism. And the Wall fell when she was 17, something like that. And, you know, she lived in a communist apartment block outside of Sofia. I mean, in some ways the most sort of, like, impersonal, modern, sort of ghastly environment--except that it was socially very close. So, all the families knew each other. All the doors were open. The kids could run in and out of people's apartments. They--multiple generations living in one or two rooms in an apartment. I mean really close collective living. It had its stresses, but also was an incredibly rich and comforting and secure way for a child to grow up. There's always an adult around. There's always people to play with. There's an incredible sense of community. And children really thrive on that.

20:38

Russ Roberts: Yeah. Let's turn to that. It reminds me of a friend of mine who, a family of four, had a two-bedroom apartment; the parents said, 'I remember the two boys shared a room. And they would go out to the suburbs to visit their friends; and they would come back'--the boys were, I think about 8 or 9 years, 10 years old at that point, and they would say they felt sorry for them, the people out in the suburbs. 'Why?' 'Well, the kids have to sleep by themselves.' In your book, you mention that in passing to some extent; but it's more than just in passing that we raise children in a way--in the West--that's very different from our evolutionary heritage.

Sebastian Junger: Yeah. You take a baby chimpanzee and put it in a cage by itself without its mother, and it will go crazy pretty quickly. I mean, it will develop obsessive, very, very anguished behaviors, really, really quickly. The young are vulnerable. They are vulnerable to predators. And they instinctively know that. So, a young child--I mean, that's how[?] I grew up--and a young child is put in a room by itself in a dark room at night. It knows--it's going to get eaten. It doesn't know that it's not in the jungle. It has no idea that it's in a suburb. The child is a year old, or whatever; and all of its wiring is telling it, like, scream till help comes. Because you are really vulnerable right now. What I tell people is that you really should--you should act with your children, in terms of sleeping arrangements and closeness and proximity and all of that--act with your children at home as you would if you were camping in the wilderness. Like, if you were camping in the wilderness, you wouldn't put your child in another tent--

Russ Roberts: 30 feet away--

Sebastian Junger: Right? No. The child would be with you in the tent. And if you tried to put the kid in another tent, it would be unhappy. And you guys wouldn't get any sleep, either, because you'd be worried. Right? And just the fact that you live in a safe--a physically safe environment--doesn't mean it's emotionally safe, and doesn't mean that that separation is, in evolutionary terms that it's psychologically sound. So, people generally sleep in groups. The bigger the group you are with, the safer you are. I mean, I've gone camping in the wilderness alone. And you don't sleep very well.

Russ Roberts: It's not fun.

Sebastian Junger: It's not fun. Every crack of every twig, you wake up. I sleep great in the middle of a platoon in combat on a combat operation. No problem, right? I've got 30 well-armed guys around me. No problem. The physical threat is way less disturbing. The real physical threat is way less disturbing in a group than the imaginary threat is disturbing when you are by yourself in the mountains of New Hampshire.

Russ Roberts: Well, there's a lot of advice you get as a parent when you have your first kid. And then, when you continue to have kids, people still give you advice. And, sleeping is a big, big issue for most parents, how to deal with it. There's not a lot of good scientific evidence on it. There's not a lot of good randomized control trials. People run their own, and they are of course flawed by what the kid ate that night and whether there's lightning, or whatever. But, I thought that the most interesting casual piece of evidence that you provide in the book, and I'd never thought about it before, is infants' and children's' attachment to a stuffed animal. Which I always--I hadn't really thought about. It's like, 'They like stuffed animals. They like animals. Oh, what's weird about that? They like animals.' Maybe it's [?].

Sebastian Junger: Yeah. I mean, Anglo-, Northern European, English society is really the only society puts children, shuts children in dark rooms by themselves to try to go to sleep. And that started pretty recently, a couple of hundred years ago. This isn't in my book, but I heard this since my book came out: It was the gin epidemic in London the 1700s, where people were going to bed drunk and sort of rolling onto their children and crushing them, that got doctors saying, 'Look, you should put the kid in a cradle. You should put the kid in another room.' To keep them safe. Because the doctors couldn't get people to stop drinking. So, the truth is: If you are not overweight, if you are not on sleeping pills, if you are not drunk, if you don't smoke cigarettes, if you are clear-minded and healthy, you will not crush your child in bed. Right? If you did, it's a wonder that we would have, that the human species would have survived. Right? Like, here we are. Clearly, co-sleeping couldn't have been a mortal threat to the young. And there's a wonderful website called Evolutionary Parenting that talks about our evolutionary origins and how do we incorporate norms that have been around for hundreds of thousands of years in terms of parenting--how to incorporate those norms in a healthy way into a modern society where, whatever: we have to deal with the world we live in. And, it's an amazing website, and they talk a lot about [?] being and all that stuff.

25:51

Russ Roberts: Well, let's come to what seems to be radically different topic, and yet you tied them together in the book. Which is, PTSD, Post-Traumatic Stress Syndrome. The horror that people can go through after a crisis, certainly after war. And I just--I just read a fascinating book called, I think it's called D-Day Through German Eyes--

Sebastian Junger: Oh, wow--

Russ Roberts: and it's a set of 1st-person accounts of the landings on D-Day from the German side. Which nobody pays any attention to--

Sebastian Junger: of course--

Russ Roberts: it's a loss[?] for starters: German soldiers don't have a lot of emotional sympathy in the last 60 years. But there are a set of very beautifully interesting coincidences. These interviews got done in the 1950s--ten years after D-Day--by a journalist who had interviewed them in 1944, right before D-Day.

Sebastian Junger: Wow.

Russ Roberts: So, 10 years later, this man comes back and--I have to say, I have a little bit of skepticism about it, because their accounts are so poetic and powerful, I just, I wonder how--

Sebastian Junger: You want to hear the tape.

Russ Roberts: Yeah. I'd like to hear the tape. But, put that to the side. It is--any account of war has, in the modern era and in the past as a matter, has horrific accounts of things that human beings can do to each other with weapons of death. And this is particularly powerful because it's extremely vivid. It's detailed and graphic. And, it's not from the people you are sympathetic to. And it's still unbearable. A lot of these were--I'm just going to mention in passing, because we are on the topic, but it's, it ties into the episode we did with your Yoram Hazony about Nationalism versus a more universal approach. One of the stranger parts of this, of these accounts, is that many of the soldiers were surprised that the allies were angry at them and fought with such ferocity. Because they saw themselves, they had been propagandized so effectively to believe they were defending Europe; and that they were part of something good. They didn't see the films that we saw.

Sebastian Junger: Right--

Russ Roberts: They didn't--in fact, they talk about an unimaginable thing. In all places, some of the prisoners get sent to Idaho. And they are talking about how incredibly well-treated they are, and how good the food is, and how guilty they feel because they know people back in Berlin, their relatives, are eating rats. And, he said, it was great until they showed the films. And they said, the interviewer said, 'What films?' 'The liberation of Auschwitz.' And when they saw what was going on with the concentration camps--first of all, they said all the American guards stopped talking in them. They wouldn't--they wouldn't--they weren't cruel. They just stopped talking to them. Stopped being friendly and treating them normally. And they had an inner debate about whether they were propagandized, whether they were effectively Photoshopped, because they were so horrific. And a couple of them said, 'No, the SS [Schutzstaffel, or Waffen-SS]'--that's really--so that's really powerful. And if you had lived through that, on either side--and you can watch the poor man's version, you can watch the first 5 minutes of Saving Private Ryan, and get the most trivial flavor of what this about. And you could understand: That would be very horrible. You can understand why survivors of concentration camps and Auschwitz and of the Gulag in the Soviet Union never talk about it. Because they can't. It's a classic thing in Jewish circles that children of Holocaust survivors never hear one thing about what they went through. So we all understand that. And yet, your book--sorry for the long intro--your book gives a very different take on why someone coming back from a horrible experience like that struggles to reintegrate into normal life. So, talk about that.

Sebastian Junger: Yeah, well, first of all, understand that our evolutionary past must have been filled with trauma and horror for individuals. And, if trauma was psychologically incapacitating for a majority of people for most of their lives, the human race would have died out. Right? You need someone around--after the lion attacks the camp, someone is going to have to go hunting the next day. And if they are in bed with PTSD, everyone is going to starve. So, clearly, as a species, we are wired to adapt to trauma pretty quickly, to recover from it pretty quickly. Trauma usually happens to groups of people. I mean, throughout human history. Because people live in groups. So, when trauma happens, it's often to a group. But then, recovery from trauma often happens in that same group. And what seems to be--like, if you take a rat and you traumatize it by exposing it to a cat in a cage, and you save it before it's killed; you take that rat and you put it into a cage by itself, the trauma reaction that it has will never go away. If you take a rat and expose it to a cat and save it before it's killed and put it into a cage with other rats, within a week, the behavior of the traumatized rat is indistinguishable from the other rats. So, I think what's happening in modern society is that people are going to war in a group; they are getting traumatized in a group--and, keep in mind, only about 10% of the U.S. military is exposed to combat. So, we're talking about that 10%. They are exposed to trauma in a group. And then they come back. And all of a sudden they are dispersed to their communities, which often are not very cohesive. And they are filled with people that didn't experience combat. And, you know, Auschwitz survivors don't talk about Auschwitz: They talk about it with other people who were in Auschwitz. Right? So, soldiers are coming back to a group of people who didn't go through what they went through. So, of course they are not going to talk about it. And, the thing is--I get this, too--I've lost some very, very close friends who I was in the war with. And I don't like to talk about war because you talk about it for more than 3 minutes, you are going to end up talking about people who love who died. And that, and no one likes to cry in public. And that's what happens, if you have a real conversation about war. So, they avoid it except when they are with each other. And, my--the woman I'm married to right now is the youngest of 12. And her father was 55 when she was born; and he fought his way through the entire, all of WWII, from North Africa, Sicily, Italy, D-Day on the South Coast of France--most of it on foot. He was combat infantry lieutenant and a captain. Wrote just a ghastly number of letters to parents. I mean, that was probably the most traumatic thing for him in the war, was writing those letters. You know, young men under his command--

Russ Roberts: kids--

Sebastian Junger: Kids who were killed. Yeah. Young men under his command. He was in his late 20s, and the boys he was commanding were 17. And he would have to write their parents. I can't even begin to imagine any loss--his entire platoon, over and over again, because they kept getting chewed up. And they'd replace them with new guys; and those guys would get killed. And on they went. And we ran out of--basically, the Germans ran out of tanks and men before we did. That's why we won the war. At any rate: The whole damn thing right into Austria. And he came back to Wisconsin, to Kenosha, Wisconsin, and all his 6 brothers had all also served; and they all lived within a few blocks of him. And I'm sure every man in that neighborhood had served. And even the people that didn't serve, the families, they all--there were enormous sacrifices that were made by the public during that terrible time. And, you know, of course he was radically altered by those experiences. But he wasn't incapacitated. Right? He was the Mayor of Kenosha; and he ran a bank. You know? And I think he, in terms of honor and all that stuff--I don't know. He passed away--I never had a chance to meet him. But, I'm guessing that he saw his service to the community as the Mayor and in running this small community bank, he saw that as just as important as his service overseas fighting the Germans. I'm guessing that in terms of sort of honor and dignity and service to the country, he didn't draw--they are very different activities. But in terms of what the nation needs: Thank you for your service. I mean, we should be thanking school teachers for their service, in some ways. You know, I mean, it takes everybody to run this thing. So, I'm all for saying, 'Thank you for your service,' but what I would say is let's understand that it's not just soldiers. There's an awful lot of good people who are working very, very hard to keep this thing going.

Russ Roberts: Yeah; you talk a number of times in the book about that phrase, 'Thank you for your service,' which has a--it's supposed to add dignity, I think, to the status of a veteran; and in some ways it's unbelievably condescending. I say it a lot. I say it when I see soldiers; I say it when I see policemen, policewomen. But, it's cheap talk, to a large extent, for obvious reasons.

35:07

Russ Roberts: What I want to focus on, though, in this conversation about returning veterans is--there are two things, it seems to me. One is, the society you return to as a, say, an America, is an individual, somewhat isolated--depending on your choices, but it can be very isolated and lonely. And the way I would describe it is potentially emotionally thin. A part of what we're talking about is missing--that camaraderie, the combination of doing something with people for a cause, something that's higher than yourself; depending on others, the way you talked about earlier about the need to be needed; and the vividness of everyday life. And, to come from that--even if you didn't have to endure horrible trauma--to come from that to the comfort of a life that most of us get to enjoy, which I really love--my life--it must be very powerfully difficult.

Sebastian Junger: Yeah. I mean, one of the things about combat is that even the smallest details can have catastrophically large meanings. So, if you tie your shoelaces or not, it's not really a big deal in society. If you trip on your shoelaces in combat, you might get killed or the guy next to you might get killed. So, for example, at night: Often the attacks would come early in the morning, and so you'd--we were up on this rocky hilltop, and if you got overrun, you didn't want to be running down the hill in your bare feet: it was pretty rugged terrain. But you also didn't want to be trying to tie and untie your shoes for 5 minutes during a dawn attack on the outpost, right? So, what I did, and think a lot of other guys did this, too, is that you would tie your boots but super-loose, so that the laces weren't trailing on the ground where you could dive your feet into them in a moment. Right? And be up and running, even if you were in your underwear. You could be up and running in seconds. That's just your shoelaces, right? And every single thing, every article that you own, everything you do in combat, potentially can make a difference in whether you survive or not. And that gives existence. And the things of existence: they literally, the physical world around you gives it an almost sacred glow. Because it all has to do with your survival. And it gives you a, almost a kind of Zen appreciation for--the moment-by-moment, the circumstances of your existence.

Russ Roberts: The mundane isn't mundane any more.

Sebastian Junger: Yeah. Exactly.

Russ Roberts: Nothing is mundane.

Sebastian Junger: So these supposedly trivial objects suddenly are sort of glowing with importance. Everything you do, you think about and examine, ideally. And your connections to other people are your ticket to survival. And to be connected to other people, you have to act well, too. Right? You can't be selfish, cowardly, and a son-of-a-bitch. Right? You'll get kicked--like, whatever. You will not be part of the platoon. Right. So, those sort of norms of like, 'We're up against it. Everyone better act well. We all need each other.' That--it's a very ancient human adaptation. And when people go through it, it makes them feel very, very good. And they really miss it when they have to give it up. And so people experience, soldiers experience, coming back, as this: Oh, suddenly you have great sort of plentitude of material, of possessions; and they are safe and all these [?] nice things. But yet there's poverty of human connection. And that's the thing that actually makes, determines whether people feel good or not. And that's the thing that they give up. And there's a wonderful movie called The Best Years of Our Lives, about veterans returning from WWII--

Russ Roberts: Fredric March, I think--

Sebastian Junger: Yeah. Amazing. Amazing. And, so they land, these guys get to know each other in the transport plane; and they land at the airfield; and they decide before they disperse to their homes, are they going to get a taxi? And they share a taxi. And they are on their way. And of course they pass a bar. And like, 'Hey, let's just stop and have a drink?' They have a drink. They immediately get into a bar fight. They get back--so, their families don't know they are coming, right? There's no Facebook; there's no cellphones. There's nothing. Like, these guys would come home unannounced, and come walking up their street. Right? Which probably was interesting sometimes. And complicated. But, that's how it worked. So, then they drop one guy off. And then they get to the second guy. And they pull up in front of his house, and he doesn't want to get out of the car. And he goes, 'Can we just have one more drink?' And his buddies are like, 'Listen, your family is in there. They don't even know you're in the country.' Like, 'You have to go home and start your life.' And he takes a deep breath, grabs his bag, takes a deep breath and says, 'I feel like I'm about to hit a beach.' I feel like I'm about to land under machine gun fire to take an enemy position: that's what going home felt like to that guy. So, this is not a modern problem. I would say it goes back thousands and thousands of years.

40:16

Russ Roberts: You talk very poetically in the book about how people adapt to those crisis environments, despite their challenges. During the Blitz in London, during the bombing of civilians in the City of London, the British government was afraid that people were going to get hysterical, if they were bombed every night. Very reasonable thought, it seems to me. And yet, as you point out, people very quickly adapted to spending evenings in the Tube--in the subways of London, and makeshift bomb shelters, and other things. And, people died every day. Not in the numbers that people [?], but people died every day.

Sebastian Junger: Yeah. They lost 30,000 civilians. So, 9/11 times ten. Right? And over the course of 6 months. And, yeah, the government was worried about mass psychiatric casualties. But, on the contrary: Admissions to the psych wards went down during the Blitz. And then back up when the Blitz stopped. Right? What it seems to be is that if you give people an urgent task, it gives them the opportunity to stop thinking about themselves. And when you do that, you cut short this sort of awful feedback loop of something that is called anxious rumination: If you give people enough--troubled people. I mean, people who have things on their mind. If you give them enough space to think too much, they think themselves into a circle, and they get more and more anxious and depressed. And so what a crisis does is pops them back into the present moment. And again, that sort of Zen idea, like, you are in the present moment right now. Be here right now. It pops them back into that, and they can forget about their personal troubles. One British official said in amazement, 'We have the chronic neurotics of peacetime driving ambulances.' That's what happens.

Russ Roberts: Yeah. There's a wonderful book called My Brother's Keeper, which is about American pilots who went to Israel to fly the early planes of the Israeli air force in 1948. Which were horrific. Horrible, horrible planes. I think they got them from like, Romania. I can't remember right now. They were literally dangerous, the planes. And they were primitive; and they didn't work well. And they didn't have supplies. And, these were people who had just been in a war 3 years before. And when I was reading the book--and there's a really nice documentary made about these soldiers, by Nancy Spielberg; the book's written by Jeff Weiss and his brother, I think it's Craig. But in the interview it says, 'Why did you do this?' Now they are 60-, 70-, 80-year-old men. And their answer is, they say things like, 'Well, I have a Jewish identity. I wanted to do something for the Jewish people.' But, part of it was: They missed it. They missed the risking their lives. It's hard for us to understand it.

Sebastian Junger: There's a great author, a veteran, combat veteran, marine veteran, named Elliot Ackerman. And he's coming out with a book in a few months that I just read. And he goes back to--you know, he was in Iraq, and Afghanistan. And then he got out of the service. And so then there's a civil war in Syria, and he goes back--not to fight it but to cover it as a journalist.

Russ Roberts: Yeah; journalists have this challenge, too.

Sebastian Junger: Yeah. So he described the war in the Middle East as--he described going back there and his interest in the Syrian Civil War--he described it as the interest one has in an ex-girlfriend that dumped you. Like, 'How's she doing now? I want to just check up and see: Does she have a new boyfriend?' Like, 'What's going on with her?' Right. That was him going back to Syria, or to Southern Turkey actually, to just sniff around and see what it felt like again.

Russ Roberts: Yeah, we did an episode with Paul Robinson on the norms that emerge in these types of stressful situations. And, economists I think are prone to talk about the self-interested part, and the urge to, say, get a disproportionate share of a limited amount of food in a crisis. That gets punished very quickly. And, you talk in the book about how--and you need the police to take care of people during the Blitz. They don't need a handbook. People very quickly figure out what's right or wrong, and the group enforces it very quickly.

Sebastian Junger: Yeah. I mean, serving yourself at the expense of the group is a mortal sin. And in human society I think it was quite often punished with death. You know, you are hoarding drinking water and crackers on the life raft while everyone is dying--like, you are probably going to go overboard. Right? No one needs someone like that. And it's really interesting, because these--you know, these human norms aren't called upon very often in modern society, because technology and the Industrial Revolution has solved a lot of those immediate survival problems. But, once in a while there's a crisis. And even when there isn't a crisis, Hollywood--I mean, one of the things we do is we love to watch movies about communities where people are, communities that are facing a crisis. And we want to see this story told over and over again, of people, ordinary people, acting well in a crisis. We love that story. It's like a bedtime story for adults. Right? And I did some research--it's not in the book, but I did some research about this, because I felt that Hollywood movies are maybe our version of folklore, of tribal myths: It's what we have, as a mythology. And so I thought, 'Okay, let's look at the roles in a disaster movie,' whether it's the Martians invading or an earthquake or whatever it is--whatever Hollywood cooks up. What are the roles that people take on in these films? Because I felt like the scripted roles would actually reflect cultural values. And so, I found a company that does, like, market research, and they show films and get people to respond to films, and they tell the ending--whatever; it's Hollywood business. So, I talked to them about these sort of classic roles in these films. And, you know, of course, they will advise the studios to change characters or change endings depending on what people want. Well, what people want is--and this is going to be very un-PC [un-Politically Correct]--but this is what the audiences say they want. They want, if there's a physical threat to be countered, they want a man to do that. Right? A trustworthy, upright, good, courageous man.

Russ Roberts: Jamie Stewart[? Jimmy Stewart?]. Tom Hanks.

Sebastian Junger: Right. They want a woman, associated with him, who is sort of dealing with the group. Right? They are not literally with a machine gun facing death, whatever. But they are dealing with the group dynamics, and tending to the wounded. Which is equally important. Right? So there is no hierarchy of importance here. But one very common character in this is the selfish guy--

Russ Roberts: Right. It's the Thenardiers, yeah: that's the Master of the House--

Sebastian Junger: There is always a guy. And they always end up falling into the pit of lava or getting eaten by this sabre-tooth tiger or whatever. Like, that guy, the guy who puts himself before the community, always dies. And then there's a fourth--there's a final fourth character, very common, is the husband who didn't act well: is on the outs with his wife, his wife and kids; and he's been cast out for bad behavior. And then the crisis comes, and he comes home and saves the family and saves the day and she takes him back. And that's like the eternal[?] human story that we all love to hear told.

Russ Roberts: It's Star Wars. Harrison Ford in the first Star Wars--the selfish guy who doesn't do his duty, is irresponsible. But he comes back.

Sebastian Junger: He comes back.

Russ Roberts: And that's the right thing.

Sebastian Junger: Right.

48:03

Russ Roberts: So, let's try to put this in a bigger perspective and think about some of the issues that we've been thinking about in this program about modernity, the Enlightenment, progress. You know, we had John Gray on here talking about there isn't any progress: We have material progress but socially we are struggling--as your book really is, when he says struggling, it's the nature of human beings. He would argue that we've made no progress on those fronts. And you are suggesting, actually, we're kind of falling behind a little bit. I want to read, rather a really beautiful summary of the way I've started to think about these issues, for better or for worse, having been a tremendous optimist for most of my economics career. Now it's a combination of life, age, 2018 , I don't know--reading too many of the wrong books. Anyway, here's what you say:

There's no use arguing that modern society isn't a kind of paradise. The vast majority of us don't, personally, have to grow or kill our own food, build our own dwellings or defend ourselves from wild animals and enemies. In one day we can travel a thousand miles by pushing our foot down on a gas pedal or around the world by booking a seat on an airplane. When we are in pain we have narcotics that dull it out of existence, and when we are depressed we have pills that change the chemistry of our brains. We understand an enormous amount about the universe, from subatomic particles to our own bodies to galaxy clusters, and we use that knowledge to make life even better and easier for ourselves. The poorest people in modern society enjoy a level of physical comfort that was unimaginable a thousand years ago, and the wealthiest people literally live the way gods were imagined to have.

And yet.

And that "And yet" really just blew me away. Because that's the way I've started to think about things. We've got, as listeners know, I think it's totally misunderstood what's happening to the standard of living to the average person in America in the last 50 years. I think it's gotten a lot better. Recently I had an essay on that on Medium--we'll put a link up to it--it's not just the rich; it's the average person and poor people. I think life is just better for almost everybody--not everybody but almost everybody. And yet. And I think what your book reminds us is that meaning doesn't come from stuff--which we all know. I mean, it's a cliché of clichés. We know that. And yet we strive for stuff; and we over-strive for stuff. We spend too much time on stuff. And, you don't talk about this, but I think one way to think about your book is: We want to be in a tribe. We need to be in a tribe. And, I think there's a temptation in modern political discourse to decry tribalism. I have. But it's naive to think, 'We just need to get people to stop feeling that way because it's unhealthy.' It's who we are. And it's where we get, to a large extent, our sense of meaning; and it's certainly where we get--sometimes we get our sense of meaning from hating people who aren't in our tribe. And that's just extremely unhealthy, to pretend that's just something we're going to--I don't know, change face: 'We just need to regulate Facebook so this tribalism thing'. We have some serious issues. I don't know if talking about it helps, but we have some serious issues.

Sebastian Junger: Yeah. But I think technology and mass communication have made connection and division easier. You can post something on Facebook and you are reaching thousands of people instantaneously. That's new in human history. Until recently, the number of people you could persuade to your viewpoint was limited to the number of people who could hear you when you were shouting. Right? And those would be the people within your immediate community that you grew up with, some of whom you're related to, who you share an inherent interest with of survival and that you identify with. And there's them; and then there's outsiders. And it's all very, very simple. But with a modern, connected world, living in a nation of--340 million, is it? Something like that? You know, that's an experiment that's never been tried before. And so when you say that tribalism is hurting America--and I agree--the problem--yes and no. The problem is how you define the tribe. If we're going to bother living in a nation of 340 million, we have to define our tribe as that nation. Because we're not going to get rid of the tribal impulse. It's served us well; it's allowed us to survive. It has arguably distasteful or even toxic outcomes. It also has incredibly admirable and moving and generous outcomes--in equal measure. It's not going anywhere. So, if we're going to be tribal, we need to think of this nation as our tribe, or we should just stop this crazy experiment: It's been great but we should get out, and divide up into the groups that we consider our tribe, whatever that may be. I think that's a horrible, sad idea. And I think we can do it, but one of the things that has to happen is that we have an expectation--I mean, there's free speech in this country. It's one of our most precious liberties. You cannot take that away. But that doesn't mean that speech can't be censured--that it can't be criticized and condemned. And, when we have people who are incredibly powerful people, people we have given control of our very lives and society to, we have said, 'Take care of this problem. Society needs to be run by somebody. You've been chosen to do it. Take care of us.' When you give people that kind of power, it should not come with license to say whatever you want about other people in the tribe. And when politicians and media leaders talk about other Americans--demographic groups, political rivals, whatever it may be--not with criticism: criticism's great, right? Dislike? No problem. You don't have to like anybody. I don't care. But when you talk about those people with disgust and contempt, what you are really doing is you are communicating, 'You know what? Not only do I disagree with this person; they shouldn't even be in the group.' Like, 'They shouldn't even be in the country.' And when you're doing that--I mean, for example, when candidate Trump talked about Barack Obama as not being a U.S. citizen--I mean, just think about that. We're a country at war; we have hundreds of thousands of soldiers overseas, or tens of thousands of soldiers overseas. And someone is telling these guys and young women that their Commander in Chief actually is a foreign agent who is not an American citizen--I mean, what the hell? Right? He's free to do that because we have this wonderful thing called free speech. But the Republican Party is not free to stay silent. The Republican Party, if you sort of think in terms of national security, really must step forward and say, 'We do not espouse that notion. President Obama is an American citizen and we respect,' etc., etc. And likewise with the Democrats--the Democrats have their own [?] too. So my problem isn't so much with that kind of speech. It's that the political institutions remain silent while things like that are said. And that is a threat to our national security.

55:21

Russ Roberts: Yeah, you said it really well in the book. You said, basically--and I certainly see it on both sides. President Trump is a flamboyant figure. But, of course, Hillary called Republicans 'deplorable.' It's just not a word you should use for your political--

Sebastian Junger: Right. There's the contempt. [?]--

Russ Roberts: [?] the contempt. And, it's a high standard, in everyday life--we are judgmental human creatures. But we should demand a better standard of our elected officials. And our journalists, as well. One of the things that disturbs me about journalism today is that journalists have just given up any pretense of objectivity; and indulge in that precise emotion: Contempt. And that's just--it's not healthy. But you point out in the book: what you're really accusing people of, frequently, in those settings is treason. Not, 'I don't like your public policy. I don't think it's good for America.' But, 'You're bad for the country.' That's crazy.

Sebastian Junger: Right. Not only bad for the country: you actually are intending to harm the country.

Russ Roberts: Correct. That's your point. That's your point. I never thought of it that way; and it's exactly what's bad, I think one of the things that's really unhealthy about--there's a lot of things unhealthy about our political discourse. But the idea that you are trying to harm--that you are deliberately--not, 'Well, your policy wouldn't work out, I don't think,' but rather, 'Oh: you are deliberately trying to harm the country.'

Sebastian Junger: Yeah. I mean every society, and we are no exception--every society has to, first and foremost, take care of two things. It has to physically defend itself from enemies if there are any; and it has to keep itself together. It has to remain cohesive. If it doesn't remain cohesive, there's nothing to defend. And if there's no defense, no amount of cohesion in the world will save you from an enemy. So, you have to do both things. And if you don't, nothing else is really worth doing. And, the United States is militarily so powerful that I would argue the only threat to what we sometimes call our freedom--right--in fact, I don't think American soldiers are defending our freedom. They are defending some other very important things. Freedom is something that we gave ourselves. That's not something that can be[?] taken away. Freedom is a political contract. Al Qaeda cannot destroy our freedom, because it's self-given. Only we can do that. And the only way we can do that is through words. No one's going to come shooting their way into America and take our freedom away. Take our political process away, our liberty, our democracy away. No one's going to do that. It's not possible to do it with bullets. But it's very easy to do with words. In that sense, I feel that that kind of awful rhetoric, which, as you say, both sides indulge in, is actually a far greater security threat to this country than Al Qaeda and ISIS and all those other people.

58:23

Russ Roberts: So, a related issue, which doesn't seem related but I think it is, and it's strange that I think right before I read your book I wrote an essay about rampage killing and shooting sprees that seem to be on the rise in America. And, you wrote

It may be worth considering whether middle-class American life--for all its material good fortune--has lost some essential sense of unity that might otherwise discourage alienated men from turning apocalyptically violent.

My essay was called "The Lonely Man with a Gun." It's a man. It's almost always a man. It's a lonely man. And after the--they go to interview the neighbors: 'Oh, yeah, he kept to himself.' So it's a person who has been disconnected. There have always been people who have been disconnected. There have always been people with guns. The idea of training a gun on a bunch of strangers and killing them for--I think for notoriety. For a feeling that you matter. Listeners know I love this quote from Adam Smith: 'Man naturally desires not only to be loved but to be lovely.' By that he meant we need to matter to other people. If we don't, we're going to find a way to achieve it. I'd love it if we didn't cover these tragedies and didn't name the names of the people who did these things. That's not going to happen in a free society. So, I think we've got to think about why these happen and what needs to change. Or just accept it. Because, I think it's part and parcel of our freedom, that we allow people to live by themselves. We let people live on the street. We don't put our noses into other people's lives. It's a great thing. It's also a not so good thing--that we let people be on their own, and miserable, lonely. We say, 'It's up to you. Your problem.'

Sebastian Junger: One of the interesting things about the mass shooting phenomenon--I did a sort of limited analysis of it--there's never been a mass shooting--I mean, there's gang shootings, all kinds of ghastly stuff. But there's never been a mass shooting, that kind of intentionally nihilistic act where you kill as many people as possible before you kill yourself or get arrested--there's never been a mass shooting in a high crime urban neighborhood. They almost always happen in otherwise safe, low-crime, Christian neighborhoods--I mean, sort of like traditional America Christian, white Christian middle class towns that have very low crime. And, it's possible--I mean, yeah, correlation isn't causation--but it's possible: If you look at the breakdown, a sudden escalation in mass shootings in, I think it was the late 1980s; and then all of a sudden they tripled in 2006, right around when Facebook hit. And social media sort of took over. And social media--it connect people; it also disconnects people. And I think ultimately the net result is we should be calling it 'antisocial media.' I think it's actually terrible for human relations. But, regardless: the timing is interesting, but the rate of mass killings has just kept doubling in the last 20 years. And I would say the rate of alienation and loss of community has also done so. But it seems to be a phenomenon of comfort and affluence and served[?] otherwise safe little towns.

Russ Roberts: I want to challenge the economists out there listening--students and faculty--to think about what economics has to say about this. And I think the answer right now in this discipline is: Precisely nothing. We have these strange models where people get utility--which is a vague term to mean satisfaction or pleasure or delight or meaning--out of stuff. And I think if you are not careful, you might study that and think it's right. It is what people--it's true that people strive for things. They do like, they do generally take jobs that pay more than jobs that pay less. But, this human connection idea, and the need to have social connection, I think is the weak spot of economics. Adam Smith was really interested in it. And around 1759 it was a big part of our field. But it seems to have gone away. So, I hope some people think about that. In terms of what people care about, I think it belongs in our utility function; but I don't think necessarily that's the right way to deal with it.

Sebastian Junger: If I can jump in on that--

Russ Roberts: Yeah--

Sebastian Junger: I think I have something that might be interesting to people. So, in an environment of scarcity, which of course is the environment that the human race spent most of its history in: That, sort of compulsively acquiring, hoarding behavior or free sources makes perfect sense. Likewise, a taste for sugar--eating as much sweet stuff, as much fat--all those things make perfect sense in an environment where there's not often a lot of food, not often a lot of resources. It makes perfect sense. Like: While it's there, consume as much as you can because you don't know when you are going to eat again. Right? It's adaptive. The problem with modern society, I think, in that sense, is that we have these adaptive behaviors that are tuned to a low-resource, high-activity, high-intensity environment. We're attuned to that. Our metabolisms, as it were, are attuned to that. And now we have a surplus of everything. So, we are wiring, we'll have us continue to acquire and consume and acquire and consume. But what we're not adapted to, is a situation where there's infinite resources, and we don't know how to stop. And so, I just want to say that that's sort of like utilitarian principle of get as much stuff as you can. It has great evolutionary roots. Like, it got us here. But we are not a slave to our wiring. Right? We have to understand that's a trait that was adaptive and useful. And we have to know when it must be overridden. Or, it's actually going to start damaging us. And that's true for material goods, for sort of commercial, culture, sort of material world; it's also true for food. And at the end of the day, if that's where your energy's going, it's probably not going towards other people. And we know--psychologists will tell you--it's our connection to others that makes people live longer, have more meaningful, happier lives. Like that is what a happy, meaningful life is, is connection to others.

1:05:01

Russ Roberts: Well, listeners know that I keep the Jewish Sabbath--which is one way to insulate yourself from over-gadgeting and connecting via very sterile--I think somewhat sterile--modes of connection, social media. So I take a 25 hour break once a week. Maybe it should be longer. But be live in a time--and religion historically has played some role in tamping down and tempering both the self-interested urge and the material, the pursuit of material things. And yet, we live in a time when religion is, I think, very much on the wane. Waning and getting less persuasive to most people. And I think about David Foster Wallace's fabulous quote that 'Everyone worships.' And he says, 'There's no atheism'--this is David Foster Wallace; this offends atheists, of course. But I think what he is saying is correct: We all worship something. It may not be God. It may be beauty. It may be art. It may be your looks. It may be money. It may be various forms of addiction that we find ourselves in. We are sitting here complaining, to some extent, about the flaws of modern Western society. No one's in charge of it, of Western society. It has emerged through the Enlightenment, through our creativity, through free market capitalism, most of which I think has been phenomenal in eliminating poverty. And at the same time we've had trouble maintaining our connection to something larger than ourselves traditionally. Which was religion. And we've looked for other things. Sports is one of them. You mentioned it earlier. People are into sports in a way that, 50 years ago, people would have said, 'Well, that's not healthy. That's weird.' I mean, sports weren't a thing, really, in 19[?], fandom in sports. So, you raise the question: What's next for us? Is it--other than observing this, which is fascinating to me: Is there anything we can do about it? Anything positive we can say?

Sebastian Junger: I mean, to return, wholesale, modern society to a more communal, small-scale, connected society, you'd have to turn off the Internet and ban the car, basically. And, essentially, it would be a natural disaster that wiped out the grid. And just, and the grid stayed wiped out. And eventually we'd blunder our way back to--a more human and connected, and much poorer way of living. And so no one--

Russ Roberts: shorter life spans. Lots of negatives to be--that's the challenge here. It's the other side of 'and yet.' We'd have a lot of meaning in our life, but a lot of suffering.

Sebastian Junger: Yeah, right. Exactly. Like I said: You don't get to have it all. No one gets to have it all. But I think what we can do as a modern, wealthy society is understand the dangers of modernity and wealth. And work very hard to counteract them. So, for example, I think is--I read a story in Japan that older women--Japan is pretty hard on the elderly, I think--and older women were shoplifting so they could be put in prison and have the company of other older women. Right? That's an awful solution to a problem. Right? But, also in Japan, what they started--I think it's Japan--what they started doing is putting middle schools and nursery schools next to old folks' homes. And that the people in the old folks' homes would go visit the schools, and vice versa. And that the sort of cross-pollination--of course, you know, young children, they don't make any distinctions of race, or age, or anything. It's just how you treat them. And that's wonderful. And so that the sort of cross-pollination of youthful and older energy was great for both groups, right? So, I think society is starting to come up with solutions, small-scale solutions, that actually work, where people--there are now I think in San Francisco and New York there are buildings you can buy into, you can get a bedroom in a building that's basically a huge collective space with collective living areas and your own bedroom. And you are basically buying into a concrete village. It's basically a village of 30 or 40 people which is a typical human group in our evolutionary past. It's a village of 30 or 40 people with common areas but your own privacy. And so, people are starting to--developers are actually starting to develop buildings and develop projects that attend to that basic human need of [?] privacy and communality. You do have to balance them. No one wants to sleep in a barracks for the rest of their lives with a bunch of other people, right? But, having those common spaces where you can interact with other people--not just people that you know really well. Those are friends. People that you just kind of recognize. Like, 'Hey, how're you doing? What's your name again? Oh, yeah. Nice to see you.' That kind of connection with someone that you know is part of your group but you don't know them really well--like, people love that. That's why people go to coffee shops. I mean, everyone can make coffee at home. But they don't. They pay 5 for a coffee at Starbucks. It's partly so they can be in a small, a brief, small community.

1:10:07

Russ Roberts: One thing we haven't talked about, except very much in passing, is marriage. It's hard to believe--it's tempting to disbelieve this but I think it's a true fact, as opposed to a fake fact--in 2014, there are fewer households with two earners than in 1980. And that's shocking, because women's labor force participation has increased dramatically. So, you'd think there would be a lot more households with two people working. It's not a big difference. It's down from 33% to 31%. But that it's down at all is shocking. The reason it's down is because it's true that married women are much more likely to work than they did before; but there are much fewer marriages. So, very few--a lot more single people, people--a lot more divorce. A lot more people not getting married to start with. A lot more people not re-marrying. So those village structures and urban life for young people is very different today than it was 30 and 40 years ago when people married at a younger age, started. And, you know, marriage is kind of dying as an institution in some--it's not dead, but it's definitely also waning. As religion is. Which is just another way that we would get human contact: coming home to a spouse is another way to feel connected to humanity. Sometimes it's not a good marriage, so you are not so happy to see the spouse, maybe. But there's someone there in your life. And I really--your point about people who, your acquaintances--again, Adam Smith talks a lot about the different ways we interact with intimate friends, somewhat friends, people we recognize, strangers. And that's all part of a rich social life.

Sebastian Junger: Yeah. Right. And understand that 'community' also includes people you might not even like; but you understand that, because you need the community, you need that person. And that's just a fact of life. That you may not like the blacksmith, but every village needs a blacksmith. And once in a while you are going to have to go to him to get your axe fixed, right? And so, that experience of community--there's overlap, but it's different from sort of gradations of friendship. And so what humans--what humans are adapted to, is to be part of a community that also includes people they don't particularly like. But we all understand, 'Without this community, I'm screwed.' And so, it keeps people invested in good, basically in good, pro-social behavior.

1:12:37

Russ Roberts: One of my hopes, one of my sources of optimism, is the way that culture and free markets--they give us what we want. And if we want to live with other people and interact with other people, we'll find ways of doing that, whether it's that developer develops a building that's a little bit different or where we choose to live. Do you see any examples of that in terms of cultural norms emerging that recognize the importance of our tribal past, that help us connect to other people, that things changing that might be a little source of optimism?

Sebastian Junger: I see it all over the place. I think the whole mirage of social media is that if we followed it, it will lead to a sort of blissful community we can all be part of. I think it's a mirage and a lie. But we clearly are, at least thought we were pursuing something healthy. You know, you see in advertising--I mean, I don't have a TV [television] but when I see advertising on TV, like: You know, there's groups of people are having a good time, and being, like, nice with each other, and like drinking a beer, and over, around a barbecue. I mean, it's just this constant re-enacting of like ancient, ancient human behaviors of communal life. And it is clearly--that's, you know, you show that, and whatever it is people are eating or drinking while they are having a good communal time, people will go buy it. Because they want to be part of that experience. So, I--we see it all the time. And I think we see it because it's so lacking in a substantive form in our society. So, all that it takes--you just have to go the next step and say, 'Oh. This is actually something--I don't need Coca Cola to give me this.' Right? I don't need Facebook to give me this. I can get this. Right? But I just have to know it's something that I want. And I have to deliberately set out to try to create it. To try to make it happen. We're not going to completely restructure modern society back to some sort of small-scale tribal norm. It's not happening. We'd have to give up too much stuff. Too much good stuff. But, I think within our society, if we are at least aware of what's paining us--of what we're missing, of what we're lacking, what we're longing for--at least understand it, bring it to our conscious mind, we can seize on these opportunities where the chance presents itself to act like that, to experience that, and hold on to it. And develop it. And I think if we do that, I think it will lead, like these developers with these buildings, like the genius in Japan as putting a nursery school next to the old folks' [?]--I mean, these things will happen. And as they become norms in our society, our society will change incrementally. I really think that, not only can it happen, I think it must happen. Because clearly our society is in an enormous amount of pain. We look at the addiction rates and murder rates and suicide rates, and mental health. I mean, you just look at that list: We are in agony as a society. And we need to save ourselves. And we are only going to do that by connecting to each other.

(31 COMMENTS)

Mariana Mazzucato on the Value of Everything

Economist and author Mariana Mazzucato talks about her book The Value of Everything with EconTalk host Russ Roberts. Mazzucato argues that economists have mismeasured value and have failed to appreciate the role of government as innovator. She argues for a more active role for government in the innovation process and for government to share in revenue proportional to its role in the creation of new technology.

This week's guest:

• Mariana Mazzucato's Home page
• Mariana Mazzucato on Twitter.

This week's focus:

• The Value of Everything: Making and Taking in the Global Economy, by Mariana Mazzucato on Amazon.com.

Additional ideas and people mentioned in this podcast episode:

• Physiocrat. Encyclopedia Britannica.
• The Physiocrats: Six Lectures on the French Economistes of the 18th Century, by Henry Higgs. Online Library of Liberty. 1897.
• Adam Smith
• Adam Smith. Biography. Concise Encyclopedia of Economics.
• Adam Smith's Enlightened World.
• The 2008-2009 Bailouts and spending other people's money
• Gambling with Other People's Money: How Perverse Incentives Caused the Financial Crisis, by Russ Roberts on Amazon.com. Preorder, releases January 1, 2019.
• Russ Roberts on the Crisis. EconTalk, May 2010.
• Barry Ritholtz on Bailouts, the Fed, and the Crisis. EconTalk, March 2010.
• Neil Barofsky on Bailouts. EconTalk, September 2012.
• Some public funding examples
• Huawei. Wikipedia.
• Defense Advanced Research Projects Agency (DARPA).
• ARPANET. Encyclopedia Britannica.
• ARPA-E. Energy.gov, 2005.
• Istituto per la Ricostruzione Industriale (IRI). Wikipedia.
• Some government-funded private companies
• Solyndra. Wikipedia.
• Tesla, Inc.. Wikipedia. Elon Musk.
• SpaceX. Wikipedia. Elon Musk.
• Fraunhofer Institute.
• "Auto Industry Bailout: Was the Big 3 Bailout Worth It?", by Kimberly Amadeo. TheBalance.com, updated November 27, 2018. GM, Chrysler, Ford. U.S. stock ownership followup.
• Bell Labs. Engineering and Technology History.
• "The Ghost of Invention: A Visit to Bell Labs," by Douglas Coupland. Wired.com, September 2014.
• Bell Labs. Wikipedia.
• The Entrepreneurial State: Debunking Public vs. Private Sector Myths (Anthem Other Canon Economics), by Mariana Mazzucato on Amazon.com. 2013.
• "Mission-oriented research & innovation in the European Union: A problem-solving approach to fuel innovation-led growth," by Mariana Mazzucato. Publications Office of the European Union, February 21, 2018.
• Institute for Innovation and Public Purpose. University College London. Institute set up by Mariana Mazzucato.
• Gregory Zuckerman on the Frackers and the Energy Revolution. EconTalk.
• "Sustainable development goals: all you need to know," by Liz Ford. The Guardian, January 19, 2015.
• Robin Feldman on Drug Patents, Generics, and Drug Wars. EconTalk.
• Rejuvenating the Mature Corporation, by Charles Baden-Fuller and John Stopford on Amazon.com.

A few more readings and background resources:

• David Ricardo. Biography. Concise Encyclopedia of Economics.
• Karl Marx. Biography. Concise Encyclopedia of Economics.
• Marginalism, by Steven E. Rhoads. Discussion of value.Concise Encyclopedia of Economics.
• Capitalism, by Robert Hessen. Concise Encyclopedia of Economics.
• Free Market, by Murray Rothbard.Concise Encyclopedia of Economics.
• Industrial Revolution and the Standard of Living, by Clark Nardinelli. Concise Encyclopedia of Economics.
• Marginalism, by Steven E. Rhoads. Discussion of value. Concise Encyclopedia of Economics.
• Public Goods, by Tyler Cowen. Concise Encyclopedia of Economics.
• Opportunity Cost by David R. Henderson. Concise Encyclopedia of Economics.

A few more EconTalk podcast episodes:

• Marc Andreessen on Venture Capital and the Digital Future. Smart phones, and more. EconTalk, May 2014.
• Russ Roberts on the Price of Everything. With Arnold Kling. EconTalk, August 2008.

| Time | Podcast Episode Highlights | | --- | --- | | 0:33 |

Intro. [Recording date: December 6, 2018.]

Russ Roberts: My guest is Mariana Mazzucato.... Her latest book is The Value of Everything: Making and Taking in the Global Economy, which is the subject of today's conversation.... Underlying your book is the idea that the economics profession has misunderstood the nature of what is valuable and how to think about it, and that in turn has hampered good public policy. Summarize your argument.

Mariana Mazzucato: So, one the key points in the book is actually that we've stopped debating value. So, ironically, the concept has left economics departments and gone to business schools where the word is all over the place, in terms of shareholder value, value chains or shared value--a more trendy way to talk about it. But economics used to, basically for 400 years, actually debate: what are the productive parts of the economy, and what are the, perhaps, unproductive parts that, if they grow too large will siphon out resources. So, the Physiocrats back in the 1700s were very concerned about how the landlords of the time seemed to be siphoning out too much value compared to the value that was actually being created by the value-creators in their minds, who were the farm laborers. Similarly, the Classical economists--people like Adam Smith, David Ricardo, and Karl Marx--they focused on the value creation that occurred basically by industrial labor inside factories. And so someone like Adam Smith was very interested in the division of labor within these factories: how thinking about that division would increase productivity, growth, and hence the Wealth of Nations. And Karl Marx complemented that also with his big focus on the role of technological change and the effect that would actually have on the amount of labor required, which he thought was one of the key sources of surplus value and profits in the system through the exploitation of labor. So, he questioned whether capitalism itself would be able to reproduce itself, given what was happening on the labor side. But, just to say, the big revolution that happened, which I pinpoint in the book, was that this concern with the objective conditions of production--in other words, what was actually happening in the agricultural land, what was happening with the factories, with the machinery, with the division of labor and technological change--that then changed with modern neoclassical thinking, and the attention went to a subjective understanding of value, where value was actually basically in the eye of the beholder. So, supply and demand curves, preferences, all this focus on the individual firm the individual consumer, the individual worker--so even wages are looked at in terms of preferences workers have for leisure versus work. And what I do in the book is I don't say, 'Oh, look at today's value theory; it's totally wrong.' What I actually argue is that the debate around value has disappeared. Value itself is no longer contested. What we end up having is kind of a fuzzy, flimsy notion of value which makes it much easier for value extraction activities to actually pass for value creation [?]. That's what's new. It's not that value extraction itself is new. That was already, as the Physiocrats highlighted, happening in the 1700s. But the landlords of the time didn't pretend to be value creators. They didn't pretend to be innovators or fundamentally creative parts of society. They just said, 'Give me your money.' That's why, by the way, Adam Smith called rent 'robbery' and landlords 'thieves.' They were seen as basically earning income by doing nothing. So, rent itself, as a category, rent as an economic category, was seen as unearned income. Whereas today that concept is seen just as an imperfection towards a competitive price. But, so, this big revolution of making value go from an objective to a subjective category, but in the process, economics students no longer are being taught that there's actually different notions of value, and that this fundamentally affects how we measure GDP, for example, or how we think about governance in particular types of organizations, in business or elsewhere. Then it makes it very difficult to steer economies in ways that actually produces innovation-led [?] growth, sustainable growth, inclusive growth, which everyone seems to want.

| | 5:09 |

Russ Roberts: So, where we agree here is, I think--let me restate the part of your--let me try to restate your argument in a slightly different way. I think a lot of capitalists--free market people like myself--would argue that profits are earned. To get a profit you have to make something of value that people like, and if they are willing to pay for it, obviously they like it--that's the subjective part. And I think we agree on that. Where we also agree is that there are some profits that don't appear to be producing real value, and that would be, say, the financial sector, where their profitability and the incredible growth in their profitability does not seem to be correlated with producing value. And, I have smart friends who will, when I point out that this is a problem--smart friends who happen to agree with me ideologically--they say, 'But don't we need a big financial sector to enhance growth and to fund good activities, etc.?' And my answer to that is No; and I suspect that's your answer, also.

Mariana Mazzucato: Well, see, it depends. It's quite curious, because Adam Smith, again, who was one of the three main classical economists--first of all, he would differ from you in how you talk about the free market. For Adam Smith, it wasn't free from the state. It was free from rent. Free from rent seeking, and in order to limit rent seeking in the economy, which he understood to be unearned income, so, people kind of just moving things around and yet getting funds for that, you actually needed also more smart state[?]. But the other thing is that--

Russ Roberts: I don't disagree with any of that.

Mariana Mazzucato: Yeah. Yeah. Yeah.

Russ Roberts: I agree with all of that--

Mariana Mazzucato: Yeah. I guess I would mean more how the common economist also sometimes uses the word free market. I don't think most people realize that Adam Smith meant free from rent, not free from the state. But, sort of, another point in terms of Smith and how he comes into this discussion is, he actually made a list--it was quite a funny list, actually--of those activities he thought were productive and those he thought were unproductive. The unproductive list is quite funny, because he seemed to not like opera very much, so he would put opera dancers, opera singers, and all sorts of musicians. Which didn't mean he didn't think they were important: he just thought they weren't actually creating value. What I think Marx did which Adam Smith didn't do is he didn't make this static list, like: this is where production happens, this is where value is created, and this is where it sort of doesn't happen. He actually looked at what was happening. So, if you were driving a truck with certain types of merchandise in a particular direction you might actually be creating value; if you were just kind of driving around luxuriously[?], you weren't. In other words, the financial sector itself: it's not about finance being good or bad, or being value-creating or value-extracting. It's, 'Well, what is finance actually doing?' And don't forget that Marx's objective was actually quite different. He was very interested in how surplus value and exploitation occurs in the economy. But, still, he had a more dynamic understanding of these categories. And I think the question of finance today, the real question is: How can we reform finance, for example, for it to have a more direct relationship with capacity in the real economy? For example, in industry. And, how would we have to then change the ways that it is relating to the real economy, but also literally maybe think up new types of financial institutions. An example would be, you know, innovation which is very key to economic growth doesn't require any type of finance. It requires patient, long-term strategic finance of the kind that some public banks are providing around the world--you know, Huawei, number one telecoms company in the world today would not have existed without the patient finance it received from the China Development Bank. Similarly, the Internet never would have happened without the patient finance received from a DARPA-type institution [Defense Advanced Research Projects Agency] in the United States. And so, this kind of need for more patient committed long-term finance would be one way to turn finance to be more valuable, in terms of being better able to drive the long-term capacity-building in the economy, versus just kind of saying finance has been too extractive and we need more kind of industrial capacity. Because industry itself has become overly financialized. Many companies--you know, Pfizer and Cisco spent huge amounts of their income just on buying back their shares to boost stock options and executive pay.

Russ Roberts: Yeah. That doesn't bother me. We might talk about that. I think that's a bit of a red herring.

| | 9:52 |

Russ Roberts: But, I want to make a quibble about Adam Smith, and then I want to move on to more substantive stuff. I am pretty confident Adam Smith never used the phrase 'free market.' So, when we talk about whether that means free from the state or free from rent, the part I agree with is that surely Adam Smith was a big fan of competition, and knew that without it business would often create cartels and try to raise prices and exploit consumers. That's clearly--he was very aware of the profit motive. But he also was very wary of over[?] involvement of government in the economy. So, you know, I think he was both a fan of competition and a fan of limited intervention. He's not an anarchist; neither am I. Most people I know who call themselves 'free market,' they don't literally mean no government. But I think the interesting places where you and I disagree and we're going to get to soon are over what's the appropriate role for government. Thinking about finance, my dislike of the financial sector or concern about the financial sector is its ability to use other people's money to invest and to create financial vehicles; and that, to me, is overwhelmingly driven by the opportunity to use government money from bailouts and the prospect of bailouts. Do you worry about that? It seems to me in your book, at least in one place, you were a fan of the bailouts. Do you think those were a mistake? And do they worry you--or do they worry you? [*silence* Russ: Mariana, are you there? I lost you. I'm going to call you back, if you can't hear me.... *callback sounds*]

Mariana Mazzucato: Helloo.

Russ Roberts: Hey. I don't know what happened there. I lost you.

Mariana Mazzucato: Oh, that's weird. Can you hear me now?

Russ Roberts: I can. Did you hear me ask that question?

Mariana Mazzucato: I heard you. I heard you all fine. So, I can answer the question about the bailout. Everything.

Russ Roberts: Yeah. So, take a breath and go ahead.

Mariana Mazzucato: So, I'm not either a fan or an unfan about the bailouts. In terms of the bailouts, what was interesting for me is that many people don't realize that government saved the capitalist system from falling apart, through the bailouts. Now, where I'm definitely not a fan is that, you know, you shouldn't just bail out a system. If you bail it out--which they did, and against saved the capitalist system from basically exploding, in terms of, you know finance, global finance, was saved--there should have been very strong conditions attached to what had to happen. Even just purely financial conditions, to be honest. I mean, you know, the level of risk also that governments took in the bailout process should have been rewarded. So, if the taxpayer is saving Goldman-Sachs, what did the taxpayer get back from in terms of that risk-reward relationship? And I find, to be honest, this is a general problem. You know, when government gave a guaranteed loan to Solyndra for $500 million, it gave almost the same amount to Tesla. Solyndra went bust. Taxpayer bailed out Solyndra and got pretty peeved off in the process. But why did they not get a direct return from the Tesla investment? Because, of course, what we know--and any venture capitalist would admit this--for every success you have when you are investing in innovative areas, you are going to have to accept quite a high failure rate. And, what was very interesting, also, because this all happened right after the Financial Crisis, by the way, these investments that then were made in different types of green tech areas--what Obama said to Tesla is the opposite of what he should have said. He should have said that if you don't pay back the loan, we get 3 million shares in your company. And the price per share when Tesla received the loan in 2009 was $9 a share. When it paid it back--because it was successful--2013, it was $90 per share. Imagine that difference multiplied by 3 million: That would have more than paid back the Solyndra loss and the next round of investment. That same mentality could have been, also, played out with Goldman Sachs--not just getting back the money, but getting it back with a high level of interest, given that the taxpayer was, you know, taking on. And so this is the problem. And I think this probably gets to the heart of where you and I disagree: I don't see the role of government as just kind of enabling and facilitating, investing in infrastructure, you know, roads, police force, private property historically, and capitalism--which is a system that has been fundamentally driven by innovation. The government, when organized--big 'when'; I'm Italian, so I know when this goes wrong--when organized properly through these DARPA-type institutions, but also, you know, around the world we see these popping up in different forms, has actually been an Investor of First Resort. Not just a lender of last resort. Has allowed certain high-risk, high capital-intensive areas to be financed before the business sector is willing to put their money in. In fact, the history of Venture Capital is very clear: they've only come in after the government paid the wave [paved the way?], you know, for example, in biotech, 20-30 years of National Institutes of Health spending before the Venture Capitalists came in. So, in terms of the bailouts, where I see they went wrong was not so much the bailout itself, but the complete lack of conditions attached to make sure that the public sector and the taxpayers and the process got back a reward for this big risk that they took in bailing out banks that could have just then ended up going under.

| | 15:37 |

Russ Roberts: So, we disagree on that, in that I don't think they saved capitalism. I think they'd already hampered it and done some things in the past with previous bailouts before 2008 that helped set the stage for it. But that's a different talk, a different conversation. I want to move away from that, because I think what you've said about the government and the government's potential to be reimbursed or to share in the gains is the really interesting question. It's the, I think the most innovative part of your work. And, so, I want to step back. So, you argue that there's been a lot of innovation in the last decades that was government-funded, government-started; and that venture capitalists reaped the benefits of and taxpayers got little or nothing from other than indirect taxing of profitability of the corporations that then investors enjoyed--

Mariana Mazzucato: If that.

Russ Roberts: But, I want to go back earlier than that. Certainly, the transformation of the standard of living of the modern world over the last 300 years--government did not play a crucial, innovative role in that. Or did it? In other words, in my view, which you characterize quite accurately, I want government to set the rules--allow for courts, property rights, police, defense, infrastructure that's poorly provided by the private sector like sewage, perhaps. But, that was government's role until maybe 70 or 80 years ago. And the first 200 years of the Industrial Revolution did transform the standard of living through innovation and technology without government taking an active role. Or do you disagree with that?

Mariana Mazzucato: So, I think there's two different issues. One is that the government has historically, definitely played a basic role. So, funding the roads, including the railroads, and you know, schools, and kind of what we call in economic-speak or innovation-speak, these horizontal conditions that without which, you know, it would be very hard to have successful commerce and competition between companies that wanted to invest and innovate, because you wouldn't basically have the groundwork there. And those aren't areas--infrastructure is not an area where the private sector has been willing to invest in. Where I differ is that, you know, basically how we talk about this in economics is that this is about fixing market failure: So, fixing those areas where the private sector is not investing, whether that's due to a positive externality--so areas where the spillovers from that investment are so large it's hard to appropriate the profits from that, so the private sector doesn't invest, so public sector has to come in. That's by the way, why I sound American; but I'm Italian, so my Dad does basic research on nuclear fusion physics, so he left it to go to the United States because the U.S. Department of Energy has been a big investor in these kinds of basic research--energy, areas of the private sector, you know, wasn't willing to invest in. Very little controversy there. Or negative externalities--pollution, you know, it's the opposite problem where companies aren't including in their cost structures the kind of negative things they are doing like polluting, so the government might have to come in with something like a carbon tax. So, this notion of what the government is for--it's not that it's wrong. It's just very limited. It's just fixing a problem. And those problems definitely exist. There's big market failures. What my approach has been is to say, 'Well, let's step back a minute. That explains some things, but it doesn't help explain innovation.' Kind of, big, important general-purpose technology, so, revolutionary changes that have occurred around the Internet, around aviation, around renewable energy, around nanotech, biotech--which actually required government to play a much larger role--which I call market-shaping and market co-creating, not just market fixing. And this is not a repeat, not about the state versus the private sector. Private sector, of course is important; and all those different areas that I just mentioned. Very important private businesses were, you know, part of that private valuation process. But the role of public sector wasn't just, you know, creating the background infrastructure, skills, and education or some rules of the game that leveled the playing field. They were also acting as an Investor of First Resort. Everything in your smart phone, if you have a smart phone, which I assume you do because we are Skyping and you must have some smart products in front of you--everything that makes those products smart and not stupid were government financed. Forget whether it was a civil servant or public servant, you know, who actually thought about it. But the money, the high risk funds, did not come from Venture Capital. It came from government--

Russ Roberts: Well, some of it--

Mariana Mazzucato: the Internet.

Russ Roberts: Some of it. Not all of it.

Mariana Mazzucato: Let me just list them. In your smart phone. I assume you have a smart phone.

Russ Roberts: I do.

Mariana Mazzucato: Hah, hah, hah. You don't have one of those little curly-wired ones. Right. So, Internet, GPS [Global Positioning System], touch screen display, Siri--they were all government financed. Other things, of course were financed by business. But I'm not debating that. We know that. Those things--

Russ Roberts: No. Those things--

Mariana Mazzucato: all over the world--hmm?

Russ Roberts: Those things that were financed by government--touch-screen, GPS, Siri, etc.--they were partly funded by government. Things, innovations that made them possible in their final form were funded by government. But of course there were other innovations that made them useful and practical, and--

Mariana Mazzucato: Yeah. No one is debating that. But, see, we are on--what I'm not doing is saying the private sector is not important. What you are potentially doing--and maybe you are not but some other people are, many people are, is denying the role that government played in doing more than just the infrastructure. Government, around, even around--you know, battery storage today, which the equivalent, it's a huge innovation, it's actually downstream, it's not just basic research, the biggest innovation came out of ARPA-E, which is the sister organization of DARPA, which is in the Department of Defense, which basically came up with the Internet. Now, the point is not, 'Oh, there was also some private sector activity.' We know that. The real question is: How could it be that a whole book on Steve Jobs, that great book by Isaacson, which also turned into a movie, that not one page, not one paragraph, not one sentence, not one little word--this is my point--not one word on any of the public investments that made Apple's success possible? Which is not to say the people working at Apple are not incredibly smart, geniuses, and Apple as a company is not fantastic. I think that's true. But, you know, for example, the great design, and the fact that Steve Jobs also took these calligraphy classes: that's all well documented there. And that, itself is incredibly important. I would never dismiss that. But why do we dismiss the role of government? And, also, the self-fulfilling prophecy, by the way, is when you do dismiss one, dismisses all the role of government, we also don't ask the difficult questions: Well, what does this mean? How should we actually set up different types of public organizations so they welcome risk-taking, welcome exploration, experimentation, and can be innovative, as innovative as DARPA was but in the areas like health or energy or whatever. These key questions that business schools ask of private business, because they know, correctly so, that business is innovative and value-creating, they take classes like strategic management, organizational behavior, decision sciences. There is none of that [?] meaning for public servants. So we end up getting the inertial, slow, bureaucratic public servants, and that we call them 'bureaucratic, slow, and inertial,' well, that's how we made them, because we didn't admit, actually, these success stories of when government was organized differently.

| | 22:55 |

Russ Roberts: So, I would never deny any of that. I think that's all true. I think that's all true. I think the real question, which is the big question you pose, and I think it's a great question, is: What do we make of this? What are the implications of this reality? So, we do romanticize, often, and I'm guilty of this, the private sector's use of these underlying technologies. And I maybe don't sufficiently remember or champion the role that government innovation played in allowing them to flourish. But I think there's a flip side of that, which is that we don't want to over-romanticize what government achieved--

Mariana Mazzucato: Definitely--

Russ Roberts: in particular, almost all of these innovations came out of the Defense Department, the military. The space program. Things that--the United States is really good at. My--I'm going to give you a different perspective on government from the standard one or yours, which is: Government is really good at two things--killing people and taking money from one group and giving it to another. And the killing part--the United States has got a really good military. That's one of its most successful things. That's led to a bunch of good things, at times, and some really horrible things at other times. That's not the scope of this conversation. But, a sidelight of that, the ridiculous amount of money that we've devoted to the military in the United States, is that, 'Yeah, we've come up with a bunch of technologies that were used in ways that were never intended, never planned by the government.' As, some private innovations have also come out that way. So, the question then is: Would--what do we make of that? Obviously, you are not going to suggest we should increase the size of the military budget in the United States because it has all these positive spillovers, I assume. What do we do with the fact that, yes, some government innovation, particularly from the military, has been useful to private sector actors?

Mariana Mazzucato: Right. So, one of the points of my book--my other book, the Entrepreneurial State book--was--

Russ Roberts: which we'll also link to--

Mariana Mazzucato: Yes. Sorry. Which was basically to document what you just said, which is the role that the military--through, by the way, different types of organizations--it wasn't just kind of top-down, you know, department of the Military. It was through the kind of more nimble DARPA-type institutions had on innovation. But then the next question was, 'So, what are the lessons being learned or not being learned?' Unfortunately, lots of lessons are not learned about how we might devise similar types of organizations in other areas--which actually are urgent, and they also have security implications. Now, I should first start by saying they have been learned, in some areas. So, in health, you know, the National Institutes of Health, in the United States, publicly funded body, spent over $30 billion dollars a year on financing some of the most high-risk, high capital-intensive parts of the innovation cycle in both biotech and pharmaceuticals. And, in fact, the Health Department basically is second to the Department of Defense. Department of Energy, as well, as I mentioned before, fusion, but not just fusion, lots of applied areas, for example, through ARPA-E that I mentioned, which is the sister-organization of DARPA. So, in some ways one could say, we have--you know, it used to be just the military/industrial complex, in fact all those different organized technologies I mentioned--Internet, GPS [Global Positioning System]--you know, those are kind of--the Navy basically discovered GPS. You know, those lessons have been somewhat carried over to these other areas. But the point that I've actually been working on a lot with global governments--and ironically, Trump is unlearning the Silicon Valley story at the same time that China is learning it, hah; that should be a big worry for Americans interested in competitiveness--what's interesting is: How do we then take really important challenges that we have, whether it's around climate change, the future of health systems, growing inequality in some countries? So, just take what we call the Sustainable Development Goals, these 17 goals that over 100 countries have signed up to: How do you turn them into not just these kind of blah-blah challenges, but really concrete moonshots that could actually also have some innovation road-mapping, both through international organizations together--because many of these challenges are global--but also within countries, even at the city level, or at the state level, if you see what California is at least talking about doing around climate change. 'What would it look like, question mark, to have kind of a mission-oriented approach towards the way that public and private sector actors co-invest across the whole innovation chain to tackle particular challenges?' And, by the way, I just wrote a report--it's probably the thing I'm most proud of, which came out last February, February 2018, for the European Commission. You know, I'm Italian but live in the United Kingdom but grew up in the United States; I'm a bit of a chameleon here, but I wrote it for the Commission to say, 'Hey, guys, you spent all this money on innovation, but look at what happened in the United States when they did the moonshot.' To go to moon and back again in one generation required not only, you know, really agency like NASA [National Aeronautics and Space Administration] coming up with that ambition--very aspirational, bold, and high risk. But also required lots of different sectors in the industrial base to work on that problem. So, it wasn't just aeronautics. It was also clothing. You couldn't go to the moon in jeans and a tee shirt. Nutrition: You couldn't just eat a hamburger or hot dog up there. Right? So, lots of different sectors had to innovate. And invest. To get there. That should be important today when we see the record-level hoarding that we have in both Europe and the United States. But also, lots of different projects and kind of homework problems had to be resolved. Hundreds. Of which many failed. And the ones that succeeded are precisely those in our smart products today. So, it's not about public or private, but how do you also set a really strategic direction for this public investment? So, instead of the NIH [National Institutes of Health] just plowing in $32 billion a year and kind of just assuming that somehow this is going to end up resolving great health problems and then allowing--I mean, this is what's crazy--allowing the pharmaceutical industry to set whatever price they want through this dysfunctional notion of value that they call value-based pricing, why not learn from that mission-oriented approach to the moon and kind of implement that for how we think of the big challenges around health and energy?

| | 29:15 |

Russ Roberts: So, I think NASA is quite an interesting case. There was a very specific goal: Get to the moon and back. We mobilized through the public sector and the private sector as you point out, an enormous amount of resources. I happen to be a very romantic lover of space travel, so I'm really glad we went, personally; but I'm not sure it was worth it. And I think that's the challenge. It's hard to pick the goal. Should the goal be immobilize everything to cure cancer? So, which kind? Should the goal be to cure various other health challenges? Should we try to get better water, cleaner water in Africa? I mean, there's so many human challenges. And the question is: Will the government do a good job? And I think NIH is a good example. I am a big fan of NIH. I think there's a very powerful case for government funding of basic funding of research. But there's also a good case for private funding through foundations; and they're doing that, of course, as well. There's fads in medicine that the NIH responds to. There are fads in political goals that influence, political forces that influence what NIH spends its money on--which I'm not sure are a good thing. But, I think the deeper point--I want to come back to your point about Solyndra and Tesla, which I think is a more interesting point of practical public policy. You make the point, which I think is undeniable, that government spending often leads to benefits that will go uncaptured, say, by taxpayers and then get captured by, say, venture capitalists or the pharmaceutical industry in the case of NIH. I want to hear the case for why I should care about that. What should--it's undeniably true. It just doesn't seem to me to be necessarily--it's undeniably true that government spending has side-benefits for private actors, and for taxpayers. And that there's value created by some government activity; maybe a lot. Why does that imply that government should be a profit center and receiver of revenue when those go well?

Mariana Mazzucato: Okay. So, I think, first of all, you framed it really well. It's a really important question. And I'll sort of unpick[?unpack?] different dimensions of it. First of all, the public did care. The U.S. population apparently cared a lot when Solyndra went bust. There was a whole discussion, almost every paper I saw at least addressed it, which was: What is government doing? Government should not be picking winners. It should be doing those background kind of investments that we were talking about in the beginning: set the rules of the game, protect private property, invest in roads and infrastructure, and then get out of the way. So, the first point is to say: Actually, government has historically done much more than that; and sometimes it succeeded, and sometimes it has failed. The Solyndra loss, which everyone seemed to know about, was a failure. Why did they not know about the Tesla success? Most people would not know that Tesla's initial investment came from Uncle Sam [nickname for the U.S. government--Econlib Ed.]. Nor would they know that Elon Musk, the person behind Tesla--and forget his more recent reputation after he started tweeting--Twitter seems to be the downfall of many people; maybe I should stop tweeting--you know, Elon Musk himself has received $5 billion dollars of different forms for his three companies, SpaceX, SolarCity, and Tesla. So, the first point is just the marketing. Government has actually been quite stupid. It hasn't marketed the successes. It's just allowed people to know about the failures, because it's very easy to criticize things when they go wrong. The second point is: It's not true that government just funds basic R&D [Research and Development]. Because I would agree with you, to be honest: When government is funding basic R&D, forget it. Don't worry about getting a monetary return. You do it precisely because it's a public good. Those spillovers do spill over in terms of the great knowledge that is, you know, created--you know, the private sector was not willing to fund, for the reasons I laid out before. And that, itself, is a return. To the country. You've created this great thing called The Knowledge Base. But the truth is: Government has gone way beyond that in recent years, precisely because finance has become increasingly short-termist. Much of the long-term, patient finance downstream--and by 'downstream' I mean to the actual companies, like the Tesla investment, which is a $465 million guaranteed loan to one company--that's very different from, you know, funding a nuclear fusion that I was mentioning before, my father moved from Italy to the United States for--that, I think, is naive. It's simply naive for government not to at least ask: What should the return be, beyond some sort of, you know, basic spillovers? Because there isn't a basic spillover. That's for the Tesla car. Which, by the way, is quite expensive, so it's not as if it reaches every American. For those kinds of downstream investments, unlike the basic R&D, there's all sorts of different ways that government could get a return. One could be equity. I'm not necessarily a big fan of that. It's just interesting that the government did think about it. But in the opposite way it should have: It said, 'If you don't pay back the loan, we get 3 million shares.' I'm saying it should have said the opposite. But there's other ways that it could think about the return. I just wrote a report called "The People's Prescription," rethinking health innovation for public value for the pharmaceutical industry. And there the public return could also be conditions on re-investment--you know, lots of these big pharmaceutical companies, but also the big energy companies don't reinvest their profits. They increasingly hoard them. Or use them for share buybacks. Which would be fine if these were atomistic, you know, companies, just getting their profits out of the blue. But if it also is due to public investment, there could be that condition. Which, by the way, is the condition that got us Bell Labs. AT&T [American Telephone and Telegraph] was forced to reinvest its profits in order to retain its monopoly status. That's where Bell Labs came from. It could be conditions on the IPR [Intellectual Property Rights]--so, the patent system. Today, we are, we have a dysfunctional patent system. I have nothing against patents. But, we have allowed patents to be--so, intellectual property rights--to go increasingly upstream so that the tools for research are being patented. That's a bad deal for the state, which has given a 20-year monopoly on, to a company. What ideally would happen after those 20 years is that knowledge gets diffused more than it used to be in the Middle Ages when there was just secrecy: Nothing was written down. The patents actually, you know, codify this knowledge. But if we patented the science, then it becomes very hard for that to happen. Or, it could also be conditions on pricing. And that's the obvious thing that we should have done with the medicines, which receive something like 2/3rds of the research funding from the state. Why don't the medicine prices reflect that? So, those are just examples--you know, equity, reinvestment, IPR, or prices could be the way that government gets less naive for its public investments so we don't just socialize risks, but also socialize rewards. Not in a Communist way, but to make capitalism more functional.

Russ Roberts: So, I agree with you on the patents. We have a dysfunctional system. And I recommend listeners go to the Robin Feldman episode--we'll put a link up to that--where he talked about some of the ways that the system is currently being abused by the pharmaceutical industry. So, I agree with you on that.

| | 36:31 |

Russ Roberts: I want to talk about this general issue of patience and short-termism. Government is pretty short term, too. Most politicians have a very short time horizon. I don't see any reason to think they are going to be more long-term than private sector investors. And, in fact, we see right now--we've seen it many times--private sector R&D, enormous amounts of money going into areas that are very iffy and that take a very large amount of patience: the genetic mapping of the genome--of course, much of it came from the public sector, but a lot of it's come from the private sector. People are waiting for that return in biotech; it's not really come along. But people continue to invest in it and become optimistic it will happen. But, of course, along the way, a lot of people will have lost a lot of money because it took too long for their horizon. Similarly, the driverless car: extraordinary amounts of money being put into it by enormous companies spending huge amounts of money for a long, long period of time. So, I don't see patience as the biggest problem with why we don't have more innovation. I see the fundamental problem being that it's just really hard to do. And, I don't see why--I agree with you and the government has spent some time and money doing things beyond the rules. It's occasionally successful: to be crude about it, I would say a pig every once in a while finds a truffle. So that the military sector, for example, does come up with lots of things that it didn't intend that have nice human impact beyond war. But, what's the evidence that government is going to do this well? Why would we encourage government to step outside its rule-making, rule-keeping area and do things like Tesla and Solyndra? Tesla--I'm against it. I wish they hadn't given that loan guarantee. It might have happened by the private sector anyway. But it did turn out pretty well, so far. We'll see. You know, people debate about whether Tesla is really a viable concern in the absence of government help of other kinds. But, I mean, government does lots of things really badly in the United States. School system--one of its fundamental roles, which should be spending a lot more time and potentially money if it could spend it well. It doesn't do well. So, I think that's the fundamental reason that so many Americans are skeptical about a more active role for government innovation. Forget the Department of Motor Vehicles, which is a standard--or the Post Office--things, for small government, people like to pick on. [?] pick on the big stuff: education, a thing government should be doing and should be doing well, doesn't do well. Why should we have a more active role? Why should government compete with private sector investors for innovation? Why should it be involved? Let's let the private sector--which is very imperfect at it: it's hard to do. These are people who have a lot of money at stake, and they still make lots of mistakes. Why would we think government officials would do better?

Mariana Mazzucato: Okay. So, first of all, I went to a state school in New Jersey, Princeton High School, and it was a great state school. There's other state schools that are terrible. There's some private companies that work really well, very efficient, produce great products and services that the world wants to buy; other ones that don't. So, my point, as I mentioned before, is there's nothing in the DNA of the public sector, or the private sector, that will necessarily make it a good innovator, because we have admitted that the private sector is essential, as it is, to innovation. We ask really difficult questions to it; and that's why the top CEOs (chief executive officers) all go to some great business schools, to study those issues. One of my colleagues wrote a book called Rejuvenating the Mature Corporation. Why? Because when corporations get big and heavy and bureaucratic, they can get really inertial and slow and dinosaurish. So they have to rethink themselves. When the government becomes big and bureaucratic, we just say, 'Oh, that's government. Government is bureaucratic.' So, the first thing is to recognize that value is in fact potentially created collectively by different types of actors, including, by the way--this isn't just about public and private--the third sector has become, so the voluntary, philanthropic sector is becoming increasingly important in some areas, like say the Gates Foundation around health, but also, we should never forget trade unions. We would not have weekends; we would not have the 8-hour workday; we would not have children not working in the factories without trade unions fighting for that. Which was a fundamental force in capitalism to make it work as it currently does. It was a part of this market co-creation process that I mentioned in the beginning. So, if we then hone in on the public sector, we should ask difficult questions to it: How should you organize yourself? Because, if you're not organized properly, you won't be able to organize your activities, whether it's education, health, or energy, or particular investments in those areas well. So the real question should be what has happened in recent years to the way the United States has thought about education, including, by the way, the outsourcing of the capacity of the government to even be innovative. I mean, I've seen this from NASA to other organizations around the world: they've increasingly disinvested in their own ability to think big and to have internal capabilities, which we all know is important in the private sector. But the other really important issue you raise is the short-termism, because the business sector short term is due to certain factors, for example the pressure from shareholders. But the governments are often short termists for the reasons of elections. You know, if an election happens every four years, or five years, or whatever, that might make the politician at best just have a little pet project just so they have their name on it. Or, at worst just not want to make any important investment and just kind of hand out some money to potential voters, and that's all sorts of issues around corruption and capture can occur there. And that's true. So, my question is, and this is why I set up this Institute for Innovation and Public Purpose at University College London, is to actually pose those questions. So, for example: Well, how was DARPA set up? Or, because everyone knows about DARPA, let me mention a different organization: How was the Italian IRI [Istituto per la Ricostruzione Industriale] set up?

Russ Roberts: Can you spell that?

Mariana Mazzucato: So, it's I-R-I. It was called the--what was it called, actually? I think it was the Istituto per la Ricostruzione Industriale. It was basically the public entity that was set up under Mussolini. Sorry, I hate to talk about its original foundations. But it became one of the most innovative organizations in Italy when it was transitioning from an agricultural economy to an industrial economy. And it had 3 phases: public and not politicized; public and super-politicized--so, each party put its hands in; and then privatized. And the 2nd and 3rd stages were equally bad, in terms of its ability to actually be ambitious and innovative. The first phase, it actually constructed what's called the Autostrada del Sole--the motorway that goes from the top of the boot to the bottom of the boot [reference to boot-like appearance of Italy's geography--Econlib Ed.], toward Sicily, in 4 years. And it was a huge amount of kilometers. Whereas recently it could barely do the Turin-to-Milan. So, how it was actually constructed in that early phase, which was independent from all the political parties getting their hands in, actually made it one of the coolest places to work: The top Italian managers found it to be an honor to work inside IRI. In more recent history I found that was very interesting: When Obama was doing his fiscal stimulus package, which in Europe we kind of forgot to do because we just obsessed about austerity, he had about an $800 billion that he wanted to pour into the system. And initially, he, I think, had some really interesting ambitions around it. He really wanted to green the economy. And so, he--this was the period, precisely the period, that ARPA-E ended up getting set up, in 2009 one year after the Crisis. And because he had an ambition to direct the fiscal stimulus--and he really started talking about the green kind of manufacturing--you know, how to use green as a direction for the whole economy--it was an honor for a Nobel Prize winning physicist called Steve Chu, a Chinese American, to direct that agency. The Department of Energy, for a certain period was directed by a Nobel Prize winning physicist who then set up ARPA-E. But he would never even wanted to do it--forget what actually happened and what didn't. Just talk about talent. You know, how do you attract talent? No Nobel Prize winning physicist would have wanted to have work for an agency whose agreement was: 'Well, go help Elon Musk. Go de-risk Elon Musk. Go fix a market failure.' It really had a mission, as ambitious as the DOD [Department of Defense] has had to win the war, or go out to space. And that becomes one of the ways that you also attract talent. Then, how you use your tools--for example, procurement policy, price schemes, grants--to really crowd in that bottom-up experimentation. Because we know top-down doesn't work; that's why the Soviet system failed. But, how do you use government instruments--let's just take procurement policy, which is government's purchasing power--to kind of be very clear on what government wants. For example, 'We want soldiers not to die when they are inside their tanks.' Well, driverless cars are not a bad solution to that. And that's basically where the initial investments in driverless cars came from. Fracking, by the way, came mainly from the DOE [Department of Energy]. Which doesn't mean that the private sector later wasn't important. Of course, it was. But what you often see from these mission-oriented public agencies is they laid the way. They took on the initial risk. They also had a bold, kind of inspiration, to solve a public need--which could be either fighting the war or curing a disease or getting a renewable source of energy--which then, if done in ambitious ways, lays the groundwork for then the private sector to increase their expectations of where these future growth possibilities lie. The irony is that when government doesn't have that ambition, it ends up actually doing what we end up blaming government for--either being too boring and slow, or even worse, crowding out--this word that economists like, 'crowding out'--the private sector, because they end up doing what the private sector should do but doesn't do.

| | 46:48 |

Russ Roberts: Well, I think crowding out is important to think about. How important it is, is always an empirical question. But, one of the challenges we haven't talked about is that--I meant to mention this when we talked about the space achievements of NASA and getting to moon--we don't know what the opportunity cost is of that. We don't know what was foregone. We don't know what investments or activities didn't take place. We look at the success; and we [?] happy about it. And that's true. You know, the same would be true of Bell Labs, other things that led to good outcomes, ones that we point to, that we happen to like. I want to go back to one thing you said, though, because I think it's important. I don't think trade unions have much to do with the fact that children don't work in the mines, or anywhere else any more: that there's a weekend or a shorter work week. We have a shorter work week for the last--the amount of time people work has been falling steadily because we want to work less. We are richer. It's a market force. And trade unions occasionally have asked for. But, if it wasn't happening through market forces, and it wasn't what people wanted, it would have been very hard to get. And often--they are increasingly less important now, for that reason.

Mariana Mazzucato: That's historically just wrong. I mean, trade unionists and workers. I mean just talk about workers: trade unions are simply their organization that kind of bargains for them but that workers fought for, many and died for, many of these advantages that you just mentioned.

Russ Roberts: I think they would have happened anyway. I don't think there's--I don't think there's--I don't think there would be working--

Mariana Mazzucato: --well, there's that's--there's no [?] that. I mean, I could say the private sector would have invented the Internet. I mean, but you have no way to actually prove that. So, let's just talk [?]

Russ Roberts: But wait a minute. Hang on. Hang on. There is some evidence for it. It's not just an empty claim. The fact that the work week is getting shorter, now, without unions--

Mariana Mazzucato: Yeah, yeah. I would agree with that. Yeah. But the 8-hour work day is something that was specifically fought for by Trade Unions. You know, the fact that construction workers have construction hats, when they got that job was fought for by trade unions. Otherwise things were falling on their heads. And people actually had to pay for their own construction hats. There's many different examples I could give you like that that was fought for. That doesn't mean that we glorify trade unions. I personally think that they should be much offensive and less defensive with technology. They should, if we had a stakeholder, governance-type of corporate governance, trade unions would be at the table, you know, saying whatever--I don't know, whether it's good or bad, whether saying it is not even the point. But they would be debating alongside the shareholders, alongside the managers, alongside some businesses--sorry, government officials that would be at the table given the subsidies that these businesses are receiving: what form of, you know, sort of, new digital landscape are we, you know, co-creating together and why we should really kind of think through how to allow or how to construct the type of, you know, kind of big data, AI [Artificial Intelligence] kind of a market that is currently developing instead of always ex-post worry about the effects it might be having on labor or taxation. But, your other question I think is a really important one, which is: Was the Moonshot even something to do, to have happened anyway? So, one of the issues is: If you take a systems perspective, which I do take, because I really believe in innovation systems--and what I mean by that is, the Soviet Union was spending a huge amount on innovation, one of the biggest funders of it in the world. But, where science--sorry, I should say, science and the whole knowledge base, where it didn't turn into innovation in terms of commercializable innovation, because they didn't have innovation systems. They didn't have those, for example, science industry linkages. They didn't have a financial system that was flexible. So, systems do matter. So, even though you put in a lot of R&D money, that won't lead to innovation, unless you have that system. So once you take that--I mean, that's just one example. But once you really unpick that in terms of the real kinds of granular structures that were kind of important in terms of important like Silicon Valley, then you could ask, even if we hadn't gotten to the moon and back again but you actually structured the innovation system properly so that you had both public and private actors across that innovation chain working in this dynamic way as they in fact did. In that case. Would all these spillovers, which ended up happening along the way have happened anyway? And I think the answer there is, sort of, 'Yes.' Which is that what really matters is the process, the system. So, if you have a linear, top-down system, where you think that just because you put in a lot of money that somehow is going to, you know, lead to great things at the end, that almost never works. If you get, kind of the feedback loops happening, this is something by the way that United States has started to underfund. You know, Germany, has these Fraunhaufer Institutes. The United Kingdom is investing in these catical[?] centers. This is really one of the great things that the United States did have, which was, you know, centers where industry and big science kind of basic blue-sky science met, in places like Stanford and places via great national labs. If we stop not only funding them but stop also making sure that they are structured in ambitious ways that are not also measured in really static ways--that they have to prove their economic value tomorrow--then, you know, they will remain very important parts of that system. But, you know, in some ways, I think that the way we elect politicians should be based on the moonshots. I mean, look at Alexandria Ocasio-Cortez's campaign in and around the green new deal. Forget whether she's right or wrong. But that's how she campaigned. We shouldn't be using, you know, net present value and cost-benefit calculations on whether we should be going to the moon. That should be what politicians, you know, kind of argue for in order to get elected. You know: 'We want a green transition. We want a digital revolution. We think we should be tackling the big productivity challenges.' That's how we should be in a democratic society, electing our politicians. Then once they are elected, we should make sure that we have the right kind of public institutions, private institutions, third-sector institutions, interesting places for them to collaborate and dialog together on how to then achieve those goals. But, unfortunately, I would argue that the political process has also become incredibly static and miserable, where we are also not also debating some of the biggest challenges of our times. And people are getting elected based on pretty flimsy promises.

Russ Roberts: Well, we probably agree on that.

| | 53:06 |

Russ Roberts: I want to go back to something you said about risk-taking, because it's another part of our--an area that I think is easily missed. You said in passing--and it's all over your book, as well, about how the public sector "takes the risk." They took the risk with Tesla. That panned out. They took the risk with Solyndra. That didn't pan out. They--the NIH, all the fundamental research that's taking place there--there's a lot of uncertainty. But, the problem is--this is I would say the crucial difference between the public and private sector and I challenge I think to your vision of a larger public role, is that: The public sector doesn't really have to take risk. Because it can always raise money at the point of a gun, through the tax system. Whereas the private sector runs out of money. If the idea doesn't work, there is, eventually, they can't attract investment any more and it disappears. Do you worry about that? Is it a problem with the public sector--that--I know we don't want to overstate the role of profits; but since there's often no accounting measure of success or failure for investments of these kinds we are talking about, how will we know that they are done well? And what's to stop bad ideas from continuing to take money away from good ideas?

Mariana Mazzucato: So, I would even be more extreme than you are in this, in some ways. I would be agreeing with you, but even more than you just said. Which is that the government actually doesn't rely on taxes. It can even just, literally print the money. That's what it does when we go to war. I don't think you've ever heard the government say, 'Oh, we can't go to Afghanistan. We don't have enough tax money. We can't go to Iraq. We can't fight World War Two.' In those cases--and this comes back to your previous point about the military industrial complex, when things were seen, or framed, in terms of security issues, urgency, national priorities, they can, unlike family, unlike a household, just create that money. And hence, also, potentially run into this--well, actually run into this accountability question. So, but that's a first very important point which sometimes would work against some of what may be some of your listeners think, which is that the government should be acting like a responsible household, because you shouldn't be spending the money you don't have. So the first point is, governments are not households. They actually can, A). Print the money. And B). well, this is when you have your own Central Bank, by the way--in Europe that's different--and also you can stimulate the economy. And if done so properly, you can also generate a lot of tax revenue if you also want to fund your priorities through tax revenues. So that's just the first kind of clarification--

Russ Roberts: but, that's true, but--

Mariana Mazzucato: But then your point comes in, which is the important point, which is: Then, there's a big distinction, right? You know, if a private sector company doesn't do things well, it'll just fail. By the way: That's not always true. Just look at all of Trump's businesses. He just got up again because he got bailed out, so that's your bailout question before. But anyway, so that's a really important question, which is: What is the right way to then account for, measure, evaluate government activity, given that, you know, it's different from a private sector company? Which in theory, not in practice, but in theory would go under if it under-performs? So, the first issue is, kind of more pro-active kind of point, which is the point I was making before: Well, let's learn from those parts of government that worked well, precisely on that issue. One of DARPA's great success points is precisely knew when to turn the tap off. This wasn't just turning the tap on, throwing a lot of public money in. The reason the DARPA, the ARPA-Es, and the global, you know, the few global organizations that have been able to replicate that kind of organization of the public sector have been successful have been they not only have the missions that we were talking about before, but also were flexible--you know, taking risks, but also flexible inside to know how should we turn this tap off because it just isn't going anywhere. And that requires going against the grain. Because if someone is in there just for career reasons or just wanting to, you know, please the supervisor, you just might keep the tap on. So also you show that that organization funded all these great things. But, if it's not, you know, happening, turn it off. And knowing how to turn off the tap is a skill. It means also having dynamic metrics. Because you don't want to turn it off too quickly. Because that might lead to short-termism. But if it's not going anywhere, stop funding it. But the other issue is: We should have dynamic metrics. So, let me give you a really concrete example. The Concorde Plane--it's not flying. Is that a failure? It's definitely a private sector failure. Because the private sector would want to build the plane--that is, flying, and they are earning profits from it. That would be stupid if it's not flying. The public sector--I mean, that was a publicly funded project--the actual investments made in the Concorde had massive spillovers across the economy in all sorts of other sectors that actually led to innovation in different sectors. Now, the last thing I want to do is say that the Concorde plane was a good investment or the right investment or a success. But the metrics we have that governments should have, should be dynamic metrics; which in this case should be able to capture explicitly the spillovers that occur across the economy with that investment, even if that investment the final outcome fails. That kind of comes back to my point about the moonshot: even if we hadn't gotten to the moon, had there been a functional dynamic, innovative ecosystem, innovation system, then maybe it would have been less important getting to the moon as long as all as those spillovers happened, which again are inside our smart phones today. Now, all I want to say with this is it's hard. None of this means, 'Oh, it's easy. Just throw a lot of public money at stuff.' In fact, in Italy, the country I'm from, what's interesting is these lessons haven't been learned. So there's a lot of public money going to all sorts of things, but there aren't the right public structures. And by the way: One of the obsessions that economics have with the deficit, you know, 'Oh, let's keep the deficit low,' actually makes little sense when you look at different countries. Italy has always had a low deficit. It's almost always been lower than Germany's, for example. But its Debt/GDP [Debt-to-GDP] is very high. So, Debt/GDP is not the same thing as the Deficit. And precisely because it's public and private actors, both of them, in the last 20 years have been pretty rubbish, structuring themselves in strategic ways, providing that patient long-term finance in both areas, also the private sector, then their productivity hasn't grown. So, long-run GDP hasn't grown. But that's the denominator of Debt/GDP. And even with a mildly rising deficit, Debt/GDP can in theory go to infinity if the denominator is not growing. Now, again, that doesn't mean just spend, spend, spend. But what my point is: Spend Wisely. Strategically. And structure the organizations in both the public and the private sector in ways that are smart, mission-oriented, and also work together well, because almost all the challenges we have ahead have to happen in partnership.

| | 1:00:09 |

Russ Roberts:

Russ Roberts: We agree on the spend wisely part. I think the challenge--we probably agree on this, too--the challenge is in incentives. And, my concern is that I don't see why the public sector bureaucrats, whether they are nimble or really unlike Steven Chu, his high IQ [intelligence quotient]--I don't think that's very useful as a bureaucrat or organization like that--it's just very expensive assignment of his talents to that, and it would be interesting to see a cost/benefit study on that. But, I just don't see why you would think that that's going to go well. In the private sector, sure--

Mariana Mazzucato: But it won't necessarily go well. Why should it always go well? You are putting a huge amount of pressure on a public organization that I don't think that you would ever ask a private organization. 100% probability that everything goes well. You'd never have innovation in the private sector, if that's how they thought.

Russ Roberts: Well, that's not what I think of 'go well.' 'Go well,' to me, means, use the money wisely, spend wisely. I don't know why--of course, there's going to be failures. There's an enormous amount of uncertainty, going back to the venture capital example. One out of 10 is an incredible home run. Two out of--two or three make a little bit of money. And the other four to five lose money--and it's all gone: You lose all of it. So, it's very focusing. You are really trying hard to do well. Even in that world it's really hard to do well. So, I just expect the public sector to do badly, also. But at least in the private sector, they have to pass some kind of market test. I don't see--

Mariana Mazzucato: You have history--Russ, you have history against you. Fracking. Nuclear technology. Aviation. Internet. You know, green technology. Without the public sector playing this ambitious mission-oriented role, you would not have had private innovation. So, it's not about saying private good, public bad, or vice versa. It's about that the public sector, when it was ambitious, it actually laid the groundwork for the private sector to even see an opportunity for investment. Now, that's not necessarily to with gadgets. I am, I must say--this is where I would, you know, put a condition on what I'm talking about. I'm talking about the big stuff. The big stuff that has driven growth under capitalism for the last 200 years.

Russ Roberts: But that's--you know, history is complicated. My view of history--I'll give you my story and then let you close it out: My story is that when government was small--which was up until about 1930--and government wasn't even large until 1960, and even then it wasn't--it was mainly transfers, not actual regulation/innovation and spending of the investments we are talking about: The private sector was coming up with new stuff. Really, kind of amazing. Like, antibiotics. That's private. That's not public. Sure, many current antibiotics came, were helped by public investment. But most of the innovations--as I like, one of my favorite lines is: Orville Wright didn't have a pilot's license. A lot of the great innovations that people came from were just private people fiddling around. Sometimes for large amounts of money; other times just because they were just creative people. Isaac Newton didn't come up with calculus because he thought it would make him rich. He did it because he loved thinking and the respect of his peers. And that's a pretty powerful thing. And it worked for a long time really well. And it would have continued to work really well, I think, in the last half of the 20th century and the 21st. But, you're right: Government, through a bunch of things it didn't intend, created some good stuff. You're hoping, I think--maybe this is unfair; I'd love for your reaction--you're hoping that if we tried harder to intend it, it would turn out even better. That just isn't obvious to me. But tell me why I'm wrong, and I'll give you the last word.

Mariana Mazzucato: Okay. So, again. You know, for me, it's never about saying the private sector wasn't innovative during these periods in which I have tried to highlight, and basically the history of some of these massive technological shifts for the public sector did play a big role. It's not to say that the private sector was not important. It's that the form that these public investments--this is another thing I'd say--let's not use the word 'spend' but investments, public investments, investor of first resort--played, actually required not just a bunch of public money thrown at things, but particular types of organizations. And, sometimes these failed just because of the--you know, it's inevitable to fail for you know, all the successes that also occur, but also they could fail because those organizations are structured problematically. So, in inertial ways, with the wrong kind of career structures where you are not allowed to take risks. I remember when I interviewed Cheryl Martin who was one of the first directors of ARPA-E, she said, 'We actually measure our success by how much risk we are willing to take, and then how much, then, economy-wide success our successes have.' So, my first point is always about the structure. The structure, the structure. That, because we've admitted the private sector is important. We structure it. In some cases. Properly. The public sector often is often mis-structured. So, I'm sort of agreeing with you, when it doesn't work. Now, the times it's worked best was when it actually had a problem to solve. That's precisely why the military has actually been really important. They want to win the war. They want the soldiers not to die. They--even a lot of the medical innovations have also been funded not just by the Department of Health but also by the Department of Defense, because there are certain diseases or vulnerabilities that soldiers have, which, you know, people just living in wealthy cities don't have. So, you know, the question is: These urgencies that then allowed government to take the problem seriously and to structure their innovation system in ways that was dynamic, that was fueled by both basic research and applied research and institutional capacity that fueled the feedback between them, unfortunately, we haven't always learned those lessons in the big challenges we have ahead around health and energy. And I would actually argue in health we sort-of have, because of the NIH. But actually the NIH, one of my critiques of it, is it hasn't been ambitious enough. So, most of the research spending that occurs in the National Institutes of Health, which is precisely the spending that has actually led to most of the new molecular entities with priority rating--again, it's been incredibly innovative also compared to the private pharmaceutical industry--however, why just drugs? Why have they allowed the pharmaceutical industry to define the market and not really also invest just as much in areas like healthy living? There's very little proper research on that. So, many of us think we know what healthy living is, but it's kind of just voodoo. Or, even, to be honest, something more boring than healthy living, diagnostics and surgical treatments. Much less research thrown at their areas than at drugs. So, I think the role of the public actor, and I would argue of a philanthropy, is to be a thorn in the side of how we define markets. To be an active market creator, not just in terms of investing where the private sector doesn't invest, but also redefining that market. That's, by the way, what I often argue the BBC [British Broadcasting Company] was able to do in the broadcasting area. But that would be a whole other conversation which we could maybe come to some other time.

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(58 COMMENTS)

John Horgan on Mind-Body Problems

Science journalist and author John Horgan talks about his book, Mind-Body Problems, with EconTalk host Russ Roberts. Horgan interviewed an array of scientists, philosophers, and others who have worked on consciousness, free-will, and what it means to be human. Horgan argues that no single solution to the problems in these areas is likely to be established by science and that our perspective on these questions is inevitably colored by our personal experiences rather than by scientific evidence. Horgan concludes by making the case for personal and intellectual freedom and the need to embrace subjective interpretations of mind-body issues in ways that bring meaning to our lives.

This week's guest:

• John Horgan's Home page
• John Horgan on Twitter.
• Cross-Check. John Horgan's blog at ScientificAmerican.com.

This week's focus:

• Mind-Body Problems: Science, Subjectivity, and Who We Really Are, by John Horgan. Free ebook.
• Mind-Body Problems: Science, Subjectivity, and Who We Really Are, by John Horgan. Kindle version.

Additional ideas and people mentioned in this podcast episode:

• EconTalk podcast apps and feeds
• 2015-present, Current (main) subscription file: To subscribe in iTunes, search for EconTalk or add the direct feed: http://itunes.apple.com/us/podcast/econtalk/id135066958 For other podcast players, search for EconTalk or add the direct feed: http://files.libertyfund.org/econtalk/EconTalk.xml
• For our complete list of free subscription feeds by year from 2006-2014, search your podcast App or mp3 player App for EconTalk, or see RSS Feeds for EconTalk.
• Economics. Free iPhone App with complete list of EconTalk episodes, by Kasey Baughan.
• Francis Crick
• Francis Crick. Biography and Nobel Acceptance Speech. Nobelprize.org.
• Christof Koch home page. Neurocientist.
• Panpsychism. The Stanford Encyclopedia of Philosophy.
• Adam Smith. Biography. Concise Encyclopedia of Economics.
• Robert Wright on Meditation, Mindfulness, and Why Buddhism is True. EconTalk.
• "My trip to Pittsburgh", by Russ Roberts. Medium.com, Nov. 2, 2018.

A few more readings and background resources:

• Deirdre McCloskey on Capitalism and the Bourgeois Virtues. EconTalk.
• Capitalism, by Robert Hessen. Concise Encyclopedia of Economics.
• Free Market, by Murray N. Rothbard. Concise Encyclopedia of Economics.
• Regulation, by Robert Litan. Concise Encyclopedia of Economics.
• Health Care, by Michael A. Morrisey. Concise Encyclopedia of Economics.
• Adam Smith. Biography. Concise Encyclopedia of Economics.
• Richard Brautigan's Surreal Story: 'Trout Fishing In America'. NPR.com interview with Billy Collins about Brautigan's work.
• P.G. Wodehouse website. Author of the Jeeves and Wooster books.
• Ed Leamer on the State of Econometrics. EconTalk.
• Alan Lightman on Science, Spirituality, and Searching for Stars on an Island in Maine. EconTalk.
• Freeman Dyson on Heresy, Climate Change, and Science. EconTalk.
• The Black Cloud, by Fred Hoyle, 1957. Science fiction. Gas cloud surrounds earth and a scientist dramatically decides to link his brain to it no matter what the risks, to learn all there is to know. Wikipedia.

A few more EconTalk podcast episodes:

• Iain McGilchrist on the Divided Brain and the Master and His Emissary. EconTalk.
• Michael Pollan on Psychedelic Drugs and How to Change Your Mind. EconTalk.
• John Gray on the Seven Kinds of Atheism. EconTalk.
• Jordan Peterson on 12 Rules for Life. EconTalk, February 2018.
• Tim Harford on the Virtues of Disorder and Messy. EconTalk, November 2016.

| Time | Podcast Episode Highlights | | --- | --- | | 0:33 |

Intro. [Recording date: November 30, 2018.]

Russ Roberts: I want to mention that if you are listening to this on the iPhone Podcast App, you are likely to have all the episodes going back to 2015 on your feed. And I think that's true, as well, for Android listeners. But, if you search for EconTalk on your iPhone Podcast App, in addition to the regular feed, you will also find individual years' episodes. So, the 2006, 2007, 2008, all the way up through 2014--they are all there. So, feel free to download and listen to those as well, and not just go back to 2015. As long as you give me, cut me a lot of slack, that I was not a great interviewer, I believe, in the past--I like to think I've gotten better. I also want to mention there is a free App for iPhones called Economics that happens to just be EconTalk, as it turns out--that is not related directly to this program: We didn't create it. But, it's out there and it's a fantastic app. It has every episode; you can comment, you can voice-comment; it has all kinds of different speed choices; it's beautifully laid out. So, feel free to check that out.

| | 1:46 |

Russ Roberts: Now, on to today's guest. He is science journalist and author John Horgan. His latest book, the subject of today's episode, is, Mind-Body Problems: Science, Subjectivity, and Who We Really Are.... I want to mention to parents listening with young children, we may get into some adult themes in this conversation, so feel free to vet the episode before sharing it with your kids. So, I want to start with a very basic question: What is the classic mind/body problem, and why do you make it a plural in your title, Mind-Body Problems?

John Horgan: Well, the phrase "Mind-body problem" dates back to the early 19th century. It was German philosophers who came up with it. And, they realized that if you assume that reality is made of matter--which is what science was strongly implying back at the beginning of the 19th century; a lot of people had already accepted that--that creates a problem if you are trying to understand the mind. Consciousness. Free will. All these different mind-related phenomena. And so, eventually the phrase spread to the English-speaking world; American scientists and philosophers started bandying it about. It's still not as well known in some circles as just the problem of consciousness, or the problem of free will. But, I like the mind-body problem because--in part because it's kind of vague and it encompasses all these different mysteries that are posed by the mind. And even by human nature. By human behavior. The way that I like to describe the mind-body problem to try to help my students understand it and put it in straightforward terms is that it's really the problem of who we are, and what can we be, and what should we be. And these are all the deepest mysteries of existence. And, they're questions that humans have been asking forever, really. Certainly going back to ancient Greece. And so, yeah, that's kind of what the mind-body problem is about.

Russ Roberts: Yeah. I like to think of it as: Is matter all there is? It seems obvious to most people that are scientifically minded that, 'Of course matter is all there is. It's all chemistry. It's all just a bunch of chemistry, and there's nothing else there.' It feels weird to suggest otherwise. But you quote someone saying that, 'We're the matter that longs to matter.' And that is the strangest thing. I expect we'll come back to that issue. I find that deeply puzzling and fascinating. But, the problem itself of who we are, and are we just animals--are we just physical neurons firing and chemistry--is a problem that--I would say--you don't say this explicitly in your book--but I would say there are three groups of people who try to think about this in a systematic way: Scientists, particularly Neuroscientists; Philosophers; and Theologians. And, you spend a lot of your time with the first two in the book. So, describe--this, by the way, I will tell listeners: This is an utterly fascinating book on so many dimensions. If you care about any of these issues, like, the meaning of life, which I think most thinking people do, you'll find the book provocative. But it's more than just an interesting exploration of these issues. Because, it's a portrait of the views of a variety of different people. So, describe how you came to write the book the way you did, and why that was a good idea. Because, I think it was, even though it struck me, once I got started I thought, 'Whoa. This isn't what I bargained for with this book.' I kind of was taken aback. And it does two things. One thing it does is it's incredibly entertaining, the portraits you describe of these people. But, describe what you did.

John Horgan: Okay. First, I think I--I keep forgetting to mention this. I do want people to read my book. And, I should say, it's online; and it's for free. This is the first time I've ever done this with a book. But I really--at this point in my career, I want people to read my stuff more than I want to make money. So, I encourage people to check it out online. All right, so why did I write the book in this way? I have to give you a little history--

| | 6:44 |

Russ Roberts: Well, tell--I didn't give you a chance to talk about--tell about what you did actually, first. And then tell why. You didn't just write a book about these issues. You went and interviewed a bunch of people. Describe that.

John Horgan: Um, but I have to explain the reasoning behind it. I had always assumed, as a science writer, that there is a solution to the mind-body problem. So, I started writing about consciousness in the late 1980s, when consciousness was becoming--when it looked like it might be a solvable scientific problem. This is when Francis Crick and this young sidekick of his, Christof Koch, started writing articles for Scientific American and other journals laying out this program for reducing consciousness to physiological processes in the brain. So, they say, 'Philosophers have had thousands of years to try to figure out what consciousness is and how it's related to matter; and they haven't done a good job of it. So, now science is going to take over and we finally have the tools to do that.' And I found that thrilling. And I started writing articles for Scientific American about this quest to solve consciousness. And I've been following the effort to solve consciousness for decades now. And, I assumed that, if there would be--if there is a solution that science can discover, it will be a single solution. And so, you normally have, when a field is in an immature state, lots of different ideas. There's isn't a kind of unifying paradigm yet. And that was the state of consciousness studies when I started writing about it in the late 1980s and early 1990s. But, I expected all these different strands of research to converge on one correct way of looking at the problem. And that just never happened. So, I went to a big Consciousness Conference in 2015, where there were some philosophers and neuroscientists, including this guy, Christof Koch, who had been talking about consciousness with Francis Crick in the late 1980s and early 1990s. And, they were talking about this new theory of consciousness, Integrated Information Theory, that they thought could solve consciousness once and for all. But the theory had these radical implications. It suggested that consciousness is not just a property of brains, or even of just living matter. It could be a property of all matter. One of the implications of the theory is that even a single proton, because it has three quarks that are doing a little bit of information processing, might have a tiny little spark of consciousness. So, this is the old, mystical doctrine of Panpsychism. And I thought everybody had gone off the deep end, that they were even taking an idea like this seriously. It seemed to me to be a big step backward from materialism. And even a return to this kind of narcissistic, superstitious thinking about humanity's place in the universe. And I began wondering what was going on with this scientist, Christof Koch. By the way, I sometimes pronounce his name sometimes 'kotch', sometimes 'kock'--I can't decide which way to pronounce it.

Russ Roberts: You said 'coke' a minute ago. It's [spelled] Koch.

John Horgan: I just wanted to explain that in case listeners noticed the difference. I'll stick with 'kotch' for now. So, I thought that he must have been going through some kind of identity crisis to have seized upon a theory that, to me, was just ridiculous on its face. And then I started thinking, 'Well, maybe the reason I'm so resistant to the theory is that I'm committed to the idea that science will never discover a theory of consciousness. We'll never solve the problem of consciousness. Which is something that I've said in my previous books. And, that got me thinking about the role of subjective thinking, and emotions, and personal experience, and influencing our intellectual views--our supposedly rational, scientific views of the world and of ourselves. And, the whole quest for consciousness assumes that consciousness and the mind-body problem in general--the sort of more expansive way of looking at the mind--can be reduced to an objective problem. We can get all the subjectivity out and come up with a really clear, rational way of solving this problem, in the same way that we do with more traditional scientific problems like photosynthesis or heredity or gravity, and things like that. And, at some point, it occurred to me that maybe, when it comes to the mind-body problem, consciousness, and free will, and the meaning of life, we will never get subjectivity out of our--deliberations--out of our attempts to try to come up with solutions. Maybe every individual person has to come up with his or her own solution to the mind-body problem. So, subjectivity, in a way, is the problem that we're trying to get rid of. And we can't get rid of subjectivity. And then I thought: What am I going to do with this idea? How am I going to elaborate on it? And, the idea for the book came to me: A book in which I would find mind-body thinkers who were wrestling with it, from the point of view of different disciplines: Philosophy, neuroscience, evolutionary biology, even economics. And I would try to show how their personal lives had affected their professional views. And I looked for people with particularly dramatic personal identity crises. In the case of Christof Koch, it was the breakup of what he had thought was a very happy, stable marriage; plus the loss of his religious faith. He'd been a devout Catholic since he was a little kid. And, shortly before he seized upon Integrated Information Theory, he stopped believing in God; and he started searching for other answers. With other people in the book, they were wrestling with alcoholism; with severe mental illness--schizophrenia in one case, bipolar disorder in another case. One of my favorite characters in the book, Deirdre McCloskey, who is a very prominent economist and somebody that you know, Russ: She was born a he, and spent the first 50 years of his life as Donald McCloskey; and was married and had two children. And suddenly in his 50s decided that he was really a woman. And I really just wanted to show the intersection, the entanglement, of these sorts of personal issues with the attempts of these intellectuals, these thinkers, to come to grips with the mind-body problem. So, that's why I wrote the book as a series of 9 profiles of different thinkers who had very different approaches to the mind-body problem.

Russ Roberts: I've been lucky to learn economics from both Donald and Deirdre McCloskey. Donald was my professor at Chicago; and I'm still learning from Deirdre. And she is a former EconTalk guest, and we'll put up a link to that episode with her work, as well.

| | 15:23 |

Russ Roberts: But, the focus of the book as a series of portraits--besides the fact that these people are very interesting people. Right? It would be a fun book even if they didn't have much to say about the mind-body problem, because they are just interesting people and they have gone through interesting things. But one of the--it does allow you to hit this theme, which is a big theme of this program--that we're all prone to confirmation bias: that our faith and our reason and objectivity is greatly overstated. And the book hammers that, on that, as a meta-theme, all the way through. And it's utterly fascinating. But, as a result, because it is a medley, it could turn out--I don't think it does, but it could turn out to be nothing more than an interesting grab bag of perspectives. But it's more than that. And, what would you say is the lesson of the book, both for you as the author, of having explored in some extraordinary depth some of the personal travails and experiences that you write about? What's the lesson for you? And what's the lesson you want me, as the reader, to take away?

John Horgan: I guess--just speaking for myself, in the course of writing this book, I think I've become not just open minded--that's too mild a term for how I feel now. I have decided that, when it comes to understanding ourselves and deciding who we are, there is no hope for a final answer; and that I don't want there to be a final answer. And it's not just because I'm in love with mystery. I've begun to see how science, especially when it's turned on us--when we're using science to try to understand ourselves--has this terrible downside of possibly limiting our freedom, and limiting our imagination. So, just in terms of personal identity, I see human history as this gradual process of giving us more and more choices to decide who we really are. And science has helped us understand ourselves from different perspectives: certainly evolutionary biology did that, helping us understand our connection to all other species on earth. But, there's a political and philosophical dimension to this as well. The expansion of human rights is really about giving us more freedom to discover who we really are, and to change our minds about who we really are. And, so, by the time I finished the book, I guess I'd come to this--I see that our effort to figure out what reality is and what we are as being in this tension with our desire for freedom. And, I guess when it comes to human nature--I think in some cases, science is really dictating how the world works. I'm not a total Post-Modernist: I don't think scientists are just making stories up. And, I think that the atomic theory of matter and the periodic table and the theory of evolution--they are giving us deep insights into how nature works. But, science has always been very weak when it comes to trying to help us understand ourselves and to solve some of these deep riddles, like free will itself, which I see as pretty much synonymous with freedom. And so I guess the biggest lesson for me--one way I could put it is that: Freedom, when it comes to human beings, when it comes to trying to understand who we really are, freedom should trump truth. And we should be very wary of anyone--whether they are religious prophets or scientists or philosophers or politicians--who says they know who we really are and that there are consequences to that; that we should live in a certain way to fulfill this vision of who we really are. There have been all these utopian visions in the past that have been based on a single idea of what we really are; and in general those have led to disaster.

Russ Roberts: I am reminded of Adam Smith's man of system in The Theory of Moral Sentiments where he says that the man of system thinks that humanity is just like pieces on a chess board that you can move around without being conscious of how--that they have their own modes of motion and their own desires; and the people who try to impose their will on that chessboard do tend to lead to death and destruction. It's kind of a horrifying aspect of modernity.

| | 20:48 |

Russ Roberts: But I want to go to the--I want to digress for a second; maybe it's not a digression. I want to talk about the Enlightenment, and reason. Because, you've made a very interesting summary of what I would say is the benefit of science. We've gotten so many wonderful things from science and technology, glorious things. Glorious things from the liberation of reason in the last 300 years or so. And most of those glorious things are material, almost by definition that's going to be the case. There are people who think science can give us nonmaterial things. We'll talk about that, I'm sure, at some point today. But, the Enlightenment has been a pretty great thing. And yet--there's that 'and yet'--the worship of Reason can be extremely dangerous. And this idea that there's only one correct way to think of ourselves, I agree with you, is a seductive and potentially dangerous idea. So, I'm a big fan of freedom, and the freedom to decide for oneself, how to look at oneself, how to look at human existence. Yet, at the same time, you have to be conscious and aware of the fact that we are the product of our family, our genes, our destiny, perhaps: that free-will thing rears its head and you start to say, 'Do you really think I can choose how I make myself? I really have the freedom to be who I want to be, to mold myself?' I mean, that really is in many ways, I think, the American Dream. And, I'm not as romantic as I used to be about it. I'm a little less romantic, as I see it not working out so well, overall: it's not as glorious as it seems to be. It seems to me it's a very mixed bag.

John Horgan: Yeah. You know, freedom means different things to different people. I actually--the last full chapter of my book was devoted to McCloskey who has a vision of human history that I find very appealing to me, because I'm an optimist. And I believe in progress; I want to believe in progress. And I want to believe that life is getting better and better for more and more people, in spite of our obvious setbacks. And, McCloskey is pretty much a laissez faire capitalist, and, you know, she thinks that we're going to work out our current problems; we're going to figure out climate change; we are going to overcome some of the excesses of capitalism. We spoke a little bit before Donald Trump was elected; and I don't think either of us was anticipating that Trump would be elected. I'm not as optimistic in general as I was a couple of years ago, and I'm much less optimistic about capitalism working through its problems for the benefit of all. And, capitalism, of course, is one expression of our modern freedom. So, I'm--that's something--

Russ Roberts: What are you going to do with that, John? I mean, that's a--I'm sympathetic to your view. I'm a hard-core free market capitalist myself. But I also am worried about it. But, what's the alternative? Given your unease about single-minded solutions, what's--it's hard to beat the bottom up, emergent aspect of capitalism. You could argue it's too much crony capitalism. Great! Let's get rid of the crony part. I'm all for that. But, where are we going to go?

John Horgan: Yeah. I'm hoping that it can just be reformed in regulation. So, the Scandinavian countries which are always upheld as these models of successful societies, they are certainly capitalistic but with lots of regulation and government intervention. I don't think capitalism works very well when it comes to health care. American health care is a total mess. We pay more than any other country and our health outcomes are way down compared to most other countries--certainly the Western European countries. And capitalism has produced inequality that I think has become toxic. So--there's also the problem of climate change, which is a product of unregulated industry. So, my hope is that people come to their senses, even the free market people, realize that there's certain areas where capitalism works really well and other areas where you need some kind of government intervention. And, I'm just hoping that happens, still. But, right now, it's hard to see how it's going to happen. I certainly don't have any specific solutions to solving these problems.

Russ Roberts: I just have a couple of things. If you look at the proportion of our health care spending that is out of pocket, versus paid by third party, the out-of-pocket portion has steadily decreased since about 1950, coinciding with a massive increase in both quality and expenditure. So, it's again a very mixed story. But, we don't have anything remotely like free-market health care. So, I would just urge you not to judge the current mess that we are in, of spending enormous amounts for maybe not-such-great results, as a product of free choice. It's an unbelievably highly-regulated market. So, it's not much of a: It's not a free market, for sure. And government's hand is quite heavy right now. We can disagree over how much, how different or not it would be if government weren't involved. There would be different problems, of course. But I think that's important to put on the table.

John Horgan: Well, I think we're probably pretty much in di[?], --in agreement. I don't see an alternative to capitalism. I've had some critics of capitalism come to my school--Naomi Klein gave a talk a couple of years ago, and you know, a real barnburner; and it was about how we need to reform capitalism in some kind of radical way or civilization is going to end because of global warming. That was her message. But, Naomi Klein, at least from my conversation with her, she recognizes that we need capitalism in some form. She's not a real revolutionary. I don't think I know any true revolutionaries. So, it's a matter of tweaking the system to help it overcome some of these problems. And, just going back to the theme of my book, ensuring that whatever system we have, it keeps giving us more options for living our lives. For choosing different identities for ourselves. And even changing our minds and adopting different identities at different points in our life, the way that Deirdre McCloskey lives. That, the amount of freedom that we have today is so much more than--certainly than what was available when I was a kid--

Russ Roberts: Yup--

John Horgan: When it was illegal for blacks and whites to get married in certain states. Abortion was illegal. Homosexuality was a crime in many states. And, you know--so, I'm sort of in the Steven Pinker camp of trying to get people to recognize that we really are making extraordinary progress in many ways. But it's threatened. It's constantly threatened. And it's threatened more now than at any time in recent history by this resurgence of--maybe this is too strong a term, but of very traditional, even kind of racist and sexist thinking--

Russ Roberts: Well, I--

John Horgan: and a throwback to other kinds of ideologies that do not accept certain kinds of human freedom.

| | 29:45 |

Russ Roberts: I'm worried about a different set of things. I'm somewhat worried about that. I don't--think the system is pretty resilient right now. I'm more worried about populism writ large, and a decline in the rule of law, which would lead to all kinds of things of which the ones you are worried about would be part of them. But there would be other things, too. And restrictions on freedom for lots of people. And I think that's a somewhat ominous turn. So, my view, as listeners know, on the Enlightenment thing is that, I'm not the optimist I used to be. I've been influenced by John Gray and Jordan Peterson and others to think a little bit more broadly beyond the material wellbeing that we have--which I'm a big fan of, but I don't want to oversell it. It seems to me that the trump card that you have to play--and I have played as a freedom lover--is, if you don't like, say, the loneliness of modern American life, which I worry about right now--you are free to join clubs, communities, churches. You can go live in a small town, if that is what you long for. That freedom includes the freedom to join with others. And so, I think we need to--that's the trust I have in emergent solutions to these problems. The example of technology--that many of us are addicted to it and it's unhealthy and it's destructive of the human experience--I think that's true. And I think it's really important that we be free to make that choice for ourselves, to give up technology if we can; to look for ways to help ourselves if we feel we are addicted. And not to have, say, those solutions to those challenges come from legislature. So, I think that's where I think we agree. I hope--

John Horgan: Yes. Absolutely. The way I put it in my book is that, you know, we've had this age-old quest to find a perfect society. A Utopia in which we can all discover our true selves. And the implication is that when we discover our true selves, we are all going to be living in harmony with each other and with the rest of nature. And what we have now--and, of course, this utopian idea which is manifested in certain religions and also in the ideologies of Communism and National Socialism and the Nazi Party--it's led to some very bad consequences. But it's still--you need a Utopian vision, if you are dissatisfied with the way things are. You know, you've got to have a vision of how you want things to be. And what I think is fantastic and underappreciated about what we have in the United States right now, and I'd say in Democratic societies in general, is, it's kind of like an anti-Utopia. The idea is that you can--'You are free to choose; you are free to create your own mini-Utopia.' And so, if you are a fundamentalist Christian, that's fine. And you can create your own community of people who think that way. Or Buddhist. Or maybe, you know, fly-fishing is your passion and you think that's the best possible life. I happen to have grown up in the 1960s; I was really into psychedelic drugs. And I know communities of people who share that as a kind of basis for living. And a kind of spiritual path. So, in our--you can say that our utopia consists of allowing people to discover as many possible utopias as possible. Including one which would consist of turning your back on this kind of society. And turning your back on technology. And isolating yourself in the woods with your family, or again with another group of Luddite types--

Russ Roberts: yup--

John Horgan: And so I'm just hoping that we can hang onto that. What worries me is that I feel that democracy is passing through a kind of crisis right now. And there are a lot of doubts about whether democracy will, um, will prevail. And there is always this counter-trend in humans toward wanting certainty. And you want to believe that what you value most is objectively valuable, and that other people should value it, as well. Your truth, your answer to the mind-body problem, to the question of who we really are is The Correct Answer, whether it's political or spiritual or scientific. And, I see strains of that kind of thinking in the world right now; and that's--that worries me.

Russ Roberts: No, I agree. And I--I would just say that I think democracy is incredibly dangerous, and that's why we have a republic. We don't have majority rule in the United States, and I think there's a feticization of majority rule that's quite dangerous coming from--that happens to be coming from the Left. There's plenty of dangerous things coming from the Right. But, a sort of worship of Democracy as a majority rule of democracy as "the will of the people" when it could be 52% of the people wanting to brutalize the other 48% or run their lives is really a dangerous thing. And I wish we could get back to a world where we honored the Constitution a little bit more and had respect for the fact that democracy is a flawed, imperfect system. So, I agree with everything you said, more or less, about the beauty and poetry of a system that, a utopia that says there's no utopia, so we each create our own.

| | 35:56 |

Russ Roberts: But, I want to get back to the book. Why does this book matter? And I'm asking this partly because I know listeners--there must be some listeners where I've kind of lost them already. Who are saying like, 'What the heck? Who cares? Why this consciousness thing? I'm just going to live my life. What's the importance? Why does it matter whether science understands the brain and the idea of consciousness? Why is this--other than just intellectual golf? It's just a form of intellectual entertainment. There's nothing important here.' What's your answer to that, that listener who turned us off 20 minutes ago?

John Horgan: Well, I think scientists and philosophers have turned the mind-body problem, the problem of consciousness, and free will into these very sort of esoteric technical problems that are only really subjects for experts, and that you have to learn quite a bit of philosophy and science, biology, neuroscience, and even mathematics to really have anything to say about the mind-body problem and to understand some of the new theories. And this is why I'd like to tell people that it's really the problem of who you are. I assume everybody, all your listeners, have at least at one point in their lives asked that question, 'What am I really?' If you are religious, if you are Christian--I was brought up Catholic--you think, 'What I am, really, is an immoral[?] soul that was created by God, and if I live in a certain way they I will be rewarded by God. And if I live in another way, then I might be punished.' So, that religious concept is a very common response to the question of who we really are. Science has given us different ideas of who we really are: are we a software program, or a collection of genes? We're animals that are related to other animals, especially to the great apes; and our brains and bodies, our minds are sculpted by natural selection, and we have certain tendencies that can be explained by these theories. Economics, economic theory gives us a certain view of ourselves. So, every thinking person is trying to figure out where they stand in relation to all these different ideas that thinkers for millennia have been giving us about who we really are. And the assumption has always been that there is an answer to these questions; and an answer that can help us make sense of our lives, that can help us, help give us a sense of meaning. And, I'm actually telling you that there are an infinite number of answers. There is not a single answer. And, actually, the idea that there is a single answer is a bad idea. It has had bad consequences through human history. So, if my book succeeds, by the end, people will know why this matters. And they will realize that it's as personal and important a topic as there can be. It's an attempt to help people make sense of their lives.

| | 39:50 |

Russ Roberts: So, I want to take the example of one of your portraits--and you'll remember the name, although there's more than one with this related issue. It's the story of a scientist who cheats on his wife. And, it ends up destroying his marriage. And, I don't think he's particularly happy about that; and there's some shame involved in the way he treats his wife, in the story. And, at one point he sort of reflects, 'Well, it's biology. It's hard to resist sexual attraction.' And, we all know that. That's what science teaches us. And, if you're not careful, it's what science excuses, right? It says, 'Ehh. You can't blame yourself. You don't have personal responsibility.' And, that's just a--one way of thinking about that is: That's what science teaches us, but if we're not careful it will lead us astray, if we don't add to it the potential for personal responsibility. Although, I think--in a way, that's kind of a microcosm of the whole issue. Right? We have urges. Self-interested urges--this is where the economics also comes in; and it's what Adam Smith wrote about in The Theory of Moral Sentiments: we're fundamentally self-interested; and yet we don't always act that way. Which is extraordinary. Right? At one point in the book, you say, 'We understand who we are. We're biologically designed to reproduce.' That's it. But, of course, we hate that--except when we are trying to excuse our behavior. We might invoke it, as that scientist did. But, why do we hate that? Why is it that it bothers us that we're just animals? Why can't we accept it? And I would suggest that maybe we're not just animals, right? But I'm curious what your thought on that is.

John Horgan: Well, so one of the great crises that's been created by modern science, and especially the assumption that we are just matter--we are collections of genes designed by natural selection--is that we don't have any free will. It's very hard to understand how free will arises in a strictly physical universe. And there have been some great scientists who have been disbelievers in free will. Einstein was one--very much to my dismay. Einstein once said that 'If the moon were conscious it would think that it was revolving around the earth because it wanted to.'

Russ Roberts: Yeah.

John Horgan: Francis Crick, who I interviewed back in the early 1990s and he, as I said earlier, was one of the people who made consciousness scientifically a respectable topic, didn't believe in free will, and thought that the more we learn about how the brain works, the more we will accept that free will is just an illusion. I--maybe because I was brought up Catholic, maybe because it is not strictly rational--I need free will. I need the concept of free will much more than I need the concept of God. Without free will, I can't make sense of life. I can't make sense of my own life. It seems to me that the choices that we make are what makes life meaningful for us. And, the more choices that we have, the deeper the meaning is. This is why I think it's so important that we've had more freedom as history has progressed. There are no good explanations of free will right now. People invoke quantum mechanics, but with a lot of hand waving. It's not very plausible even to someone like me who really wants free will to exist. But, my conclusion is that this just shows that modern science is radically incomplete, because it cannot yet explain this phenomenon that all of us know is real. And yet--and without which life doesn't make any sense. And even understanding human progress, human history, without the concept of free will it doesn't really make any sense.

Russ Roberts: So, I sense--

John Horgan: So--

Russ Roberts: Go ahead.

John Horgan: Sorry. Go ahead.

Russ Roberts: Well, I was going to say that we have a lot of evidence for free will. It's--in our heads. We feel it. We feel like we have free will. The question is whether that's an illusion or not. I give an example: If you back to 2007 and 2009 and 2011 on EconTalk, I interrupted guests a lot more than I do now. I just interrupted you, accidentally, actually. But I've wanted to interrupt you about four times during that last set of remarks you've made. And, over the years I've gotten better at interrupting less. I still fail, now and then; and of course, there are times when I think it's good to interrupt, still. But the question is: Do I have control over that? Is that--this is such a trivial example. It's akin to the second or third or fourth cookie for dessert: you know, do I have free will to take a third or fourth cookie? Sometimes it feels like I don't. I feel like, 'I just ate the fourth one'; I'm thinking, 'What the heck was I doing there?' Obviously I didn't think about it or I wouldn't have eaten it. Other times, I think, 'Here I am eating the cookie. I could choose not to; but I'm going to choose to, even though I might regret it later.' All those daily decisions, if we really don't feel like have control over--we certainly feel like we have control over them. Which is your point. But, as you also say: Without it, there's nothing left. It's--you may as well--I mean, you are so unmoored if you are not responsible for your actions. If anything goes--forget the death of God; was it Nietzsche or Dostoevsky who said that once God is dead--I think it's Dostoevsky--without God everything is allowed. Without free will, boy, is everything allowed. So, I may be under the illusion that I've become a better interviewer because of a decision I made. But if that isn't true, then why would I try to get better in the future? Because there's no point to it. And yet, I do. I am. And I will. So, it seems to me--you have to live your life as if there is free will, I think is the right way to say it.

John Horgan: Well, the way I look at it is--you know, I've got all these arguments that I use to try to convince myself and other people that free will exists. And, what I've found is that they rarely work on somebody who is really sure that it doesn't exist. But, one that I use is that free will must exist if some people have more of it than others. So, you and I have more free will--and by that, I mean more of a capacity to see different options for ourselves. To imagine different trajectories for our lives ahead of us. We have more of that capacity now than we did, certainly, when we were infants. And even more than we were 9 or 10 years old just because we didn't know much about the world at that point. So, presumably, as we acquire more experience, more knowledge of the world, we can see more different, more possibilities ahead of us. Also, free will is dependent on the cultural and political environment in which we grow up. So, we were just talking before about the expansion of human freedom and human rights; and they have grown enormously just in my lifetime. Both for people like us, and especially for women and for African Americans, for homosexuals. So, again, without a concept of free will, then you eliminate all these different measures of human progress. To me, those are absolutely real. And it's almost beside the point that physics and chemistry and biology can't figure out what it means to have more choices. I don't really care. Maybe they will catch up at some point, and maybe they won't. But, to discard our concept of free will because science can't explain it now seems to me, just needlessly destructive, annihilistic.

| | 49:05 |

Russ Roberts: So, I want to make a different picture of your book, related to this. And then I'm going to take us in a different direction where I am interested in your thoughts on a different topic. Which is the following: 'The unexamined life is not worth living.' It's attributed to Socrates. I think there is something to it. Not just because it's part of what makes us human, but partly because if you want to have a satisfying life or a meaningful life or a happy life or a pleasurable life or a contributing life, you need to understand yourself a little bit. And your book forces us, the reader, to grapple what we are about and to think about what we want to do with this short, temporary time we have here on earth. And that would seem to me to be kind of important. So, I want to talk to you about, as you about something you mentioned in passing a couple of times, which is meditation. There's an enormous fad, it seems to me--intellectual trend, toward the value of meditation. I've become a little bit of a meditator over the last few years. I've gone to number of silent meditation retreats. And I think--perhaps an illusion--but I think it's helped me understand myself much better. You are a bit of a skeptic--comes through in your book. So, a lot of people are touting meditation as the thing that will save humanity. Which I think is ludicrous. A lot of people tout it as a road to morality. I think that's also ludicrous. But I do think it's the road to some self-understanding if done in a thoughtful way. What are your thoughts on that?

John Horgan: Yeah. It's funny you bring this up, because--I have been--you know, I'm a child of the 1960s. I have a lot of friends who went chasing after gurus and learned various kinds of meditations. I was more into psychedelics than mediation and yoga[?]. But, a good friend of mine, Robert Wright, is a really talented science writer, wrote a book called Why Buddhism Is True; came out a couple of years ago. He and his wife, who are dear friends of mine, have been bugging me to go on a Buddhist retreat. Because they say that I can't be a critic, really, unless I've given it a good shot. And I just dismissed that. Then I finally decided last summer, after I'd finished my book, to give--to try a retreat. And so I went on a retreat in last July, a one-week silent retreat. Lots of meditation. But, mainly just lots of lying on my back on the grass and watching clouds float by. And, Russ: It blew my mind. It's--I had a profound experience. I felt like I was high on LSD [lysergic acid diethylamide], for pretty much the whole week. And I'm still a little bit in the afterglow of that. And, uh, you know, going back to my book is that one of the themes of my book is that not only do different people arrive at different understandings of who they really are, but individuals keep changing their ideas of who they really are. I certainly have, throughout my life. And, my views have changed again, just in the last few months, because of this, this Retreat. So, I have really had to revise my estimate of the value of meditation. I still think that it's way overhyped. But, in my case, I agree: I think I've become--my girlfriend says I'm a nicer person since I went on this retreat. I just feel more relaxed. I think that the greatest benefit is that I don't get as bored and restless as much as I used to. I don't feel the need to be busy all the time. I can be just kind of content and whatever moments or situation I happen to find myself in. So, I'm not sure--this might all wear off within the next couple of months, or years: I don't know if I'm going to keep it up. But, it just reminds that, you know, life really is unpredictable. And, that it pays to try to be open-minded, both when it comes to understanding the world in general and understanding ourselves. I mean, I certainly haven't come to the end of trying to figure myself out.

Russ Roberts: Yeah. Robert Wright was a guest on EconTalk, talking about his book. We'll put a link up to that. And, I'm sympathetic, of course, to that transformation. I think I have experienced some of that myself. I think the flip side of that would be the following: I remember meeting a friend I hadn't seen in a long time--this was a few years ago--old friend. And, I remember being struck with how little he had changed, thinking, 'He's the same old (fill-in-the-blank). Same old guy. Same old person. He hasn't changed at all.' And then I realized, 'You know, he probably thinks the same thing about me.' And if he only knew how different I am inside--and I wonder how much of that is just the passage of time, versus actual transformation. I think I'm a much different person than I was before I went on my three silent meditation retreats; but I also worry that that's an illusion. That, to the outside world--to my wife and children--I mean, they tease me about it all the time, endlessly, about whether I've changed or not. I have less anxiety when I travel because of that retreat, those retreats. But, when I travel with my kids, those, of course, they are always--there's empirical evidence constantly being revealed about the effectiveness of that transformation. So, it's a very--again, it's an example of what we're talking about here: It's subjectivity all the way down.

John Horgan: Subjectivity all the way down. And humans--it's not easy being in an identity crisis and trying to understand who you really are. But, in a way, it's what makes life so exciting and meaningful. And, what we have yearned for--again, for millennia--is a resolution to the identity crisis, both that we go through as individuals and that we go through collectively as a species. We want to know who we really are. And, religion is a manifestation of that. An ideology like Marxism is a manifestation of that. We have scientific answers to the question of who we really are. And yet we sort of squirt out of every ideological bottle that we have created for ourselves. And that's a wonderful thing. And I'm sure that there are going to be ways we have of understanding ourselves in the future that come from not only science and philosophy, but also from the arts. And from the new technologies that we create for ourselves--that we can't even imagine now. And, one of the reasons I wrote my book is to get people to accept that and be open-minded to that possibility. And even embrace and cherish that vision of the future.

| | 56:41 |

Russ Roberts: So, you confessed to me you are a child of the 1960s--which means you are somewhere in my age group. I'm 64.

John Horgan: I'm 65.

Russ Roberts: So, you could argue this is something of an old man's game, this self-awareness, figuring-out-life thing. I think when you are 18, or 24, you have to spend some time living before you can figure out what life's about. And I think--I want to put in a plug for Pragmatism, the philosophy. I had a wonderful professor in college, Dick Smyth, who has since passed away. But he was an extraordinary teacher. And he gave the example of the Cartesian urge to, while in a boat, to pull up every plank and examine it: 'Is it safe? Is it good? Is this a healthy plank, or does it need replacing?' And, that's not a practical, pragmatic--literally--pragmatic way to go through life. Because, he was talking about intellectual planks. He was saying, 'Is this true? Should I believe this?' or, 'Should I replace this view, this belief, with a different view?' As if reason could solve those problems. And I think, in this conversation, romanticized the ability to transform oneself. We are, in many ways, as much as I love free will, we also are the product of our genes, and our family, and our culture, and our country. And it's not--it's a bit of an illusion to think that your mind can fix all of the things that are wrong with your mind. Which, of course, is what we are sort of talking about here.

John Horgan: Yeah. Well, I guess I would object to the language of 'fixing our minds.' I think that the idea that there's something wrong with us--this is where I disagree with my friend Robert Wright. He thinks that--the guy who wrote, Why Buddhism Is True,. He thinks that there really is something wrong with us. You know, it's sort of a version of original sin--

Russ Roberts: Yes--

John Horgan: and Buddha told us that there's something wrong with us. And, so, they are creating, in a sense, the problem that they purport to solve. Um, and I'm really sensitive to that problem. This is why I'm saying--I'm trying to convince people to see identity crises as positive and exciting. Another way that I try to get people to see, just the human condition--and I think this comes from my experience with psychedelic drugs, but it's something that I feel--I certainly felt on my Buddhist Retreat and I feel in all sorts of situations: When I'm not high on psilocybin or LSD [Lysergic Acid Diethylamide]. Which is just that life is really strange. Right? Life is really weird. It is infinitely improbable. And I think this is something that science has actually helped us to understand. It's like a convergence of science and mysticism. Life is--our existence is just infinitely improbable; and yet here we are. And, you know, if you think of one definition for something that's infinitely improbable and yet it happens anyway, would be a miracle. So, I like to tell my students, when I feel like--when they seem to be glum, which they often are, these days--I give them this little spiel about how life is a miracle, and you should--you've got to get on with your life, as you said. There are these practical realities; you've got to get a job; if you want to have kids and get married there are certain things you have to do to make that happen, and to make it a success. But: Try to stand back and just look at your life. And life, in general, now and then. And realize how extraordinary it is. This is something that I also try to show in my book: the mind/body problem, the human condition, consciousness--all these things--there's a paradox that the more we study them, the stranger they seem. The more inexplicable they seem. And that's what I'm trying to get people to see, as well.

| | 1:01:14 |

Russ Roberts:

Russ Roberts: It reminds me of the--this is a very strange thing to be reminded of--but in P. G. Wodehouse, the great British comic writer, Bertie Wooster is not very bright. And his valet--his butler, his valet, Jeeves, is quite bright. And the humor of the Jeeves stories is that Jeeves is a lot smarter than his boss. And, a lot of things mystify Bertie, because he's not very smart. He's not very self-aware, either. And something will happen, and he'll say, 'You know, Jeeves, Life is rum.' It's a British expression: I think it just means weird. And I think about it all the time. Life is so rum. I think we have a tendency, and it's part of your book in a way we haven't talked about. You know, I know the insight of Ed Leamer, EconTalk guest, who said 'We are story-telling, pattern-seeking animals.' And we really like those utopias, those ideologies, those religions--the things that we want to organize our thinking around. And there is such a temptation--and, the one I've been thinking about lately--if all goes as planned, this episode with you, John, comes out after our conversation with Peter Berkowitz on the Enlightenment. And, you know, I have an urge--well, is the Enlightenment good or is it bad? Well, it's both.

John Horgan: Yeah.

Russ Roberts: And it's really hard to accept that. I had an incredible example of it recently, where, in the aftermath of the murders in Pittsburgh of 11 Jews on a Saturday morning [Sat., Oct. 27, 2018--Econlib Ed.], I went to the funeral of two of the people who were killed in Pittsburgh--because I just felt I should have. And it was one of the most--it's almost embarrassing to say this--it was one of the most exhilarating and inspiring things I've done in my life. I say it's embarrassing because it was a tragedy. We were commemorating a tragedy at this funeral. But, there was an unimaginable outpouring of human love and affection by the 1500 or 1800 people who were at that funeral. Including members of the Pittsburgh Steelers, who were there because the sister of these two brothers who had been killed who had worked for the Steelers. So, in the middle of the NFL [National Football League] Season, Ben Roethlisberger, the quarterback, and Mike Tomlin, the coach, showed up at a funeral--took off 3 hours in the middle of the day. Which is just--I don't think people realize what a bizarre and an incredible thing that is for an NFL--people to do. That's not the way they behave. People flew back to Pittsburgh who weren't Jewish, who didn't know any of these people, just because they felt they should be there. Every policeman who I talked to, and thanked for being out on the street that day--a number of them felt guilty. They were sad and sorry that they hadn't prevented this. And so, in the middle of this most heinous crime that a human being could do, just take people's lives of strangers other than religious heritage, this unbelievable human joy--not joy, that's not the right word--but coming together and compassion was on display there. So, which is it? Are human beings fundamentally good or fundamentally bad? Well, we're both. Life is rum. Life is--and that poetry, that richness of the human experience, to me, is just deeply--I'm deeply gratified when I appreciate it. And, I just think--appreciating it is a huge part of being alive.

John Horgan: Yeah. I--when you were talking about this, about going to those funerals, it reminded me of my reaction to, you know, the terrorist attacks on 9/11. So, I was living just above New York City, and that morning I--my wife and I, now ex-wife, ran up to this hill where we live and we could see the New York City skyline, and we could see the Twin Towers had collapsed. They weren't there any more. And I remember that day as feeling both terrified--very frightened and thinking about the consequences for our young children, then--but I also felt a kind of exhilaration. Everything seemed brighter and more real. I think that the death and the tragedy and the unpredictability of it was a reminder of how fragile life is, and how easily it can be snatched away from us. Which helps you see its beauty. And, it helps you see all the good things that we have--the love, and the friendship, and how much we have to lose. So, that is a paradox. This is something that I've tried to show in my own writing. I think it's what spiritual experiences do for us when they are really working: They help us confront this richness of our own lives with, you know, the worst possible aspects and everything that's good. I'm not a religious person, myself. I stopped being Catholic a long time ago; and I've never found a concept of God that makes any sense to me, because, you know, the traditional God of Christianity, and of Judaism and Islam, who is supposedly all-powerful and loves us, allows these terrible things to happen. How can that be? This is the problem of evil. But the flip side of the problem of evil is the problem of beauty.

Russ Roberts: Yeah.

John Horgan: And friendship. And love. And everything that makes life worth living. That's a problem, too. If you are an atheist, how do you account for that? And a strict materialism--and this is something that I explore in my book and that I ask all my subjects--strict materialism doesn't really give an adequate explanation for, you know, this fantastic human adventure in which we do actually make progress. We learn ways to live with each other with more tolerance, and respect, and to give ourselves more freedom. So, yeah. It's a mystery.

| | 1:08:04 |

Russ Roberts: Yeah. Well, you bring me to an issue that came up in a conversation with Alan Lightman a couple of episodes back, where he makes the point in his book, Searching for Stars on an Island in Maine, and he says, 'I wonder if anything impermanent can matter.' And he asked the question--I don't remember exactly how he says it, but this is the gist of it--'Shakespeare, King Lear, great play. Maybe it will last a thousand years. Maybe 10 thousand. But, at some point all the lights will go out in the universe. The stars--the sun will lose its energy. It will burn out. If we've escaped to other galaxies, they, too, will--their stars will, other solar systems will burn out.' And his view, which disturbs him: Nothing is permanent. Nothing. He invokes an extraordinary ant colony that somehow manages to last for decades. And in the midst of those decades they create art, and understanding of what they are. But, after a hundred years, an ant colony can't live beyond that. And it's gone. Is there anything meaningful about it? It's a very bleak vision in a certain way. I fought against it, when we talked about it. But, afterward, either--I can't remember whether I came to this idea or a listener wrote about it--even though permanence seems to be the hallmark of meaning, impermanence is what gives life its meaning. In so many ways. It's an incredible paradox, right? If we lived forever, who cares what happens today, tomorrow, yesterday, a year from now? It's a fact that the time period is finite is what gives life its extraordinary bittersweetness. Right? It's that skyline in New York, and the funeral that I went to, and all those things--the poignance of the impermanence of life is deeply meaningful. Which is crazy.

John Horgan: Yeah. And we struggle against it. And yet, in our struggles, we discover meaning, and we can also share our experience of being mortal creatures who are eventually going to lose everything that we love. And being able to share the experience, that's a kind of way of overcoming the impermanence of things. You know, there are scientists who think that we can become immortal, and we can shed our flesh-and-blood bodies and become these kinds of cyborgs or cyber-creatures, live in cyber-space forever. I find that fascinating, but I also see it as a kind of human pathology.

Russ Roberts: Yup. Yep.

John Horgan: And, an attempt to escape--what also makes life so exciting and wonderful. But, it's always going to be painful, as well as beautiful and blissful. That's--I guess, growing up, or a kind of mature spirituality just accepts both that the darkness as well as all that's good about life. It's not always easy for me, I've got to say. And, you know, I have children; so this is one reason I worry about the future--just the near-term future. I also worry about--I think about, along with Alan Lightman, who I've met, how meaningful can life be if everything is going to be extinguished--I don't know, billions or trillions of years from now. And the universe evolves toward some state of terminal heat death. There are some scientists who have tried to come up with solutions to that: How we can survive in an infinitely large, cold universe.

Russ Roberts: Heh, heh, heh.

John Horgan: Yeah. Believe it or not. Freeman Dyson, one of the greatest physicists who ever lived, has come up with all kinds of crazy schemes. We can become gas clouds in space, sentient gas clouds. And our main cognitive activity will be figuring out how to conserve energy for another trillion years. Huh, huh. I'm just going glad--that just makes me glad that I'm here sort of trapped in this aging body right now and capable of enjoying, enjoying the very mortal flesh and blood life that I have.

Russ Roberts: Well, Freeman Dyson has also been a guest on the program; and we did not talk about that. But it strikes me as interesting, and we'll close on this--it strikes me that so many of these scientific explorations--the brain in the box, you know, immortality through the singularity, what you just mentioned of Freeman Dyson's--these are desperate attempts by people who don't believe in God to create a God that's different. And God is one way to solve the impermanence problem. Obviously. If you can't believe in God, it's interesting to me that you have to find something else. Why is that? Why do we care? Why can't we accept the fact that life is short? Now, an animal--even a proton--with its limited consciousness, or a dog, with its limited consciousness, doesn't--I don't think--spends any time worrying about its mortality. I don't think it ever wonders, 'Should I eat this, because it might make me sick, and then I'll perhaps die before my time?' I don't think a dog has those worries. We do. Why? Why do we have those worries? And, to me, that's a--I find that deeply inspiring, that mystery. It--to some extent, it's a backbone of my faith. My religious faith. It helps me, at least rationalize it in a scientific world. But close with your thoughts on that.

John Horgan: Well, the way I think about this sometimes is that, you know, I guess, intellectually, rationally, I accept that none of our attempts to create a transcendent meaning work. That's what religions try to do. There's some scientific attempts to do something similar to that, the kind that I was just mentioning that Freeman Dyson has proposed. But, wrestling with the meaninglessness of life is--has given me meaning. I feel extraordinarily privileged to, at the age of 65, to still be wrestling with these deep philosophical problems that most of us are supposed to give up in our sophomore year of college.

Russ Roberts: Heh, heh.

John Horgan: And, you know, talking to somebody like you who obviously is obsessed with these sorts of things as well, it gives me a sense of companionship. It's fun. I enjoy it. And I'm going to do it as long as I can. I disagree with Socrates that unexamined life is not worth living. I think that's a terrible thing to say. Because there a lot of people who are not terribly introspective, and they can have perfectly good lives. But, for me, it's been wonderful. I've really enjoyed it.

|

(23 COMMENTS)

Peter Berkowitz on Locke, Liberty, and Liberalism

Peter Berkowitz of Stanford University’s Hoover Institution talks with EconTalk host Russ Roberts about the origins of liberalism and the importance of John Locke. Berkowitz defends the liberal project of individual rights and liberty and argues that critics of Locke mischaracterize his thought. The conversation closes with an evaluation of the Enlightenment.

This week's guest:

• Peter Berkowitz's Home page
• Peter Berkowitz on Twitter.

This week's focus:

• "Anti-Liberal Zealotry Part I: Our Immoderation," by Peter Berkowitz at RealClear Policy. September 14, 2018.
• "Anti-Liberal Zealotry Part II: The Crux of Deneen's Critique of Liberalism," by Peter Berkowitz at RealClear Policy. September 19, 2018.
• "Anti-Liberal Zealotry Part III: Locke and the Liberal Tradition," by Peter Berkowitz at RealClear Policy. September 21, 2018.
• "Anti-Liberal Zealotry Part IV: Classical and Modern Lessons of Moderation," by Peter Berkowitz at RealClear Policy. September 26, 2018.
• "Anti-Liberal Zealotry Part V: Rediscovering Liberalism," by Peter Berkowitz at RealClear Policy. September 28, 2018.

Additional ideas and people mentioned in this podcast episode:

• Patrick Deneen on Why Liberalism Failed. EconTalk, July 2018.
• Yoram Hazony on the Virtue of Nationalism. EconTalk, September 2018.
• The Two Treatises of Civil Government, by John Locke. Online Library of Liberty.
• John Locke. Biography. Concise Encyclopedia of Economics.
• Enlightenment Now: The Case for Reason, Science, Humanism, and Progress, by Steven Pinker on Amazon.com.
• John Gray on the Seven Kinds of Atheism. EconTalk, October 2018.

A few more readings and background resources:

• Yuval Levin on Burke, Paine, and the Great Debate. EconTalk, May 2014.
• Richard Reinsch on the Enlightenment, Tradition, and Populism. EconTalk, June 2018.
• Michael Munger on John Locke, Prices, and Hurricane Sandy. EconTalk, November 2012.
• Friedrich Hayek. Biography. Concise Encyclopedia of Economics.
• Gary Becker. Biography. Concise Encyclopedia of Economics.
• Welfare, by Jeffrey M. Jones and Thomas MaCurdy. Concise Encyclopedia of Economics. Social safety net.
• The Federalist. The Federalist Papers, by Alexander Hamilton, John Jay, and James Madison. Gideon edition. Online Library of Liberty. PDF file.
• Redistribution, by Dwight R. Lee. Concise Encyclopedia of Economics.
• Milton Friedman. Biography. Concise Encyclopedia of Economics.

A few more EconTalk podcast episodes:

• Wolfe on Liberalism. EconTalk, May 2009.

Time Podcast Episode Highlights

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0:33

Intro. [Recording date: November 8, 2018.]

Russ Roberts: My guest is political scientist Peter Berkowitz.... Our topic for today is Liberalism, writ large. I will draw partly on a 5-part series that you did that we will link to on Patrick Deneen's book, Why Liberalism Failed. I want to start by your attempt--it's a bold question--to define liberalism. Not an easy thing to do. So, when you talk about liberalism, what does it mean to you?

Peter Berkowitz: Yes. Not an easy thing to do. Well, first we should distinguish: I don't mean, not because it's not an interesting question, but I don't mean liberalism as the term is typically used in contemporary parlance--that is, the left wing of the Democratic Party, the Progressive point of view, the school of political thought that argues that we should aggressively use government to regulate the economy and redistribute wealth. I don't mean that, although actually those thoughts are within the tradition that I do refer to as liberalism. When I use the term--or, I should put it this way--I want to think more about the modern tradition of freedom. And, since that's a sometimes cumbersome formulation, for short I say 'Liberalism.' And I have in mind a tradition that comes into being, that crystallizes, really, say, toward the end of the 17th century, in England, the seminal work is John Locke's Two Treatises on government. This is the tradition that, to a very significant extent, informs the founding of the United States, our Constitution. Its fundamental moral premise is that all human beings are by nature free and equal. It says that the task of government is to secure individual rights shared equally by all, rest government on the consent of the governed. It believes that government should be limited; it depends upon free markets and a vibrant civil society; and so on. That's the tradition that I have in mind when I refer to the Liberal Tradition.

Russ Roberts: And, talk about how John Locke matters, in general, for that. You happen to, arbitrarily of course, pick Locke as a turning point of some kind. Why is he important for the evolution of the institutions that we call Liberal Institutions in the West? And, who else would you give credit to, or who else is important in that evolution?

Peter Berkowitz: Sure. Well, there's a lot of credit to be given. But, Locke marks a kind of seminal moment. John Locke is not the first thinker in the Western tradition to write about limited government or the separation of powers, or even consent. But he's among the very first, and provides a classical statement of the idea that these political institutions and political ideas to be traced back to, grounded in the idea that all human beings are by nature free and equal. And, this is a relatively new idea. Not that the idea that human beings are by nature free and equal doesn't have roots in the Western tradition, in both classical Greeks and our Biblical tradition. But, the Bible doesn't base equality on natural rights, on natural freedom and equality. It bases it on our all being created in God's image. And Greek political thought doesn't begin from the idea that all human beings are by nature free and equal. Greek political thought tends to revolve around questions of virtue and human excellence, and draws moral distinctions among human beings based on the virtues and thinks about how to organize political society in relationship to virtue. Locke, again, he may not begin, he certainly doesn't begin, but he gives seminal expression to a new way of thinking about politics, a way of thinking about politics that says: most important fact about human beings--I use the word 'fact' here from Locke's point of view--is that we are by nature free and equal; and a legitimate political society must respect this freedom and this equality. Locke works that out, and much of political thought--not all, but much of political thought in the English-speaking tradition following Locke involves efforts to think through the variety of political and moral implications of this beginning thought: that human beings are by nature free and equal.

6:12

Russ Roberts: Why would he possibly--how could he possibly start there, given that he was writing in the 17th century, I think, when most people for all intents and purposes were neither free nor equal? What did he have in mind when he would make a claim like that, given that a lot of people were literally enslaved; others were in various kinds of bondage or lack of liberty, and certainly--there was a lot of inequality? What was he thinking and what did he mean by that? Go ahead.

Peter Berkowitz: Yes. Good questions. Well, I've been emphasizing as this Locke formulation by nature free and equal. In reality, human beings were not treated as free and equal: slavery, other forms of bondage, inequalities, even savage inequalities in society. At the time, Britain and Europe both were governed by divine-right monarchs. Divine-right monarchy seemed to suggest that there was a fundamental difference between kings and queens, and other human beings. Kings and queens had a right that other human beings lacked. So, Locke was writing at this time, 17th century, amid wars of religion after, officially in 1648 the great wars of religion ended but continued religious strife, including in Britain. And he was writing at a time in which the idea that kings ruled by Divine Right was becoming increasingly incredible, more and more: incredible in the technical sense of more and more difficult to believe. And Locke begins his second treatise raising the question: If we can no longer accept that political power is based upon the claims of Divine Right--and this is what he believed himself to have successfully shown in the First Treatise of Government, then we face a challenge, because we would prefer to avoid concluding that the exercise of all power is illegitimate or based upon force and violence, the stronger imposing upon the weaker. So, he asks himself, 'Is there an alternative foundation to Divine Right for political power?' His answer was Yes. His answer was political power is rooted in the natural freedom and equality of all--or, let's be more precise--in the decisions by individuals who are by nature free and equal to recognize the political power exercised over them as legitimate. Now, you ask a very good question: Why should anybody think this assumption plausible in the 17th century? And, I think one very important part of the answer is the Biblical tradition, because the Biblical tradition--and John Locke is very much writing within--I've used the phrase, but British scholar [?] John Donne, 'within a Puritan pattern of moral sentiment.' The dominant idea--I should say, a leading idea--taught by Protestantism was the basic equality of human beings. This was a teaching that you would have begun to learn when you were very young. Now, again, one objection one constantly hears is, 'Yes, but political reality differed from what children were taught and even from what might be professed in church.' It certainly did. Political reality almost always diverges from the ideal; and a great deal of politics involves bringing a recalcitrant political reality a bit more in line with what we think to be proper and just.

10:47

Russ Roberts: So, at that time--I think of it as a stirring, a feeling that something isn't quite right. And what follows from that is a set of revolutions, upheavals, both in the physical sense and in the intellectual sense, that ends up destroying the defensibility of that monarchy, Divine Right of kings--seemingly forever. And launches what we would normally--is part of, not only but is part of what we normally call the Enlightenment. Would that be a correct summary?

Peter Berkowitz: Yes. I think that gets you from Locke, toward the end of the 17th century, toward the flowering of the Enlightenment in the 18th century. I mean, one might add that there are additional developments: the rise of modern science, the rise of British maritime cultures. Ships are sent to all over the world. And not only the British, but other Europeans discovering the variety and diversity of humanity; as the economy becomes more involved and more intricate, more opportunities are created for more human beings; more human beings become open to the idea of human equality. So, a variety of elements are at work, all pushing us in the direction of recognizing that human beings are by nature free and equal, and making more demands for a form of political economic and moral life that reflects this essential equality and freedom.

Russ Roberts: And, one more definitional point: When Locke said that human beings are free, what do you think he meant by that?

Peter Berkowitz: Ah. Thank you. It's a very important question, and I should have already provided an answer to it. He meant 'freedom' in a precise sense. In other words, you can think of various ways of being free. If I'm hiking and I stumble and find myself pinned down by a rock, I can't move. I'm trapped in that situation. I'm not free to get up and move about. Or, if I have an aspiration to fly to the clouds. If I don't have an airplane, you could say, 'Well, I'm limited. I'm not truly free.' In some sense, these are legitimate uses of the word 'freedom.' But John Locke is very clear. He's not referring to freedom in that sense. The kind of freedom that we have by nature is not being legitimately subject to the will of another person, or other groups of human beings. Think about it this way: Locke is telling us that we can discern through reason that no human being is born with a title to rule over another, and no human being is born to serve another. We are not born with a duty to serve. We are not born with titles to rule. That's freedom. Now, I said, it's a narrow sense. But it's a profound sense. And it's rich with political significance. But, it doesn't refer to absolute freedom, complete freedom--as critics of the Liberal tradition come to say it does.

Russ Roberts: So, if I'm thinking of doing something and I'm worried I'm going to be judged for it--

Peter Berkowitz: Yes--

Russ Roberts: so those social norms constrain my choice--they don't constrain--that's not the right word. I don't know what the right word is there, but affect my choices. Just to take a very modest example: I'm going to a funeral, and I decide not to go in my gym clothes.

Peter Berkowitz: Yeh.

Russ Roberts: I decide to put on a suit. I'm free to put on--I'm free to go in my gym clothes.

Peter Berkowitz: Yes.

Russ Roberts: I choose not to because I think it's "inappropriate." That social norm, I assume Locke would not call a restriction of my freedom.

Peter Berkowitz: Yeah. So, we should be careful here. It is in a sense a restriction of your freedom--the guilt trips that our parents impose upon us or we as children impose upon our parents. Those are constraints on people's freedom, for sure. But, here's the important distinction: That was not the form of freedom that John Locke believed it was the government's job to protect. In other words, post-modern critics, for example, will talk about enslavement to social norms--

Russ Roberts: Exactly--

Peter Berkowitz: We should not deny that social norms can rein us in, pin us down, shackle us, already in the middle of the 19th century. John Locke and Tocqueville a little bit earlier, are making this point about the power of public opinion, and social norms, to limit us. We need to acknowledge it. It's true. Locke--Locke's teaching is: That kind of unfreedom, and the kind of unfreedom you experience in your ability to fight to the clouds and beyond, is not the kind of freedom the State is designed to protect or achieve to enable you to achieve. The form of protection that the State grants to prevent you from being subject to the will of another. And here I suppose I need to clarify. "Will," not in the sense of expressing an opinion or making a judgment that you dislike or deplore. "Will," in the sense of forcing you: the threat in the face of violence, with the threat of violence to act or to refrain from acting.

17:19

Russ Roberts: It's a very important distinction. And I think--I mean, you can use words any way you like, as long as, well, up to a point as long as you make it clear what you mean by them. And I think that particular distinction you just made is extremely important. And I guess it's the reason I call myself, often, a classical liberal--

Peter Berkowitz: yes--

Russ Roberts: a liberal in the older sense of the word. And by that, I'm talking about what I think is the correct role of the state. And when I talk about that correct role, I will often say I want a 'minimal state with personal responsibility.' And by 'minimal' I mean--I have no problem; I'm not an anarchist; I have no problem with government providing certain legal restrictions and regulations: courts, police, and so on. And everything is free to happen in emergent ways, but just not through the power of the legislature or the sovereign. And so, yes: It's okay; there are many things we don't like about life. I often: Use drugs as an example. I don't take drugs of the recreational kind. But I think we should be free to make that choice for ourself, and I have no problem with the role that religion or family or culture would play in restricting drug use through shame, education, inspiration--and various other ways. I just don't want the government forcing, not allowing people to have those choices for themselves.

Peter Berkowitz: Right. And I have a great deal of sympathy, myself, for that way of viewing the matter. In addition, that way of viewing the matter can help us understand enduring distinctions between Right and Left, within this Liberal tradition--or I use another term; I'm glad you mentioned now: Classical Liberalism--for the early moments and the mature moments of the modern tradition of freedom. You spoke of not being against the state, but for a minimal state. And, in fact, in practice many men and women on the Left recognize some limitations on the State. But, you can determine where a person falls within this broader tradition, modern tradition of freedom, by how much power they are willing to give the state for the purpose of securing freedom and equality. So, today's Conservatives tend to wish to see the State significantly limited. They want a broad, private sphere. They want the individual to be able to make lots of choices. Not because we're always confident that the individual will choose best or most wisely. But, because we're very skeptical that on balance and over the long haul that other people--government--can choose better for, uh, individuals. But, if you look at those people who want more regulation, including more redistribution, it is very interesting that always their arguments are couched in terms of freedom and equality. Very few people say, 'I want more regulation in order to achieve greater aristocracy.' Or, 'I want it to increase the power of my small clique or corner of the elite.' Almost always the arguments are in favor, are justified by an appeal by what's necessary to do to achieve true and genuine freedom, or meaningful equality.

21:09

Russ Roberts: If I can--I want to digress for a second. So, I find myself often arguing against those interventionist claims, by saying something like, 'I worry about the concentration of power in the hands of elected officials.' Because, as you said, I don't think they are going to do a particularly good job. And yet at the same time, I respect the intentions of the Interventionists who want to liberate people from what they see as oppressive conditions. Or, oppressive economic straits. And so, I think I--I find myself in what I think is a difficult position to defend, which is that: Ultimately, a lot of my opposition to various government programs or interventions is a fear of tyranny that is not apparent in the current setting. But I worry would be, if things continued in the way that they are going. And I don't know if that's a legitimate concern. I do know it doesn't sell very well. Most people don't find it as compelling as I do. And I have to then at least examine my own views as to why I find it compelling. Is it because of my so-called knowledge of myself? In a congratulatory view that I know a lot about history, perhaps? Or aware of how unbridled power has turned out, when it operates? And I guess, when I look at the other defense I would offer to my view is that when I look at the long trend in America, away from the Constitutional restraints of the past and toward a more--more of a democracy and less of a republic--I get deeply alarmed. Is there something--I suspect you share some of that concern; but it's interesting how few people find it compelling.

Peter Berkowitz: Yes, I share a great deal of that concern. But I do quarrel[?] with this, when you say how few people find it compelling. Actually, quite a number of people in the United States of America find it compelling. But, there are regions in the country, and classes of people--specific classes of people--who do not find this line of argument compelling. And those people tend to be very heavily concentrated at our universities--

Russ Roberts: They're some of the brightest and most educated, for what it's worth.

Peter Berkowitz: They're some of the brightest and most educated, and that's worth a lot. But they also form a specific political class, with distinct interests. These people think--many of these people think that they are not only very bright and very gifted, many of these people think that they know how to govern and that they know what's best for everybody else. And they, in my experience, grow impatient and resentful with people who don't recognize this. And they have both a strong desire to rule, great confidence, and great confidence in their abilities. And in having those two qualities, it seems to me, they warrant the kinds of suspicions that you entertain, and I do, as well, about what happens with great concentrations of power. Even if the original impulse is a noble impulse. But also, these people tend to equate both their interests and their perspective with the universal perspective, and universal interests. And that's just not so, historically or culturally. These people tend to be--

Russ Roberts: Explain. What do you mean by that? What's not so?

Peter Berkowitz: Well, for example, the overwhelming majority of professors at our elite universities are secular men and women. The overwhelming majority are men and women of the Left. It is not true of the United States of America, first of all, that the overwhelming majority are of the Left; and we have a sizeable religious population in this country. Moreover, this is not just a matter of representation. Now we touch on an area in which Enlightenment thought can be taken to an extreme. There are many people, many among our intellectuals, who believe that the secular point of view is not only a legitimate, a respectable point of view, a powerful point of view; they believe that it's the last word on reality. And that seems to me--

Russ Roberts: As many religious people do, as well. On the other side.

Peter Berkowitz: Yes, fair enough. And I'm actually equally averse to giving either group absolute power. Quite correct. But in our political society in the United States of America today, it is the secular class that is largely in control of our educational institutions. Not the religious class. Now, this is a rather new circumstance in the history of humanity. Up until the Enlightenment, there was barely a distinction between the religious and secular. All were in one way or another, almost all lived within a religious framework. So, yes: religious people, you might say all people, tend to equate their understanding of the world with the final understanding of the world. But for just that reason, Russ, it seems to me you are well-justified in your skepticism about handing over lots of power to determine not only decisions about labor consumption and production, but decisions about what can be said, what may not be said; what can be heard, what may not be heard; who or what to worship or not to.

28:01

Russ Roberts: But so many of the issues that I think are on the table, on the political table, are outside most of these concerns. Let's talk about the hard case. You and I--I know we're on the same people with respect to freedom of speech and what can be said and not said; and we both are upset, I know, at the current state of many university settings where certain things are, literally, not allowed to be said--at a place where we once believed everything should be said, so that the power of education can be wielded as fully as possible. I want to put that to the side. Let's take a harder case. Let's talk about various redistribution measures that the Left and the Right disagree on, or that interventionists and--the Liberal and Conservative interventionists versus noninterventionists disagree on. In particular, think about things like the minimum wage, the earned income tax credit, progressive taxation, the current levels of inequality--which, listeners know I think are greatly exaggerated. But even if they are greatly exaggerated, the actual levels are still large by many historical standards--I shouldn't say all historical standards: by some historical measures. And so, when we think about this in the framework of what you're talking about, the Lockean free-and-equal and the political issues of the day, you know, almost no one is willing to defend the abstract level of income distribution that would happen in a free market society, without the safety net, without social welfare spending, without interventions in the economy like the minimum wage. And, I don't think--when I think about--and I tend to be one of the few who is defensive of those; I'm willing, I would rather see civil society and philanthropy and charity be the means by which social differences are effected rather than through the power of the legislature and the state. I'm on a very lonely island there with a very small group of friends. And, when I think about the people on the other side, most of them are extremely well-intentioned. They are not the elites at the universities that you are criticizing and giving a hard time about, for their self-righteous--etc. They are just well-intentioned people who don't like the way the world is; and they operate on a case by case basis; they are not ideologues, like I tend to be. I try to be a more humble ideologue than I was when I was younger. But I'm still an ideologue. And I'm aware of it. Which is a plus. But the people on the other side just say, 'Come on. There's so much extra wealth laying around. You don't need it'--whoever 'you' is--and, 'Let's move some of it around.' And I think most of the people who are in favor of that don't want to be running the world. They don't want to see themselves as the philosopher kings. They just want to make the world a better place. So, what's your response to that?

Peter Berkowitz: My response is that there has always been--you could call it classical liberalism or the modern tradition of freedom--room for some state intervention in the economy, and even some redistribution; but it has to be limited. And, it's limited by considerations of freedom and right. Well, what do I mean? There's a wonderful, brief discussion in Chapter 6 of Locke's Second Treatise which deals with education concerning parents' obligations. Parents have an obligation to, argues Locke, to educate their children. But, there's also a puzzle there. If all human beings are by nature free and equal, by what authority impose their will? Educate? Because education is a kind of imposition, a discipline on their children. Locke [?]--

Russ Roberts: It's a very tough question.

Peter Berkowitz: It's a very tough question. Well, it's interesting. As a theoretical matter, it's easy to state what a solution is. As a practical, empirical, policy matter, it's at the heart of all our disputes. Locke answers this: Parents may exercise their authority, and must discharge their duty, in order to prepare their children for a life of freedom as adults. Very interesting. So, a lot of discipline, a lot of training, a lot of headache and heartache. But it's all just directed at and justified by the principle of freedom. The question arises--Locke raises the question: What happens if the child is orphaned? His answer: The state should step in. Government should step in and provide the education that it was the obligation of his father--Locke says, actually, of his parents--to provide. The state, you see, has an interest in ensuring that every citizen is at least minimally capable of fending for himself or herself. That means literate; that means capable of holding a job; that means capable at some basic level of participating in the governance of the country. So, even from the beginning in the most austere statement we have of classical liberal framework of government, we have a justification for state intervention. And, one can think in those terms about all the forms of intervention that you mentioned. Let's start with a social safety net. Although now, as then, education is one of the most controversial areas. But, the social safety net: Many people argue--including the great classical liberal Friedrich Hayek--that it's entirely proper for an advanced industrial, post-industrial, liberal democracy to make a, to maintain a basic social safety net. That is, to prevent, to try to prevent any citizens from falling below basic, minimum level of material, material wellbeing. It's bad for the country, it's bad for the economy, it's bad for the spirit of fellow-citizens if people are starving in the streets. So, there's no--this may be painful to certain kinds of Libertarian ears--but within the classical liberal tradition, so far as Locke is a member in good standing of that tradition--and I think he is--there's a very strong argument for a degree. But I want to go back to language you used earlier about a minimal state: that, the Liberal perspective also immediately adds, 'We recognize that there are cases for state intervention, to maintain certain minimums. Even moral minimums. But, we'd like that intervention to be as limited as possible, because we remain alert to the dangers of government, to the temptations of over-reach.' To use the language of the Federalist Papers of the encroaching nature of power. We want to avoid situations in which the remedy is worse than the disease. So, we can repeat this, of course, through the course of a discussion of all the great social issues of the day. One would find whether we are talking about a social safety net, tax rates, abortion, affirmative action, same sex marriage, transgender rights--a whole range of questions that one can make arguments in the name of freedom and equality on both sides of the question. With Progressives, or the Left side of the spectrum, more interested, focused on progress, improvement, making adjustments by means of the most powerful agency in society--that's government--to improve the ability of more Americans to enjoy their rights. And to create a society that more accurately reflects the equality we all share--the Progressive argument. With Conservatives constantly warning that giving the government the power to do x, y, or z brings about threats to freedom, and therefore equality that will be worse than the situation without those Progressive reforms. In other words, this is the enduring structure of the debate; and I'll only add this for now: That's as it should be. That is the debate that, since Edmund Burke criticized the French Revolutionaries, has constituted the modern tradition of freedom.

38:07

Russ Roberts: So, I want to take an example. I don't know how this fits into that. And that was very well said. But when I think about redistribution, I think the wrong argument--which is the one that's usually made; and I think it's wrong--is: High taxes, high tax rates, used to distribute income, is inefficient. Is inefficient. This is the economist's complaint about redistribution: It's going to lower the growth rate.

Peter Berkowitz: Right.

Russ Roberts: I find that remarkably unappealing as an argument. I'm not sure it's true. It's true in some sense. I'm very confident that it's true in some sense. The magnitudes, though, are often--that are found at least by people--they of course have an axe to grind, inevitably. But they do find relatively small effects. And, when people say to me, 'So, therefore it's better to let--it's better to have higher tax rates and redistribute the money,' or just to 'Have a larger government, period, because the costs are small. Because there's not going to be this big adjustment in labor supply, equality of labor supplied,' my thought always is: I have no problem with government taxing at relatively high rates if I thought they would spend the money well. I'm much more confident that the individuals will spend the money well. Yes, much of it will be on themselves. But, much of it might be given away. Much of it might be given to foundations and charities that would do good things. And I don't see a lot of evidence that the government, through the political process, spends it well. At which point my opponents will often say, 'Well, we just need to fix that.' And, my response is: 'It's really hard to fix, evidently, because we're not good at fixing it.' And I also recognize, by the way, that there may be other societies that do it much better than we do. That allocate money, and spend it more wisely and carefully; that American government spending doesn't seem to be so effective. And I'll just mention an example--where, we are having this conversation two days after the mid-term election, and a lot of people were deeply offended, and correctly so, that in many poor neighborhoods, voting machines were broken. Didn't work correctly. People were forced to stand in line for a long time. And some people saw this as something of a conspiracy. It may be. But I did make the observation that many things the government does in poor neighborhoods aren't done well. They--we don't get good police services in poor neighborhoods. We don't get good public schools. I know it's complicated. It's not just the government provision that we are evaluating there. But, it's not surprising to me that in the public process, it allocates things more happily to politically powerful people rather than to people who have very little political power. And, poor people only get the power of voting. And they don't have the power of donation in other ways that people influence the political process. So, they get the short end of the stick. Which is precisely why I prefer, often, non-governmental solutions. Of course, they also--poor people also don't do so well at that. But, that's often just at a point in time. At a point in time, yes, rich people have more stuff than poor people. Over time, things that were considered the purview of the rich are suddenly available to the poor. So, part of it will have cellphones. They have color TVs. The things that, when they first came out only were enjoyed by rich people: there's a democratization in capitalism that's quite powerful. I'm not going to say that material wellbeing is the only thing that matters. I don't say that at all, in fact. But, to come full circle, I start making the observation that I oppose high tax rates not because of market inefficiencies or slowing of rates of growth. Because I don't think that government allocates that money well. And I think that argument--again, it's not much of a winner--but that's the right way, I think, to think about those things. And--anyway.

Peter Berkowitz: Well, I think it's a good argument. And, you can make arguments like that, by the way, in other spheres. If government truly knew the correct religious--the truths about religion, why wouldn't we want government to direct us to the truths about God, the good life on earth, salvation? But, we have a reasonable skepticism about the ability of government to, let's say, allocate wisdom about religion. And that evidence comes from virtually all of human history. To say nothing of the contemporary arena. This, by the way, is not to praise each and every individual. It is to say that a lot of mischief and destruction seems to accompany government being given the power to decide what the true religious beliefs are--

Russ Roberts: That was--

Peter Berkowitz: Also--

Russ Roberts: Sorry. Go ahead.

Peter Berkowitz: Sorry. Yeah. I was going to say something similar about speech, other kinds of opinions. And, it seems to me you are making a similar argument about good services and wealth. There's not good reason to suppose that government--government: that's too abstract--that the men and women who run for office, and the men and women who are appointed by the men and women who win office, are singularly well-skilled at making these complex decisions. Now, some such decisions have to be made. But we worry about two things. One, we worry about, um, about the quantity and quality of wisdom necessary to figure out the right distributions. And then we worry about the, um, the quality of moral integrity, to avoid the temptations and corruptions of power. It seems to me these are good arguments, although I recognize that in many circles, these days, they are not winning arguments. But I don't confuse arguments that win that arguments that are the best.

Russ Roberts: Hmm. Yeah. Well, for those of those who believe in the market process, it's a little bit difficult, because the ones that we, might be tempted to argue the best, and among my friends, like, I think we'd have to admit, that the place we think markets fail the most is in the market for ideas. But we don't like to talk about that.

Peter Berkowitz: Hmmm, hmm.

Russ Roberts: But that's a long conversation for another time.

44:53

Russ Roberts: I want to talk about the Enlightenment more generally. Before we do, though, I want to reference two recent EconTalk episodes, one with Patrick Deneen on his book, Why Liberalism Failed; and one with Yoram Hazony on The Virtue of Nationalism. And I know you have read both books, and I know you have written about both books. And in our private conversations you've suggested to me that both of them get Locke wrong. How did they misunderstand or mis-construe Locke? And why does it matter?

Peter Berkowitz: Interestingly, both authors--whose books, I should say, I believe, make important contributions to questions of the first importance today about liberal democracy--but, both books, however, treat John Locke as the kind of great demon or great villain of the modern world. That, they treat them--I think this is Deneen's language--as the First Philosopher of Liberalism; and they both--both Yoram Hazony and Patrick Deneen--regard this tradition that we've been talking about as representing a disastrous, wrong turn for humanity.

Russ Roberts: Yup.

Peter Berkowitz: Both believe that. Both believe that it is necessary for us to understand how John Locke has led us astray, and overcome Locke's grip on our thinking and on our political institutions in order to achieve what happiness we can from political life and life in this world. Okay: so that's a perspective both share. Now, what do they say about Locke? Both say something like this--although I may not be entirely fair to either as I try to create a common Locke. But I think I'm pretty close, what I'm about to say is pretty close to a conception of Locke that both share. Both believe that John Locke's liberalism is devoted to 'emancipating human desire and liberating human beings from all constraint'. That's a near-paraphrase of some of Patrick Deneen's writings.

Russ Roberts: Including other, including tradition? And other inherited things, intellectual inheritances.

Peter Berkowitz: Oh--actually, most specifically tradition, custom, tradition, religious faith: Yes. All that both Deneen and Hazony think is central to making human beings what we are, and to enabling us to live a fulfilling life: Locke is devoted to emancipating us from tradition, custom, faith; overthrowing it; impelling us to turn our backs on it and make ourselves the center of the world. So, Locke is the father of contemporary solipsism, narcissism, and individualism. Ram-head[?] individualist.

Russ Roberts: And hedonism, as well. Right?

Peter Berkowitz: Oh--did I leave that out?

Russ Roberts: Yes. You did.

Peter Berkowitz: Thank you for adding. Yes, most definitely hedonism as well. That's the emancipation of desire: Whatever you happen to desire, that deserves to be satisfied.

Russ Roberts: And to make it clear: That's their view of what Locke is saying. But you disagree. That's not what Locke is saying. Your argument is they've created a straw man.

Peter Berkowitz: That is very much my argument. Locke, as I said--Locke begins from a premise that is meant to be both descriptive and factual: that human beings are by nature free and equal. Which, by the way, I suppose it's worth pointing out is also the premise of the American Declaration of Independence, and of the Constitution: that human beings are by nature free and equal. And this imposes, from Locke's point of view, definite limits on what we may do and the kinds of desires we may rightly satisfy. Second, both Deneen and Hazony think that, through his state-of-nature teaching, his teaching about the state of nature, John Locke is putting forward a vision of human beings that is radically atomized or individualistic: That human beings come into the world as individuals; they are most happy outside of political society, but need compels them to form political societies; but we are not really social and political animals. This is--if that were true, it would indeed be a repudiation of the classical teaching, the classical Greek teaching: Aristotle famously says that human beings are social and political animals because we speak, and language is shared, and because we have opinions about the noble and the base and the just and the unjust. And Deneen also argues, as does Hazony, also, that the Bible teaches that human beings are fundamentally social beings who are formed and achieved their happiness in family, community, faith-communities. So, from their point of view, Locke is the antithesis, is the enemy of the correct understanding of what human beings truly are--social and political animals. And, again, I think this represents a drastically wrong-headed reading of John Locke. And, for that matter, I should add, of the Bible. Take, for example, the First Book of Genesis. Actually, contrary to what both Deneen and Hazony suggest, the Bible doesn't begin with human beings in political society. The Bible begins with human beings in--and, forgive the expression--a radically abstract sense. God creates man--it's [?transliteration spoken in Hebrew, not transcribed?]--in his image. And then to make clear that what we are talking about is equality, I think this is, Verse 26 or 27 of the First Book of Genesis: The Bible says, '[?transliteration spoken in Hebrew, not transcribed?]': 'Male and female, he created them.' The first time we encounter human beings in the Bible, they are more radically abstract than anything we encounter in John Locke's Second Treatise and in the state of nature. Now, a reasonable person would not say that the Bible therefore does not understand human beings as also social creatures who are formed and then derived what happiness we are capable on this world from being friends, members of families, members of communities, and so on. I suppose I put it this way: I will put it this way: That, the Bible recognizes that we are both individuals with a dignity that attaches to us as individuals; and that we are, at the same time, creatures formed by our social relations, and even unthinkable, separate from the families into which we are born, the communities into which we are raised. It seems to me something quite similar can be said about John Locke's teaching. Of course, if I'm right about all of this, I'm going to now rudely anticipate your next question: Why the misreading? Where do they get this idea? Surely where there some smoke there's some fire. And I think that's right, too. I think the problem has been--in both of their readings, as you've suggested, what I regard as misreadings--both Hazony and Deneen have identified an extreme variant of modern Liberalism with Classical Liberalism itself. One could call this Far Left Progressivism. One could even call it Post-Modernism. And, we could discuss, I suppose, how certain ambiguities and instabilities in John Locke's thought, and in the form of political life it helped bring into being--Liberal Democracy--lead to some of the extreme opinions, including what I regard as an extreme contempt for tradition within Liberal Democracy, and within Post-Modern or some forms of Progressive thought. That part of the thesis seems to me, true. That is, there is a root within Locke. But the proper response is not to vilify John Locke, but to recover the fullness of his way of thinking.

54:53

Russ Roberts: Well, I think as a libertarian--I think it's--my worldview in general has suggested that, while I'm a person of tradition myself, personally, in my own individual choices, that others should be free to choose to be traditional if they choose--

Peter Berkowitz: Sure--

Russ Roberts: or to do whatever they wish. Each individual should be free to flourish according to the division of the good life that that person sees. And, of course, if that person uses that freedom to watch TV [television] all day and get drunk, that's their choice.

Peter Berkowitz: Yes.

Russ Roberts: And I respect that choice. But I think there is an atomism, or--I don't know what the right way of thinking about it is--that I've been thinking a lot about lately, in modern times, in the last few years--that's modern times for me. Where I've been forced to confront--part of it comes from my reading of The Theory of Moral Sentiments, which I had neglected until recently.

Peter Berkowitz: Hmm.

Russ Roberts: It comes from some recognition of fragmentation, or whatever you want to--alienation in American life--to recognize that my underpinnings of my viewpoint, which I would call, again, economics oriented, free market-oriented, are very incomplete. The phrase I keep coming back to is the human longing to belong. This part of ourselves to attach ourselves to traditions, to teams, to tribes. And that economics--which, again, is the root of my interest, has nothing to say about that of any value or significance, other than the occasional--I don't know--icing on a cake where we add a little bit of social interactions, in the case of Gary Becker's work, which were quite clever. And useful at times in understanding things. But, they haven't made their way into mainstream economics in any sense. It's not much of Milton Friedman's work. It's not much of Hayek's work. You mention Hayek's respect of the safety net. That's, like, two paragraphs in The Road to Serfdom. He didn't spend a lot of time on it. I think our desire to be part of something larger than ourselves, whether it's our religion or sports team, our political party--these are things that I increasingly think are important in how people achieve meaning in life. And they are totally outside the purview of the models and frameworks that many people use to justify their political views. And so, when I think about this issue of--who is the real liberal, who is the real--who is entitled to claim Locke as an intellectual ancestor--you know, I'm not so interested in that. If I were one of--my intellectual honesty is--I mean, I care about it. I think we should get Locke right, just out of respect for Locke. But I do think that our current intellectual debates about Left and Right, and where we should be heading--whether they accurately assess Locke or not, I think Deneen, and I think Hazony, and to some extent John Gray, who I'm going to bring up in a minute, also a former EconTalk guest--they are onto something that the sort of cheerful stories we tell ourselves about the Enlightenment's progress are a little overly cheerful. And we've missed out on some things. So that's sort of where, that sort of is my thought on it.

Peter Berkowitz: So, those are important thoughts. However, I think it's important to get Locke right not to settle disputes among scholars, but because I think getting Locke right helps us understand our situation better. It seems to me the objection--the objection to economics is not that economics gives us a partial view of the world. The problem is too many economists for too long claimed that it gave us the complete inadequate picture of the world.

Russ Roberts: Well said.

Peter Berkowitz: Okay. So, I want to make a similar point about Locke and the liberal state. People read Locke and they say, 'Wow. That's all there is to life? This skimpy framework of government, the state of nature, consent. Life is so much more rich. Locke could not have anything to explain to us because we know that human beings begin in families; that our psychology is formed there. Expectations.' Locke has very little to say about social norms. All this is true. Because John Locke had a very precise purpose in The Second Treatise. The precise purpose was to teach us something about the origins, the extent, and the ends of the exercise of political power. It is we who have ascribed to John Locke the idea that all one needs to know about human beings in the world is either contained in the pages of the Second Treatise--which is a bit bizarre given that the Second Treatise is actually part of a single book called Two Treatises of Government. Bizarre to write two treatises and put everything you know into one of them. But, second, also then to criticize the form of political life we have--liberal democracy--because our contemporary state doesn't minister to--well, it doesn't minister to the human soul. I was going to say to all aspects of life. But, specifically to the soul. And people infer from that, 'You see! Liberalism denies the soul. Rejects the soul.'

Russ Roberts: Correct use of the word[?] there, you mean. The fuller word[work?]

Peter Berkowitz: Yes. So, Locke helps me better appreciate that this classical liberal tradition did not deny, or at least at its best, did not deny, which you rightly affirm, that there's more to life than decisions about labor, consumption, and production, because soul is infinitely deep and infinitely varied, and the study of it, and the care for it are tremendous undertakings and tremendous responsibilities. So, for me, the commitment to a Liberal way of thinking about politics--classical liberal way of thinking of politics--is not only not inconsistent with the larger questions you raise--and that, by the way, that Patrick Deneen and Yoram Hazony raised--with this matter I'm very much with them--that inconsistent with raising those larger questions, indeed within the contemporary modern world it provides the best political framework to raise those questions. To honor tradition. To serve God as you deem best. Now, of course, there are costs and consequences. To be fair to Yoram Hazony and Patrick Deneen, and John Gray: there are developments, Enlightenment developments subsequent to the--excuse me--first-grade flowering of the Enlightenment, that put pressure on tradition. On established authority. On religious faith . To make a very long story short, it seems to me though the solution is not to overthrow the Enlightenment, without which we cannot live well and which is deeply inscribed in the souls of all of us, modern men and women. And so it strikes me as unrealistic and unconservative and illiberal--all of those evils at once--to think that we can abandon it. Simply abandon it. Rather, it seems to me the aim is to correct it, replenish it, elevate it, in light of what we can learn from classical Greek political thought and the Biblical tradition.

1:03:48

Russ Roberts: So, I want you to extend that. I want to bring in John Gray a little more formally.

Peter Berkowitz: Please.

Russ Roberts: So, John Gray in his set of books and his recent episode on EconTalk--we were talking about atheism, but we really were talking about the last 300 or so, 400 years of intellectual history, which you and I have been talking about as well. Amazing what we can cover in an hour, Peter. It's no small feat. But, thinking about that, there's a really interesting debate; and it actually matters, not just about what Locke really meant or what's the real Enlightenment. But there's a serious argument about whether the Enlightenment enterprise, which I would combine, I would say is respect for the individual, the power of reason, and political freedom--that is democracy in some version--that those three things combined to transform the world in all kinds of mostly glorious ways for the last 3 or 400 years, 2 or 300 years. And John Gray says, 'No. No, no. We haven't made any progress.' And, although I don't agree with him, he did force me to consider that I have dogmatic view of progress--that it's inevitable.

Peter Berkowitz: Oh, really?

Russ Roberts: Yes. And it was very powerful. And certainly, as a religious person, to have to read his indictments of religion--he makes fun of a lot of atheists, but he's not a religious person: he's an atheist. So, there's good atheisms and there's bad ones; and he sees the worst atheisms as Judeo-Christian tradition worked into a different form of secular religion. And it's very clever and thought-provoking. And to some extent possibly even true. But--I'm way off the track--but to get back on track, this Enlightenment experiment, this Enlightenment period that we are perhaps coming to the end of, has been transformative certainly in material ways. We could debate whether that's all it's done and whether that's come at a price of "our souls," whatever one means by that. But I do think you have to take seriously the possibility that there's some truth to that. So, you have Steven Pinker on one side saying, 'Everything's getting better--lifespan, material wellbeing, the eradication of poverty, the eradication of disease, the improvements in human achievements of all kinds.' I saw a glorious 2-minute video today of someone with Parkinson's taking some kind of treatment that stops--before this treatment they can't pick up a cup and hold it to their mouth, and now all of a sudden they can. It's quite moving. And it's certainly--it's about human flourishing in the richest, fullest sense of the word: the opportunity to overcome those kind of things. So, on the one hand, we have that story. On the other hand, we have some serious challenges, whether they are the move towards populism; the seeming fragmentation of daily life; the rise in mass killings seems to be too often in the headlines--yes, fewer people are dying in wars, but that just could be, as Taleb has pointed out, probably just a misunderstanding of the statistical process. So, I think both sides have something to say. Where do you stand on these issues?

Peter Berkowitz: I'm going to go--I'm going to step way out on the limb. The extreme Pinker view--not always his view, but sometimes his--is the progressive view: Things are just getting better and better and better, especially the last 200 years. And the extreme Gray view, which is also the Deneen view, which is that humanity took this disastrous wrong turn and things have never been worse. I go out on the limb and say, 'Some things have gotten better, and some things have worsened.' And, there is not only no logical contradiction there--some things are better in our situation, some things are worse or, some things are very troubled--it seems to me that this is the very frequent condition of humanity. Are there excesses of the Enlightenment? It would be strange if there were no excesses of the Enlightenment, because the general tendency of intellectual movements and political movements is to excess. So, of course there are. And, by the way: We need to be, I think we should be grateful to Gray, to Patrick Deneen, Yoram Hazony for focusing on some of those excesses. Gray--the pretensions of Enlightenment, Reason to have illuminated moral and political life in the ways never before illuminated. Deneen--the excessive attacks often made in Liberalisms name against tradition. Hazony--the excessive attacks against Nationalism and the Nation-State made in Liberalism's name. My goodness: Locke is a defender, though, of nation-state. He believes that the best vehicle for defending rights would be a state to which people have consented; since you can't really imagine viable consent to a universal state, he's a kind of friend of Nationalism, too. So, I, not only accept, I affirm that the Enlightenment and the Liberal tradition has in many ways gone too far. It's been carried too far by many intellectuals arguing and engaged in activism in its name. All true. So, we need to step back. And, one way of stepping back it seems to me is to ask ourselves, 'Well, what would alternative traditions teach us about the excesses to which Liberalism, the Enlightenment, to which they are prone?' And so I think about Plato and Aristotle in this question. Plato and Aristotle both put forward devastating criticisms of democracy. I should mention, the kind of small-scale democracy that Patrick Deneen very much admires. But those--despite the fact that they didn't know of liberal democracy--that is a kind of democracy that presupposes that all are by nature free and equal--both Plato and Aristotle understood that the premise of democracy was freedom, and that it seeks equality for all its citizens: seeks to [?] equality for all its citizens. They thought that this form of political life was subject to all manner of immorality and viciousness. And that it was fated to devolve into tyranny. Sound familiar? But here's something I think quite interesting. Neither of them, for that reason, repudiated democracy. Both--now, we abbreviate and distill because time is short--both more or less recommended that you're not likely to do much better than democracy, or, in Aristotle's case, a democracy that is modified by a certain admixture of oligarchy/rule-of-the-few. Which in practice means rule by the wealthy. So, Aristotle advocated something he called 'polity,' which is a mix of rule by the wealthy and rule by the people. That also could sound familiar. Could resemble certain liberal democracies that we know something about. They were--again, they were acutely aware of the moral limitations of democracy. They were acutely aware that democracy tends to take its principles to an extreme, to neglect other important political considerations, and thereby destroy itself. But they were also shrewd and prudent men, and they understood that efforts to--well, I suppose, [?] engage in revolution by changing liberal--one form of regime liberal democracy for a very different one--were bound to lead to even worse catastrophe. Even worse destruction. So, when I study Plato and Aristotle, it's true: I encounter alternatives to Liberal Democracy. I encounter counts[?] of human excellence that enrich my understanding of human possibilities, the capabilities of the soul. Also the temptations to which the soul is prone. But I also find a kind of admonition to neither dwell exclusively on the advantages of Enlightenment and Liberal Democracy; to neither dwell on those, nor to dwell on the disadvantages, but try to see the thing whole. And devise prudent policies for preserving what's best in Liberal Democracy while mitigating, reducing, limiting its excesses and unwise tendencies.

1:13:45

Russ Roberts: That's extremely well said. And normally I would have ended right there, because I like to have the guest get the last word. And the guest will still get the last word. But I'm going to try to summarize what you just said, the impact on my thinking; and just think a little bit about the sociology of belief, or the psychology of belief. I think you are exactly right. And I think what you said is incredibly deep. On the surface, it seems rather banal. Right? There's pluses and minuses. You phrased it in a way that--well, you recognize that you are not saying anything particularly dramatic. And yet, I think there is something quite dramatic about it in that, I think having, what I would call it, a humble view of the Enlightenment, or the Liberal Project writ large, or a nuanced view: It doesn't sell very well. It's better--if you want to sell a book, it's better to say--a book that says--I think Steven Pinker calls his book Enlightenment Now. But he could have just called it Enlightenment! [exclamation point]. Whereas, a book that says Enlightenment, eh, it's a mixed bag, plusses and minuses, is not going to be a great seller. And I'm not--I'm joking about Steven Pinker. I'm not picking on him personally. But--well, I kind of am, but I don't mean to. I don't mean to judge him, because I kind of understand the urge to do this; I don't want to make a cheap shot to say that, 'Oh, he obviously left out the bad parts because he wanted to sell books.' Because I assume he believes what he believes with a full heart. At least, not cynical. But I do think as human beings, we do like Just So stories. And we do like narratives that fit together cleanly. And we do like ideologies that are "always right." And the longer I host this program, the more I realize that, as tempting as those perspectives are, they are really quite incomplete. They are very soothing. They bring comfort and clarity. But, they are not correct in the literal sense. I wanted to say that because these are issues that I've been struggling with for a long time, and I continue to struggle with them. And I think your perspective, which I would summarize as--one of my favorite phrases--'It's complicated,' is probably what a thinking person who is humble about what we know and don't know, should think of it that way.

Peter Berkowitz: Well, thank you. And I agree with your formulations. And I suppose at this point it is worth adding the following: One feature that it seems to me does distinguish Liberal Democracy and Classical Liberalism from other forms of government--and by the way, all forms of government, all political principles tend to be taken by their proponents to an extreme--but what distinguish the Classical Liberalism, Liberal Democracy in America is: one, that it provides a framework within which a variety of views and voices can be heard. Not just dissenting opinions, but better opinions than the ones that rein. And second, not just tolerates the expression of opinion, but can create a framework in which one can be persuaded by the better view, the more complete view, the truer view. That gives Liberal Democracy, I believe, more than any of its competitors, self-correcting powers. In other words, it's difficult to imagine the kind of critiques that John Gray has penned, that Patrick Deneen has penned, that Yoram Hazony has penned of Liberal Democracy in non-liberal democracies. Despite the fact that historical experience tells us that non-liberal democracies also have their disadvantages. But, we in liberal democracies can not only read their books; we can listen to them, to their opinions expressed on widely distributed podcasts; and we can make judgments. And, by the way: If we think that Patrick Deneen or John Gray or Yoram Hazony--suppose we think that one is profoundly correct--we can actually create communities--this is what Patrick Deneen recommends--within our liberal democracies that are to a significant extent sheltered from the mainstream culture, the depredations of daily political life. Which, by the way, come to think of it, was part of the original design of the American constitutional system: to give dissenting voices, those who espoused more Biblical conceptions of good life freedom from an overbearing government to live in accordance to what they believed to be God's will; and our system, to a significant extent, still provides that.

(12 COMMENTS)

Maeve Cohen on Rethinking Economics

Maeve Cohen, Co-director of Rethinking Economics, talks with EconTalk host Russ Roberts about her organization and its efforts to change economics education. Cohen, who co-founded the Post-Crash Economics Society, argues for a more human-centered approach to economics that would be less confident in its policy prescriptions and more honest about the significance of its underlying assumptions.

This week's guest:

• Maeve Cohen's Home page

This week's focus:

• Rethinking Economics.

Additional ideas and people mentioned in this podcast episode:

• Post-Crash Economics Society. The University of Manchester.
• Exploring Economics.
• Luigi Zingales on Incentives and the Potential Capture of Economists by Special Interests. EconTalk, October 2014.
• "Where Do Prices Come From?" by Russell Roberts. Library of Economics and Liberty, June 2007.
• Rethinking Economics: An Introduction to Pluralist Economics. 1st edition, edited by Liliann Fischer, Joe Hasell, J. Christopher Proctor, David Uwakwe, Zach Ward Perkins, Catriona Watson. Routledge Press.

A few more readings and background resources:

• Adam Smith. Biography. Concise Encyclopedia of Economics.
• John Maynard Keynes. Biography. Concise Encyclopedia of Economics.
• Gary Becker. Biography. Concise Encyclopedia of Economics.
• Behavioral Economics, by Sendhil Mullainathan and Richard H. Thaler. Concise Encyclopedia of Economics.
• Rational Expectations, by Thomas J. Sargent. Concise Encyclopedia of Economics.
• Austrian School of Economics, by Peter J. Boettke. Concise Encyclopedia of Economics.
• Creative Destruction, by Richard Alm and W. Michael Cox. Concise Encyclopedia of Economics.

A few more EconTalk podcast episodes:

• Alan Lightman on Science, Spirituality, and Searching for Stars on an Island in Maine. EconTalk, November 2018.
• Glen Weyl on Radical Markets. EconTalk, May 2018.
• John Papola on the Keynes Hayek Rap Videos. EconTalk, May 2011.
• Anat Admati on the Financial Crisis of 2008. EconTalk, November 2018.
• Charles Platt on Working at Wal-Mart. EconTalk, June 2009.

| Time | Podcast Episode Highlights | | --- | --- | | 0:33 |

Intro. [Recording date: November 8, 2018.]

Russ Roberts: Before introducing today's guest, I want to correct an error I made in a recent episode. At the end of the episode with Alan Lightman, I read a quote from Tom Stoppard's play Arcadia. And in the middle of that quote Stoppard's character quotes from the poem "She Walks in Beauty": 'She walks in beauty, like the night of cloudless climes and starry skies, and all that's best of dark and bright meet in her aspect and her eyes'. Four beautiful lines. I pointed out incorrectly that that poet of those lines was Shelley. In fact, it's Lord Byron. They overlapped almost exactly in their lifespan; but that's an inexcusable error, though. I apologize to Lord Byron. And it's a particularly bad mistake because Byron, while not an onstage character in Arcadia, he does get discussed a lot. So he feels like a character. I want to thank listener Larry Guthrie for pointing out my misattribution. We've corrected it in the Highlights.

| | 1:28 |

Russ Roberts: And now on to today's guest. She is Maeve Cohen, the director of Rethinking Economics, an organization working to reform how economics is taught and understood. And, that reform is our topic for today.... So, how did Rethinking Economics get started?

Maeve Cohen: So, I went to university in 2012--so, quite soon after the global Financial Crisis. And I was also studying politics and philosophy. And it was quite astounding to me, the way that I was being taught these different subjects. So, politics and philosophy was looking at different ways that you could view these things, and drawing on different value bases that you could have and really exploring the discipline like that. Whereas economics was taught as this one way of thinking about economics as if it's fact, with no [?] critical analysis of anything that was happening. And, notably, no mention of the financial crash that had just happened and was affecting a lot of our lives. And so, me, and some fellow students, a group called Post-Crash Economics at the U. of Manchester, to try and reform the curriculum at Manchester. And, at the same time there were groups doing this--we found out after the fact--all across Europe, and now it's all across the world--who were similarly very discontent with the economics that they were learning and wanted to campaign for curriculum reform. So, now we are 53 groups in 25 different countries of students at universities campaigning for curriculum reform.

Russ Roberts: And, you were at Manchester, in England. I don't think your experience would be that much different from a student in the United States. I don't think that the Financial Crisis had much of an impact on how economics is taught in the United States, either. Which I, like you--I find it somewhat surprising. I'm not as shocked by it. I think I'm probably somewhat equally disturbed by that fact as you are, but maybe for different reasons, that we'll explore later on. But, I think what has happened--if I had to guess, and I'm not an expert on this, but if I had to guess--I think most textbooks have responded to it by, say, adding a chapter. They certainly haven't re-thought anything fundamental about the way the curriculum is approached. And, so, I don't think it's much different in the United States than it is there. I think it's the same problem. And, of course, part of the problem is the fact that when you become a professor of economics, as I was for 30 years, you aren't trained in how to teach. You are trained in the ideas of economics. So, the way most of us teach is we go back to our graduate notes, from our notes in the graduate classes we took--because we didn't save our undergrad ones or didn't take very good notes, most of the time--and then we try to dumb those down and match some textbook that we've adopted. I usually didn't have a textbook, didn't use a textbook. But I certainly was heavily influenced by my professors in what I thought was appropriate to teach. And I think that's probably true pretty much everywhere.

Maeve Cohen: Yeah. Yes. So, as a thing, contrast to the other disciplines that I was learning, in politics in particular we were giving reading lists, [?] on philosophy. Reading lists of lots of different thinkers exploring different ideas from different viewpoints. Whereas in economics, there's no reading list. You just get the Mankiw textbook and [?]--that's what makes up your class. And it doesn't encourage any sort of critical thought of it. It's just presented to you as this value-free science: that, this is what economics is; this is what economics always has been. Which--yeah--we feel doesn't produce the critical thinkers that we need. And when we are facing such stark economic crises like the global Financial Crash or like the ecological crises that we face, the [?] massive wealth and income inequality--yeah, this lack of ability to think critically about economics is, we feel, perpetuated in these problems.

| | 6:01 |

Russ Roberts: I think most economists like to think of themselves as like physicists, but applying their tools to human beings instead of, say, atoms. And so, in physics, there would be no reason to read Newton. And so, similarly--because it's all subsumed. Everything that was right in Newton, we still teach; and everything that was wrong, we've dropped; obviously, there were things that were wrong but not capturing what we now know is a richer story. And we try to do that in economics as well. We say, 'Well, we don't have to read Adam Smith any more, because what was good in Adam Smith we've kept, and what was bad or wrong, we've rejected.' As if economics advances like physics does, through empirical testing and rejection of things that don't match the data. But, as I think you are arguing, that's really not what economics is doing.

Maeve Cohen: Yeah. So, economics is a social science, and it's impossible to get rid of the complexity of it. It's impossible to strip it down to, like, a linear equation or to say that this is what happens--so, this model works in the United Kingdom therefore it will work absolutely everywhere. It's just not possible to do that. And, obviously, economics has developed from there, and there's loads of really interesting and nuanced work going on in the world of economics; but the problem is, we do not teach that to our undergraduates. And undergraduates are incredibly influential. Like, most people who study undergraduate economics will not go on to do a Master's or a Ph.D. They will go on to work in a bank or lead a big business or work in the media--

Russ Roberts: or vote--

Maeve Cohen: or work around a policy table. And yeah, yeah, yeah. And they have this really basic knowledge of economics. It's not representative of the world, and isn't particularly helpful in a lot of really important scenarios. And it creates this sort of economic common sense within society which is actually not helping us address some of the most pressing problems of our time.

Russ Roberts: It raises an interesting question--and this is a side-note. But, you make me think about the fact that Psychology, which is a very popular undergraduate major in the United States and I think elsewhere--I wonder how, the way academic undergraduate psychology is taught in universities affects our daily lives through people believing certain things about how the world works that--might be true, but might not be. How we see ourselves. It's a really interesting, I think not fully-explored question about how undergraduate curriculum issues get transferred into daily life.

Maeve Cohen: Yeah. Definitely. And I think particularly with the discipline of economics. Because, economics is such an influential force within society. And, for example, if you are arguing for a policy--you've just had mid-term elections--you are arguing for a policy--most of these policies have to be backed up with economic reasoning. So, we have to be like, 'Yeah, but is it good for the economy?' And, so, what the sort of economic common sense is, within society, is really important. Because it allows, em, basically allows politicians to wield--and this is solved; maybe it's a different point about how economics is inaccessible and how a lot of the population are unable to engage with economics, so they have to sort of take this, this, this version of economics as given, because they are not encouraged to think about these things or it's not spoken about in a language that people can relate to or understand or relate to their lived experiences. But it creates this huge, hugely powerful discipline that's incredibly opaque. And that in turn can create massive democratic deficits. Which is another huge problem. So, I think: Yes, there is a problem, I'm sure in so many disciplines. Definitely Psychology; and that's really interesting. I hadn't thought of that. But because economics is such a powerful force in the world, I think it's particularly dangerous within[?] an economic curricula.

| | 10:12 |

Russ Roberts:

Russ Roberts: And I agree. I think--even though we probably, you are going to see--we disagree on a lot of things; but so many we do agree on, which is I think extremely interesting. I want to summarize what I think are two of the key points that you've made so far that I think capture what I see as the approach that you are pushing. And again, I'm not--I'm totally in agreement with these. One is to make people aware that there are other schools of economic thought. In history. So, the history of economic thought, seems, should matter, as well as the diversity of thought in the current day. And then, secondly, the implication that it's value-free. Not--I think some of it is value-free, in the following sense. I think there are fundamental principles of human behavior that are agreed on by people on the Left and the Right. Even though they might disagree about what the implications of those fundamentals are, or how they get discussed in policy. So, for example, I think no matter what kind of flavor of economist you are, you might accept the fact that people respond to incentives. You might disagree about what the incentives are--

Maeve Cohen: Yeah.

Russ Roberts: You might disagree about the importance of monetary versus non-monetary incentives. I think economics of different political stripes can agree that much of what we see in the world we see around us is emergent rather than designed from the top down. Although there's, I think a lot of--there is some nuance there that people do disagree on. But the aggregation of behavior into what economics call markets is a shorthand for, um, how we interact, is useful. Now, we might disagree about how well they work. We might disagree about whether they should be left alone and what that actually means. But, to me, those are the two cornerstones of economics of any flavor. Which is: People respond to incentives. Which also implies that there is cost to action. There is foregone opportunities. Those two things, I think are undeniable. They have nothing to do with whether you are Marxist or neo-Keynesian or an Austrian. And then that--when we act, together, things happen that aren't just the sum of our individual actions. That there's a complexity that makes policy design challenging. And that we see all around us, that's hard to fully grasp without thinking about it in some depth. So: Do we agree on those things?

Maeve Cohen: Yeah. For sure. I think on the sort of complexity issue, yeah, I completely agree with you. I think that that is another issue that is not translated as well as it could be, in undergraduate curricula. Just, you are given a lot of, like, simple--well, not simple--they are quite complicated--but you're given a lot of problems that's, models, that don't really take complexity as the issue as well--yeah, they don't explain that as well as they could, I think. But, yes, I do agree with you.

Russ Roberts: Yeah, on that point, I once gave a talk to a group of Ph.D. economists--a high level, well-trained group of people. And I was talking about emergent order. And they were bored out of their minds. They said, 'Oh, look, we know all this: markets work.' And that wasn't my point at all. It turned out. But the way we have been trained as economists to think about complexity is: 'Oh, it's supply and demand, and we know how that works.' As if that stark, blackboard model--which I love, by the way: I have a lot of affection for supply and demand; I think it's a powerful, simplifying tool. But it is only a tool. It is only a simplification. It doesn't capture the richness of how our interactions actually work in the real world. It's a crude attempt to get at something that's important. But I think most economists think, 'Well, that is how--that's actually the real world.' And that's a terrible error.

Maeve Cohen: Yeah. No. Well, I definitely agree. Like, supply and demand, and the market, and all of these things are incredibly useful. And using these tools have helped economies. And--yeah--helped people achieve great things. And done a lot of good in the world. But, yeah, the point that I try and make and the point that we're about is that it's not the only tool that you can use and actually in some circumstances and for some problems it's really not useful at all. And if we are wanting economists, of people who are economically literate, to be creating a better world for us all, they need to know more than just that sort of--yeah, that simplistic model.

| | 15:05 |

Russ Roberts: So, two of the things that are behind "Rethinking Economics," your organization, are, you call democratizing economics and economic pluralism. What do you mean by those terms, and why are they important?

Maeve Cohen: So, by 'pluralism,' we mean, um, yeah--exposing students to the different schools of thought that are out there. And that's--that's--yeah--looking at first Keynesianism, looking at feminist economics, looking at ecological economics. And, and, and looking at the values that underpin each, em, as well as looking at the values that underpin mainstream economics. And then, yeah, being able to engage with these schools of thought--where they've come from and where they've got to, why they think the way that they think. And what that means for policy implications. Em, and then for democratizing economics. So, this is something--em--I touched on earlier about how we have a whole population of people that aren't included in these economic discussions. So, they don't--economics is so jargon-laden and elitist that a lot of people aren't able to engage with it. And then we get all these policy recommendations, policy proposals backed up by economic reasoning[?], and people don't understand the reasoning, so they are voting for policies that they don't understand. And that creates this massive democratic deficit. On the democratizing economics point, we have actually, so, an assisted charity called--because we realized it's basically impossible to reform university curricula--and democratize economics at the same time. So, we have assisted charity now called 'Economy' who make--they are just based in the United Kingdom, but they do a lot of work on making economics accessible. And crash courses for adults. They do a lot of work in schools. And they have website that sort of de-jargons the news. So, we've stepped away from that a bit now because it was too big a task to do--

Russ Roberts: Well, let's talk about the curriculum. Because, I think--again, ironically, when you listed those, some of things, approaches, that people aren't exposed to--my first thought is: 'But those are wrong!' and of course, you look at some things I'd like to see more; and I think, 'But those are wrong.' And I think, one of the lessons--

Maeve Cohen: But in a way that's not really the point--

Russ Roberts: It's not--

Maeve Cohen: Like, you don't have to be a feminist economist to benefit from the fact that actually, by understanding by that theory works and how it gets to the conclusions that it gets to--that in itself is an exercise that is useful, that is an exercise that helps you think critically and think more creatively. It's not just learning something by rote. It's engaging with the core of what that theory is. So, we--yeah--so, for example, we champion, like, teaching students feminist economics, for example. But then we also champion teaching students Austrian economics. Which is like, on the political spectrum, the opposite side.

Russ Roberts: Yeah--

Maeve Cohen: Because, there's a lot can be gained from these insights. And a lot can be gained from just doing the exercise of just actually trying to understand, why, when you hold these assumptions to be true, that we get these outcomes. Compared to holding these assumptions to be true and getting these outcomes. They are exercised, in and of itself, will create better, more thoughtful economists, we feel.

Russ Roberts: Well, I agree with that. When I was saying, 'That's the wrong kind,' I was being a bit facetious--

Maeve Cohen: --yeah. Yeah.

Russ Roberts: satirical. But I think, you know, one of the lessons here is humility: that you, one, me, person, does not have access to The Truth. And I just say, as an aside: When listeners write me and say, 'You have to interview so-and-so, because he or she has this model of how the world works that's correct.' And I always want to say, 'Well, I always think'--there's no one model that's exactly right. And people who are going to around saying--you learn some things sometimes from those people. But, they are also a little bit dangerous, because--

Maeve Cohen: Mmmhmm--

Russ Roberts: they are evangelists. And evangelism has value, as long as you are aware that you are evangelist. I think a lot of evangelists don't realize that. In economics, anyway. I don't know--leave aside the religious piece of that. But--

| | 19:24 |

Russ Roberts: So, I think it's extremely helpful to be aware that you don't have a monopoly on the truth, whatever your value system is. And, in principle, your organization has the opportunity to do that. But you do have, also, a direct--you are trying to build a curriculum, I understand, that would be the richer or different than the current standard one: you mentioned Mankiw, whose textbook--and it is very good textbook for describing a particular kind of economics. Greg [Mankiw] would disagree with that, I think. He would say, 'No, it's just the truth.' But, I'm sympathetic to your approach. What is your organization doing in the area of curriculum, design, or implementation?

Maeve Cohen: So, we do--so, as I say, we were born of--well we are a student movement. And we are working in different ways. So, we try and produce research that shows that there is a problem. So, we produced a book called the Econocracy that was looking at 7 different universities in the United Kingdom and examining their curricula. And then we have student groups in different countries that have done the same. Their universities--the groups in the Netherlands have done it; Norwegians have done it--there's individual universities have done it as well. The Danes are doing it. The [?] which are exciting. So we are trying to do that. And we try and create alternatives. So, we produced a reader--an introduction to pluralist economics that was edited by our students. So, that looked at 11 different schools of thought and that--the point of that was, because of this problem of a lack of reading lists, that could be something that could complement economic courses and could quite an easy win for professors: it's just like, 'This is in the university library. Explore these different ways of thinking about university--about economics--sorry.' And then the students can also learn that as a tool for learning about new schools of thought. But, with regards to creating a curricula--this is--we are not really prescriptive. We don't want to say, like--like you say, we don't want to be the people saying that this is the way that you've got to do it. Every single university is different. We are in 25 different countries, as I say; and different--different models and different ways of thinking of the economy, more suitable for different countries. So, we haven't created a curriculum. Firstly, because we don't have the capacity, the amount of time and effort and knowledge and all of those things that take--we are a compending[?] organization, so we don't have those resources. And we only have 5 members of staff, even though we have hundreds and hundreds of volunteers. But, all of us, our groups are autonomous groups. And some of them are working on developing curriculas at their own universities. And it's more of creating sort of broader strokes: these are the things that you need to include; these are, it's just like the starting point if you are going to teach undergraduates economics. Yeah, for example, History of Economic Thought is an essential part of that economic history, is an essential part of the--em. So, we haven't, and we aren't going to create a template curriculum for people, because we don't really think that that's the way to go. It's more of encouraging our students to compare[?] at their own universities and do the projects that they feel would be most beneficial to them. So, some of them will be creating curricula. And some of our students are currently teaching curricula at universities that they've created and off the back of their love of pluralism. But, yeah--it's not a sort of over-arching thing that we're creating.

| | 23:17 |

Russ Roberts: So, you mentioned two things. One, very quickly, in passing I just want to emphasize the distinction and their individual importance, which is History of Economic Thought and Economic History--

Maeve Cohen: yeah--

Russ Roberts: It's remarkable how uninformed we all around about economic history. Certainly--I got my Ph.D. in 1981. And I think I was one of the last--I don't think it's true any more, but--this was at the University of Chicago--and we were required to take, I think two economic history classes. I doubt that's true any more. It's certainly not true at most universities, and maybe almost at none. And that's a shame. Although, it's certainly more important I think for undergraduates, and for, as you say, sort of everyday people who have a, who've absorbed some kind of economic worldview, either from their coursework or their, just the air around them, the zeitgeist, to have some understanding of economic history. And, one of the things I find depressing about the United States--I don't think it's--well, you'll tell me if it's true in the United Kingdom and elsewhere--but we have this, um, this thing called the Advanced Placement Exam where high school students can get credit for college level classes by taking an exam; and then they don't have to--in theory don't have to take a class, if they get a high enough score, when they get to college. And, those--I don't think I would do very well in those exams. Which is either--I don't know if it says something about me or the exam or both. But, you know, my kids took them. And they would come and ask me questions, you know, in practicing for those. And I--some of them, [?] I would just say, 'I have no idea.' And I would give the answer; and they would say, 'Well, that's wrong. It turns out it's 3. It's c, not b.' And I'd say, 'Beats me.' So, one of the--that's a problem. That's a little strange. But the point I want to make that's, beside that fact that it treats economics as like it's just a set of facts and results, like physics, is it's extremely free of any context or economic history or complexity about the point you made earlier: that something might work in this country; it might not work elsewhere. It treats everything as if, like, the law of gravity: that it will work in Pisa, Italy as well as Manhattan. And that's just not true. And it's a terrible encouragement to, I think, wrong thinking.

Maeve Cohen: Yeah. Yeah. I completely agree with all of that. The instance of multiple choice exams is--truly shocking. So, I was a [?] student. I left school at 16, and I didn't go to university until I was 25. And I had this idea of what university would be like: And university was going to be this place where everybody was talking openly with each other and examining their disciplines, and, like, bouncing ideas off each other--

Russ Roberts: [?] and dmahhhom[?], dmahhhom[?]

Maeve Cohen: And I got there and Econ 101, multiple choice exam was like--

Russ Roberts: [?]dmahhhom[?]

Maeve Cohen: this is nuts. This is not what I thought university would be. And it's quite depressing, really.

Russ Roberts: Yeah. That's a side-problem, I would say. Which is the focus on results rather than ways of thinking.

Maeve Cohen: Yeah. And it's really difficult--

Russ Roberts: And that's what multiple choice does.

Maeve Cohen: It's really difficult. So, particularly in the United Kingdom, well, now, now that we've got--tuition fees have risen dramatically in the last few years. And that's the main source of revenue for universities, so that they--they have huge amounts of students coming to study these courses. So, in my Econ 101, there was like 600 students. And it's a real, real problem. Like, how do you critically engage with 600 students? Like, how do you examine that amount of students? So, this is where the multiple choice exams have come from--

Russ Roberts: Yep--

Maeve Cohen: and I can completely understand the constraints on academics; and it must be--it's really hard to square the circle. But, I mean, but it's essential if you want a functioning society, I think.

Russ Roberts: Yeah. I taught Principles of Economics at UCLA [University of California, Los Angeles] to 350 people, and I--I made a few decisions at the beginning of the class. One was I would not use a microphone. Which was challenging. But it kept my energy level up. When you are going to talk in a room with 350 people, you better have a high energy level.

Maeve Cohen: Well, [?], yeah, yeah.

Russ Roberts: Because otherwise you start mumbling in front of the room; and 310 of 350 are sleeping. But the other thing I tried to do, which--I don't know if it worked or not but I think this is extremely important--is that I tried to have conversation about the questions we were looking at with those 350 students. Of course, you can't let every person participate. And most of them don't want to. But there were probably 30-50 of those students who would interact with me in one--30 or so in any one class. Or 20. And then, it wouldn't always be the same, every class. But it's not so much that only 20 people got to talk. Three hundred fifty people got to hear a conversation, just like we're having right now. And I think it's the exchange of ideas and the way of thinking like an economist which is so much more important than what's the ratio of the, what's the marginal rate, definition of the marginal rate of substitution, today, dah, dah, dah, dah, dah. And so, giving over--you know, when I was a teacher, the thing that used to bother me the most, the parallel I would make was to astronomy. So, in astronomy you have this unbelievable, magical, awesome, wondrous poetry of the nighttime sky. But that's not what you learn in astronomy. What you learn in undergraduate astronomy when I took it is the dumbed-down version of graduate astronomy. Which is a bunch of results which I could just spit back on an exam. Whereas, the life-changing classes in any field, or the ones that get you to see the world through a different lens--and that's what I think economics should be and often isn't. Which is tragic.

Maeve Cohen: Yeah. Exactly. And it really depresses me. I don't--I'm sure you've experienced this in your day, your apply[?] your whatever, and somebody asks you what you do, and you are like, 'Oh, I work in economics.' And they just go blank. And they are not interested. And there is this sense in society that economics is boring. People understand it's really important, but they also think it's boring. And it's like, 'Oh, my God, it's just not boring at all!' And then you talk to them a bit more in depth about it, and people are always engaged by--usually pretty engaged and excited. And it is--society has done this incredibly good job of making this incredibly dynamic and exciting discipline seem super-boring. And, that's--yeah--quite depressing for people like us, I'm sure.

Russ Roberts: Yeah. My favorite is, a woman was next to me on a plane, and she asked me what I was going to do, and I said to her I was an economist, and she said, 'That's too bad. My husband isn't here. He loves the stock market.'--

Maeve Cohen: oh, no--

Russ Roberts: And I wanted to say 'Well, that wouldn't have helped. I don't know much about the stock market.' And, but that's what people think. The other one I like is 'That must be handy around tax time.' Well, I hate filling out my taxes. And I'm not good at it. And that's what accountants and tax preparers do. Not economists. But, yeah....

Maeve Cohen: Yeah. I'm terrible at money--

Russ Roberts: Yeah. Exactly. Terrible--

Maeve Cohen: People always say to me, 'Oh, that's really funny because you're an economist'--

Russ Roberts:'An economist'--

Maeve Cohen: Yeah.

Russ Roberts: It's not--yeah. I tried for a while to give a different answer. And I think I have forgotten: There was a period in my life where I would just, instead of saying I was an economist, I would, I would say something like--I forget what it was, but it might have been something like: 'Oh, what do you do?' 'Well, I'm interested in how things work from the bottom up rather than the top down, and how things emerge that are the product of our actions together but not any one person.' 'Oh, well, that's interesting. What does that mean?' Whereas, if you say you're an economist, it's over. Usually.

Maeve Cohen: Yeah.

Russ Roberts: It's usually the end of the conversation.

| | 31:31 |

Russ Roberts: One of the things that gives me hope, and I don't know how you feel about it, and your organization, but certainly with the existence of the web today, people have access to so much more than what they are spoon-fed or force-fed by their professors. So, isn't that some cause for celebration?

Maeve Cohen: Oh, for sure. I mean, we wouldn't exist as a company--in fact, there's been iterations of companies doing similar stuff since the 1970s. I think one of the reasons why we've had such staying power is, yeah, because of the Internet. And because there is so much--when people get in touch with those, we can point them in the direction of loads of different resources. And we're talking [?] about exploring economics, which is, there's a network of, if German groups doing this same thing, and that this is one of their projects, and they have this website called 'Exploring Economics,' which has loads of online courses looking at different schools of thought, loads of different resources that we can point our students in the direction of; and yet it's, it's incredible. And we can communicate online. We can have a little reading group, discussion things, that are happening online. Yeah. It's--yeah--very grateful for the Internet.

Russ Roberts: And people can listen to EconTalk. Which--

Maeve Cohen: Exactly.

Russ Roberts: Hearing our voices right now is certainly taking advantage of the Internet. Almost certainly.

| | 32:56 |

Russ Roberts: Before we leave some of these issues, I want to just go back to something you mentioned at the very beginning. You talked about how the genesis of your interest in these topics was in the aftermath of the financial crisis and that you were involved in something--the post-crash something--what was it?

Maeve Cohen: The Economic Society.

Russ Roberts: So, what do you feel, and what did you sense from people who were passionate about that at the time? What do you think was the mistake that was made, post-Crash? What was the opportunity that was missed, and certainly in the teaching of economics?

Maeve Cohen: Well, I think that after the Crash, lots of people went to study economics because it was so abundantly apparent that economics was super-important and was having a massive impact on people's lives. So, this is so, a perception of economics students that they--yeah, into the stock market and they just want to go and work in the city. But, actually, I don't think that that's true in general, but particularly at this time there was lots of people, and there are still lots of people going on to study economics because they want to do some social good. And, because of the way that it was taught to us as just this sort of abstract theory, that was completely detached from people and society, it lost a lot of those people along the way. Those people either became, em--they sort of forgot the reason they got involved in the first place. Or they dropped out or changed their major or whatever it is that they did. But I think the big mistake that was made after the Crash with economics education and the big mistake that's still being made is that there are lots of people that are--both the students are really thirsty for knowledge and want to do social good. And by detaching economics from people, which is how it is presented in most undergraduates, it's doing those people a disservice. And therefore doing society a disservice.

Russ Roberts: Yeah. There was an enormous interest, certainly here in the United States, I think after the Crisis. Because, we had had this prolonged period of economic--I would call it stability, slow or pretty good growth for a while--the recessions that we'd had were relatively small. Of course, people were affected by them. I didn't[?] they were small. But, for the economy as a whole, most individuals did pretty well. And there was nothing like this in our lifetime. And so, a lot of people I think did get a wake-up call. You know, one of them was John Papola, the filmmaker who contacted me, and we made the Keynes-Hayek rap videos. Really, those happened because--

Maeve Cohen: Hah, hah, hah, hah? Did you make that?

Russ Roberts: I did. With John.

Maeve Cohen: Oh, my God. That's great.

Russ Roberts: Thank you. But John--that wouldn't have happened without this film-maker--I was working in television at the time, started reading and thinking, 'I've got to figure out what's going on. Like, this is weird, this stuff.' So, I think a lot of people got galvanized. And if it hadn't been for the Internet, you know, they would have pulled out some not-so-exciting book called "Economics" that they found in a library. Would have put it down pretty quickly because it's not very accessible, as you've been saying. But for me--

Maeve Cohen: But yet this--Sorry to go on--

Russ Roberts: No, I just say, for me, and EconTalk, one of the reasons, one of the silver linings of the Crisis, was it did get a lot of people interested in what economics is. They struggled to gain access to it. As you pointed out. But, it does cause--it was a wake-up call for a lot of folks who weren't academics. Who weren't university students. Just say. And I want to know what happened. I want to understand it. In contrast to, say, the Great Depression, which was a similar event--much worse. But, at that time, if you think about being an individual in 1933, when unemployment I think was about 25% in the United States, or just absolutely horrific: What would you do if you want to understand it? You know, there was nothing to do. And here, we live in this time--doesn't mean everything's great--but at least we live in a time when people can explore things in unimagined ways compared to the past.

Maeve Cohen: Yeah. Definitely. And: Academics can use this stuff to educate the students. And I think this is a real shame, itself, the structure of academia, is there's so much weight is put on research and producing good research that the teaching, like you were saying: You don't get proper training to be a teacher. And that sort of how you engage students. I mean, I had a few professors who were incredible and obviously really passionate about how they input so much thought into it. But they are few and far between. And if you have got all these pressures on you as an academic to produce research, you've got all of this, this bureaucracy that you've got to do with these students, then actually creating a course that's engaging and using things like, [?], which seems really obvious, is--you just don't have the time to do that. And so you do end up just teaching the same slides[?] you've been teaching for the last 10 years. They are just not engaging or interesting at all. And that's a real shame.

| | 38:07 |

Russ Roberts: The other point is that--and I brought this up again; I bring it up as often as I can, I guess--in a recent episode with Anat Admati we were talking about the Crisis. And, unfortunately, many economics benefit either explicitly or implicitly from the status quo. They either hope to work for the Federal Reserve; they maybe consult on Wall Street. And so, they are somewhat compromised. And, we think of ourselves, economists, as these detached observers of the human scene. But, of course, we have our own self-interest. And I referenced then and will mention again now a conversation with Luigi Zingales, who makes this point, I think very eloquently, many, many times, and it can't be emphasized enough: Economists act like they are just these doctors who come in to repair and heal the economy. And, of course, we're not. We're something like doctors, but more like doctors who--you know, I have imperfect knowledge of how the body works, and who benefit, as sometimes doctors do, too, from certain types of treatment as opposed to others. So, I think it's just really valuable to be aware of that when you are listening to people give policy advice and other things.

Maeve Cohen: Yeah, and it's also a matter of the lack of diversity within the discipline. I mean, the vast majority of economists are middle class white men; and their lived experience is significantly different to the lived experiences of massive swathes of society. And so we can't hope for those people in those sections of society to be representative in policy decisions. So, this whole point of democratizing economics, that whole branch of what we do, one of the main driving forces behind our--is because we want to make economics relevant to people's lives and show them how exciting it is, and encourage them to out and study economics so that we can get a more diverse set of voices around the policy table. Which I think is--yeah, I mean, that's a huge task. But yeah--speaks to what you were saying of it.

Russ Roberts: Now, why do you say, 'Economics is detached from people?' That's a theme on your website, various versions of that. What does that mean to you? What do you mean by that phrase?

Maeve Cohen: So, we talk about individual agents maximizing utility, in a market. And there's no people in that. So, we look at the rational agent. And I'm certainly not rational. So, my--does that agent represent me? There's no talk of humans, really. It's--yeah. It seems that we're looking at the math and the theory and we are forgetting that actually these are people doing what people do, a massively complex dance. And, by not talking about the people within it, we make it less relayable and less human, and less embedded in the world.

Russ Roberts: But I think it's more than that. It's not just that it's not so relatable. And, we have to concede--you know, there has been a growth in Behavioral Economics, which does try to introduce some more complexity into individual choice, at least. I don't know how much of it has made it into mainstream curriculum. Do you have a feel about that?

Maeve Cohen: Yeah; I mean, it's getting there. There are aspects of progress with Behavioral Economics, for sure.

Russ Roberts: Yeah. I just don't know--I don't think it's--it's not embedded in teaching. It's sort of an aside. Like, 'Oh, by the way, this isn't complete--'

Maeve Cohen: Yeah. Not like a whole curricula. Yeah--

Russ Roberts: It's not obvious you can do that. But, I guess the issue for me, to take your critique about agents, rational agents, I think there's two things that bother me about that. It's not so much the behavioral part. It's not so much that I occasionally make mistakes--which, of course, I do; and we all do. We're all human. I think it's the--when you teach that model over and over again, that, it's basically--I want to give your critique its full due. It's basically saying that, you know, people are like programmable robots; we just have to get the incentives right. And I'm sympathetic to that point. Incentives matter a lot, as I said earlier. But I think once you start thinking of people like robots, you tend to start thinking of--or as programmable or as influenceable, which of course they are--you start to then start thinking that, 'Oh, yeah; and therefore I can make society better off by doing X. Because I can see--I know how people respond, and then I'll get this aggregated impact; and I can just add up all that utility or happiness or whatever we call it.' And I think that's a fundamental misunderstanding of the human enterprise. It's particularly materialistic. It particularly emphasizes stuff over how we experience life. You know, one of the things that, in last 2 or 3 years I've started thinking about a lot is the communal part of our lives, what I call our longing to belong. That our desire to connect with other human beings. It's totally absent from economic modeling other than in the corners of, you know, Gary Becker's work or others who are doing what has been called Economic Sociology. And, that seems to be missing out on like an enormous part of human wellbeing. And by focusing on the measurable stuff-which is--I understand the desire--we're missing an enormous part of the human experience.

Maeve Cohen: Yeah. And I would--yeah. I totally agree with that. And I would go further than that. Like, I think what is happening to our environment is a consequence of that. Because, it's not quantifiable. You can't put--you can't put a number on the environment. And that means we've not been able to accurately analyze the issues, accurately understand or provide solutions to the issues that we are creating. Because it's just--yeah. It's outside of the [?] of the tools that we are using. And to do that effectively--and of course, you can doctor the tools you are using and try and fit bits in here and there. But [?] would be that, fundamentally that way of looking at the world is not the best way to look at our environmental problems. There are other tools we should be and can be using.

| | 44:24 |

Russ Roberts: So, I want to stretch myself here, and try to critique my usual view of things. And get your reaction. So, in the United States we have this phenomenon--I'm sure you have it there as well in the United Kingdom, but I think it's more pervasive here. Which is, what are called Big Box stores. So, we have these enormous retailers, like WalMart, Home Depot, Lowes. And I love them. I love them all. I confess. I really do love them--in some dimension, anyway. I enjoy shopping there. They are phenomenal places, just to be walking around in. They are brightly lit, and their stuff is cheap, and there's a ton of stuff. Yeah--I'll never forget; I think I've told this story before, about I showed up late for--my plane was delayed and I had to give a speech somewhere, and instead of getting picked up at 7pm I got picked up at midnight; and my bag was lost, so I had no clothes. And the person who picked me up said, 'Do you want to go--do you want to get something to eat?' And I said, 'No, I need to get something to wear.' And so we went to a Super-Wal-Mart. I'd never been in one. That was about 10 years ago; and I still haven't been in one since, because they don't them--we don't let them happen around here, outside Washington, D.C. much. But it was an extraordinary experience. It was 1 o'clock in the morning. It looked like daytime, because it was lit like--it looked like I was near the surface of the sun. And they had everything I needed. And it was cheap. I bought a shaver. And I bought underwear. And I bought a shirt. And I was fine. And it was a glorious, capitalist experience. But--so that's the romance about, in favor. Let's do the romance against, on the other side. The romance against it on the other side is that, you know, small towns that used to have lots of other small retailers now have one giant retailer. It's far away. It's out in the suburb, or it's the wrong side of town where it's cheaper to build a large building. And the texture of daily life is different. Now, I don't romanticize the small-town daily life. Because the stores were not so clean and they didn't have much selection; it was really expensive; there wasn't much competition. There were a lot of negatives, too. But something has been lost by the move toward the larger suburban or exurban retailers. And, as an economist, my first impulse is to say, 'Well, people want to shop at those big stores; we should let them.' And there's issues of subsidies: put those aside for the moment. But, we generally believe in America, and certainly my economics training tells me, that if people choose it, it's for the good. But, something is lost. And the thing--the point I want to make, that I think I have to concede--and people like me, politically, ideologically have to concede--is that, it's not free, that cheap stuff. It changes the texture of daily life. And that, we don't measure. And so, I'm not saying it was a mistake that people make those choices. I'm just saying that the full picture isn't obvious. And I think that's not so good.

Maeve Cohen: Yeah. I mean--yeah. The price mechanism doesn't really work for things like that, because you can't put a price on it. And-yeah. I totally agree. I think that capitalism has brought such wonderful things and increased our living standards to such a great extent--but yeah, this stuff isn't free. And we are creating damage--we are damaging people by always being able to consume things so easily and so cheaply. We are creating pain in other areas of life. And yeah, so Rethinking Economics, I guess that's fundamentally what it's about, is looking at what the damage that currently isn't being measured, is; and how do we begin to incorporate that in our understanding of economics and how do we try and mitigate against some of the worst excesses of that. It's not throwing capitalism out. It's not saying, 'This is a terrible model and it's destroying the world.' It's saying that, 'Yes, some of this stuff is amazing and it's improved our lives massively, but actually there are some huge, gaping flaws here that we need to come look at again.'

| | 48:38 |

Russ Roberts: So, I want to try and push this Walmart example a little bit. And again, I'm ignoring the fact that Wal-mart gets subsidized sometimes by tax breaks. Of course, other things get subsidized, too. It's really a messy, complicated thing to try to measure those kind of artificial encouragements and discouragements. I just want to think about the following. So, I really love--there's two things I love. I love Amazon. And I love a good book store. And I recognize that Amazon is destroying--has destroyed--lots of bookstores. And, even though I love the fact that I have a zillion books in my house, because of Amazon, and a bunch more on my Kindle, and that I bought those books because they were so inexpensive and easy to get into my house because of the web, I also like occasionally to wander into a physical bookstore and pick up the books and touch them and look at them. And, we all have a temptation to go into those physical bookstores, fondle the books, put them back down, and go home and order from Amazon. And, we would all say, most people would say, 'Well, that's fair. Because that's what markets are about. You make your choices.' But I think we could have a culture, we could have a social norm that says, it's not enough to say, 'I hope everybody else buys their books at the little book store on the corner, because that way I can wander in there every once in a while,' but I'll be buying most of my books at Amazon. But it seems to me we could have a norm that says--again, I don't want to penalize Amazon artificially. I don't want to give them an advantage artificially, either. But I do think we could have a social norm that says, 'If you value that bookstore on the corner, you might want to sacrifice some of your standard of living to shop there, because if you only follow the narrowest of self-interest, it won't be there any more.'

Maeve Cohen: Yeah. And I think that people do. We still have vinyl shops [record stores--Econlib Ed.] in Manchester. Like, we sell at vinyl shops across the world.

Russ Roberts: You'd better explain what those are, Maeve, because most people in America don't know what those--first of all, that's a U.K. word; but it's also out of date. So, explain what that is.

Maeve Cohen: Records--music records. Those big, black disks. We still have--we call them 'vinyls' here; we still have vinyl stores, in the United Kingdom, because people have chosen that--there's other things that they value about listening to music that go beyond just downloading it on Spotify. It's going into the shop, flipping through all the little records; taking out this huge disk with this beautiful cover and they're the things that they value. And I think that there is a huge counterculture and all different aspects. So, in the suburb that I live in, there's this vegan cooperative grocery store--this big store--that is thriving. Like, it does incredibly well. Yeah. Yeah. There's a Morrison's there, which is a big supermarket chain in the United Kingdom: there's a Morrison's next door. So many people go and shop in this vegan cooperative even though it's more expensive, because they value the--they share the same values that this store does. So, I think that, yeah, people do do that. If we could--I think that encouraging those sorts of things is an important part of getting this right; but obviously there are huge systemic barriers to this, so it's not just about individual choice. Like you are saying about Amazon. The ease of it all: there's a lot of things in place that make it far more difficult to do the shopping in the little book store, that we could make some of these things easier for people. I guess.

| | 52:26 |

Russ Roberts: Yeah: it's a challenge. Because, if you are not careful, you end up supporting legislation that penalizes Amazon; and it's really done to destroy the ability to compete with those smaller players. And, I don't think we ought to do that. I think that's a mistake. I think we shouldn't be artificially helping or hindering anyone. I'm a big fan of creative destruction--despite what I just said. Which is the challenge, I think, of squaring my circle: which is, that I love the idea that the world is dynamic, and I don't want to slow it down too much. But I don't mind if we slow it down through our own choices. We are recording this in the middle of November. And every year, one of the things I absolutely have intellectual problems with is the Christmas holiday shopping argument that we 'need it for the economy.' And, of course, if people decided they wanted to spend more time sitting in front of the fireplace and less time working, and more time with their families, and the economy got a little bit smaller, that would be wonderful if that's what people wanted. If they want to work really have and have lots of--crap--they're entitled, we're entitled; I do plenty of that, too. I'm not being--but this idea that somehow we need it for the economy, it's just absurd. It's just a horrible--

Maeve Cohen: Yeah. It is really dangerous. Obviously, I am sure that you--we disagree on the whole--I don't think I would use the term 'penalizing' Amazon. Penalizing these huge monopolies that have an insane amount of market power. And I do believe in regulation and government intervention to stop that from happening. Particularly with regard to tax, and taxing them fairly. But I think--yeah, this obsession that we have with growth; and a lot of this is born of undergraduate economics education, that a good economy is an economy that grows, is complete fallacy. Yeah. We could actually stand to lose a little growth. We could stand to not--like, the amount of tat, you see at Christmas--the amount of gifts that I get--I'm just like, 'Why would you ever buy this for me?' I don't want this; I don't need this. But it's--yeah--it's good for the economy, so people have got jobs creating this tat; but people have got really badly paid jobs creating stuff that people don't want just so that people can buy more stuff just so the economy can grow. And it is completely backwards, and really destructive on people's livelihoods and just on the state of my livingroom, and yeah, on the environment.

Russ Roberts: Did you say 'tat'?

Maeve Cohen: Tat.

Russ Roberts: How do you spell that?

Maeve Cohen: T-a-t.

Russ Roberts: And how would you translate that, for those who don't speak English? Who only speak American? Junk? Is it junk?

Maeve Cohen: Yeah. Yeah. Just like rubbish. Just like little bits that you don't need.

Russ Roberts: Okay. Glad to get that straight. Love that word. It's like twee--another one of my favorite British words. Which means, I think, adorably, unbearably cute. At least that's what I [?]

Maeve Cohen: Yeah. And like, very traditional--

Russ Roberts: It's like a tchotchke. That would be the Yiddish version of twee. Well, it's a combination. A tchotchke is tat that's twee. That's our linguistic lesson for the day.

| | 55:53 |

Russ Roberts: So, let's close with the fact that--where I think we don't agree, and try to get some understanding of why. So, we're having a great conversation, and I'm enjoying it. It reminds me of some things that I feel very strongly about that I sometimes forget about. It stretches me a little bit to think about where I might have my own burdens of my education that I don't think about that I carry around unconsciously. But, we don't agree--I think are on the more interventionist side of things, I would guess--

Maeve Cohen: Yes--

Russ Roberts: than I am. I would guess. So, the question is: I wonder why that is. Given that we both don't like many of the things about economics--I wonder what is the underlying cause of our disagreement. I don't know the answer; but I want to see what you can say.

Maeve Cohen: I've got a guess.

Russ Roberts: Go ahead.

Maeve Cohen: I think this is something that--when you were coming of age and when you were becoming an economist, economics was like on the up and in its heyday; and stuff was going well. And this science-cum-religion of economics was really in its ascendency. I had a completely different experience. And this is what we say--I'm slightly older than most of our students, so it works--I'll do the one that we say for our students, and then I'll talk about myself. But, our students were coming of age when economics was just collapsing down around our ears. So, they don't have the same, like, deference towards--not that I'm saying you have a deference towards; obviously you are very critical--but a lot of our professors, a lot of people that we argue with--and deference is probably far too strong a word. But they have this respect for economics that students, that the generation just below mine I would say just don't have. So they just aren't--they aren't as convinced. They start off a hell of a lot more critical than a lot of their professors do. Me, personally: I'm from the northeast of England, which was a huge mining community; and all of them, in 1984-85, there was a massive miners' strike, and the miners lost; and all the mines were shut down. And basically the northeast of England is one of the most deprived areas in England/Europe now. Because they did nothing. So, this was an economic decision that was made in Westminster, and they did nothing to try and rebuild those economies. So, the deprivation and the consequences of the miner's strike that I grew up around made it very--I started off very critical of economics, because I was like, 'Well, that was an economic decision and it done in the economic good, and it's destroyed my neighborhood.' And so, yeah: students definitely, students today are much more critical of economics, just because they never saw it when it was in its heyday.

Russ Roberts: I think that's potentially correct. I don't--I don't like the idea that my views, of course, came out of my personal experience--that, I have my views 'because they are true.' But, of course, we know better. And you, too. But we know better. I'd say the other difference between us, and I think this is generally true in ideological conversations--obviously there are underlying beliefs that are below the surface, often, that are pushing us in certain directions. But, I think, if I had to justify my tolerance of things that you wouldn't tolerate, I would say that I'm very worried about the concentration of political power. At least, that's the way I would explain it after the fact. I don't know if that's the real reason I believe it. But, I would justify my views by saying, for example, that I don't want Amazon to get an extra benefit or a penalty from government policy, because I don't want firms to be focused on influencing that. And I worry that government will only help its friends and not do what you and I would like it to do. And that's the way I would justify it, at least after the fact. I don't know if that's the real reason I hold the views I do. It could just be because of my personal experience; and, to be even harsher on me, it could be because I do pretty well in the current system; and it's possible that I--I recognize that could strongly color the way I look at it. But, I do think a lot of people who are pro-interventionist underestimate the dangers of concentration of power in Westminster. Or Washington.

Maeve Cohen: But there's huge concentrations--but definitely, there's huge concentrations of power in business as well that holds incredible sway over our political systems. And that's in no way democratic. At least there's a semblance of democracy within our political systems. So, I would far rather be beholden to democratic governments than I would be to these massive, monster monopolies that are currently dictating my life. Yeah. So, I think--I do agree with you that it's massive concentrations of power that are undeserved and dangerous; but that--both they're in business and in politics, and both of these huge institutions have an astronomical amount of sway over our day-to-day lives.

|

(35 COMMENTS)

Anat Admati on the Financial Crisis of 2008

Anat Admati of Stanford’s Graduate School of Business talks with EconTalk host Russ Roberts about the financial crisis of 2008, the lessons she has learned, and how it has changed her view of economics, finance, and her career.

This week's guest:

• Anat Admati's Home page
• Anat Admati on Twitter.

This week's focus:

• "Ten Years After the Financial Crisis: What Have We Learned?" Anat Admati. SIEPR Associates Meeting, June 4, 2018. YouTube video.
• "Bank Leverage, Welfare, and Regulation," by Anat R. Admati and Martin F. Hellwig. Working paper. Last revised November 21, 2018.

Additional ideas and people mentioned in this podcast episode:

• Corporate governance, shareholder activism
• Corporate Governance, by Randall S. Kroszner. Concise Encyclopedia of Economics
• "The 'Wall Street Walk' and Shareholder Activism: Exit as a Form of Voice," by Anat R. Admati and Paul Pfleiderer. Stanford Graduate School Working Paper, 2007.
• 'Large Shareholder Activism, Risk Sharing, and Financial Market Equilibrium', by Anat R. Admati, Paul Pfleiderer, and Josef Zechner. The Journal of Political Economy, December 1994.
• Bank practices, deposits, deposit insurance
• Anat Admati on Bank Regulation and the Bankers' New Clothes. EconTalk, April 2013.
• The Bankers' New Clothes: What's Wrong with Banking and What to Do about It, by Anat Admati and Martin Hellwig on Amazon.com.
• Deposit Insurance, by George S. Kaufman. Concise Encyclopedia of Economics
• "As Fed to Oaktree Fret Risks, Leveraged Loans Hit New Milestone," by Cecile Gutscher and Sid Verma. Bloomberg, October 18, 2018.
• Paul Pfleiderer on the Misuse of Economic Models. EconTalk.
• "Where's the Courage to Act on Banks? Ben Bernanke and the Fed seem to have missed a key lesson of the financial crisis," by Anat R. Admati. Bloomberg, October 12, 2015.
• Incentives and the Financial Crisis
• Luigi Zingales on Incentives and the Potential Capture of Economists, by Special Interests. EconTalk.
• Gambling with Other People's Money: How Perverse Incentives Caused the Financial Crisis, by Russ Roberts. Amazon.com.
• Russ Roberts on the Crisis. EconTalk, May 2010.
• "It Takes a Village to Maintain a Dangerous Financial System," by Anat R. Admati. Chapter 13 in Just Financial Market? Finance in a Just Society. Lisa Herzog, Editor. Oxford University Press, 2017. PDF file.
• Kenneth Arrow and the Financial Crisis of 2008
• "Risky Business." Economic Policy Opinion, by Kenneth Arrow. The Guardian, October 15, 2008.
• Kenneth Arrow. Biography. Concise Encyclopedia of Economics.

A few more readings and background resources:

• Milton Friedman. Biography. Concise Encyclopedia of Economics
• Junk Bonds, by Glenn Yago. Concise Encyclopedia of Economics
• Savings and Loan Crisis, by Bert Ely. Concise Encyclopedia of Economics. Origins of the FDIC.
• "The Regulator's Calculation Problem," by Arnold Kling. Library of Economics and Liberty, April 6, 2015. Includes discussion of Basel agreements and their consequences.
• Lombard Street: A Description of the Money Market, by Walter Bagehot. Origins of Central Banking and the Fed.
• "I Rob Banks Because That's Where the Money Is: Willie Sutton? Robert M. Yoder? Fred Curran? Apocryphal?". QuoteInvestigor.com, February 2013.

A few more EconTalk podcast episodes:

• Anat Admati on Financial Regulation. EconTalk, August 2011.
• Eugene White on Bank Regulation. EconTalk, April 2012.
• Rana Foroohar on the Financial Sector and Makers and Takers. EconTalk, April 2017.
• Neil Barofsky on Bailouts. EconTalk, September 2012.
• Cathy O'Neil on Wall St and Occupy Wall Street. EconTalk, February 2013.
• Sam Quinones on Heroin, the Opioid Epidemic, and Dreamland. EconTalk, January 2017.
• Nassim Taleb Archive. EconTalk.

Time Podcast Episode Highlights

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0:33

Intro. [Recording date: November 1, 2018.]

Russ Roberts: My guest is Anat Admati.... Our topic for today is the Financial Crisis of 2008. We're in the 10th anniversary of that. And, we're also going to get into, I hope, the role of the financial sector in general. And I hope also some corporate governance issues. I want to start with what you've learned personally from that crisis, if anything. Some people have said, 'There was nothing new there; I wasn't surprised; I didn't learn anything that I didn't already know.' That isn't true for me. I'll talk in a minute about what I've learned. But I'm curious what you, who, you are in Finance--so, what did that experience either get you to reconsider or get you to learn about that you didn't know about before?

Anat Admati: Oh--it changed my life. I mean, it taught me so much. I can no longer be what I was a decade ago. It had woke me--

Russ Roberts: What was that?

Anat Admati: Well, I mean, I basically realized I lived in a sheltered bubble that involved many, many false assumptions. I was working on the wrong set of problems, not on the problems that mattered. I was uninvolved in policy, and that changed. So, everything, from my teaching to my research to my activities professionally--everything has changed about my career trajectory. I'm still a professor at Stanford, but I talk to a different set of people; I think about a different set of problems--you know, related, as an economist, but now I'm much out of my silo.

Russ Roberts: So, the bubble you mentioned: What was the nature of that and what had to be re-evaluated once you saw what had happened?

Anat Admati: Well, I mean, in one word, assumptions. Implicit assumptions. Things we take for granted. I just didn't know that so many of them are wrong. Assumptions about markets, assumptions about financial market and the financial sector. Assumptions about politics. Assumptions about people, and sort of almost the sociology, even ethics of people. All kinds of things like that.

Russ Roberts: So, give us some examples of what you believed beforehand that you no longer think are true.

Anat Admati: At research 10 years ago you'd find me--the topic I was interested in was already corporate governance. And there, the problem that economists and law-and-economics people obsess over is entirely the problem of the sort of manager/shareholder conflict, because clearly we believe the purpose of corporations is to, you know, in the Milton Friedman language, to make as much money as possible--you know, subject to the rules and ethics he adds. And in the way we teach corporate finance to basically maximize the stock price. And that's what I've been teaching in Corporate Finance class. And so the only issue is you have dispersed shareholders, especially in a public company: How do they monitor managers? Those kind of things. Activist shareholders. So, I wrote a paper with Paul Pfleiderer about large shareholder activism: we've written a couple of papers on that. The free rider problem of monitoring. Things of this sort. Voting--I had students working on corporate governance. And, I never also looked at financial institutions as corporations. It was very general. And I realized that when you say that the purpose of the corporations is to maximize stock price, or to make as much money as possible, or you frame that purpose, there are implicit assumptions there that are just false in reality. And certainly false in the reality of financial institutions. For example, implicit assumption there is that markets, free markets, are competitive, and especially that somehow the contracts and the rules of the game, the rules of society as embodied in the law, to use the language of Milton Friedman again, are there to ensure that other people impacted by corporations--for example, customers, employees, the public as a whole--are protected somehow. You know, that everybody can have a contract except for the shareholders and therefore the shareholders should be the focus of what corporations, who corporations strive to get. Whatever that actually means. And again, unpacking who the shareholder is, it's as if a shareholder is somebody who only owns that one share and cares about the wealth that they get from the ownership--meaning the stock price. So, all of that embodies a lot of assumptions. And, when I started looking at banking and emerged out of that deep dive into the banking sector and financial crisis and what happened there and the narratives around that, I realized that, especially in banking but also more broadly, there are assumptions around, for one thing because contracts are often imperfect and costly to enforce, and require, you know, they are complicated there are all kinds of clauses you can think about, you know, mentor arbitration or the way the legal process is costly or monitoring to sue or legal costs of the different sides. And, because the laws are themselves part of a political process in which corporations or certain people in the economy have a voice; and the voice even in a democracy does not necessarily bubble up the most efficient set of rules. And so, you can have a failure of the rules; and the failure could be a sort of feature, not a bug, of the way the rules are created and enforced. And so, you know, the financial crisis if you want to get into that really represents that kind of failure of markets, contracts, and rules. And that's not always a narrative you'd hear from the people who, you know, prefer other narratives. But that's where you can see what people will say and do in their own interests if they can get away with it.

8:10

Russ Roberts: Well, I think that's an interesting way to frame it. In many ways, I agree with everything you just said. I guess in other ways I'm not sure I agree. We'd have to--let's dig a little deeper. As I see the--I learned something similar. But I was different. I wasn't paying much attention to the financial sector. As a non-Finance economist, I always viewed Finance as 'something over there.' It was something--it was a specialized thing: it was a very specialized part of the economy. And I was very unaware of the way that the fingers of that industry reached into all kinds of places. And I also was unaware of what the failure of those firms would do to the economy as a whole. So, you know, I like to make the analogy with the Dot Com struggles at the turn of the century when a bunch of dot-com companies that had great hopes--those hopes weren't realized. Those companies went broke. The investors lost all their money, every penny. And it was unpleasant for a bunch of people who worked in those firms; but many of them, of course, were able to find work in other firms that didn't go broke. And, there was no macroeconomic consequence, at least, that was measurable or widely observable or obvious from that failure. When the financial sector had a meltdown, the whole economy seemed to collapse. People went crazy. People panicked about whether society could survive, even--that people might not be able to get their cash out of their ATM machines [Automatic Teller Machine]. And it provoked a set of responses that were wildly different from the dot-com struggles. So, what's the difference between the two? And one of the differences--well, go ahead. You go ahead.

Anat Admati: Well, yeah. We give that example also in the book that you interviewed me about 5 years ago. Exactly asking that question: Why was the financial crisis so harmful? And, in comparison to the dot-com collapse. Which, just to set it up more as a contrast, that dot-com collapse involved a lot more sort of paper losses, what you were just referring to--meaning collapse in the value of certain companies, indeed their demise in many cases. In the financial crisis that started with subprime defaults, the underlying losses were actually much smaller. And yet, the harm was so large. And what it is about, a lot of it, was about the nature of the system--indeed, the reach of the system and the fragility and opacity of this system: the way that it controls sort of important infrastructure, like the payment system related to whether your money is in the ATM. And the way it became so global and so connected and then so incredibly fragile. And that fragility creates all these contagion processes that did not exist in the dot-com, which was just a contained system where equity values dropped. Here you had equity values dropping in a very highly indebted chain of highly indebted companies, where their counterparties weren't quite sure how to analyze who is really sound or not. And that created many mechanisms that, in our book, we call them financial banking dominoes, to describe it.

Russ Roberts: And so we agree on that. And we certainly agree that--I know we both agree because I've interviewed you twice and I've read your book, the role of leverage, of borrowed money, as opposed to equity. And just to review for listeners: In equity, you own stock. A stock can go up really, really high, and it can go to zero. With debt, you get a fixed return; but presumably the odds of going to zero are very small. You get your money as long as the firm doesn't go bankrupt. So, the idea, at least on paper, is that debt is a little bit safer and you give up the upside to have the lower risk of the downside. And yet, all these firms, and all these investors, and all these players in this game--it lent enormous sums of money, taking enormous risks of a possible downside, knowing that the firms they were investing in through their lending had almost no skin in the game. Almost no money of their own. Very little equity. Which normally would mean that you'd be very nervous about giving up the upside and accepting a lower return for a smaller risk of the downside; in fact, the downside was quite likely in those cases, with such small amounts of skin in the game, small amounts of own money. And, when I look at that fragility that you are talking about, I notice that Wall Street went, in a very short period of time in a partnership system where people spent their own money to a world where they spent other people's money. And, of course, that's always fun. It's more fun to spend other people's money. But the question is: How do you get those other people to invest in you? And I think that's the question.

Anat Admati: Okay. So, let me explain. First of all, think of just basic banking. And that's really where you get from banking and then from investment banking to kind of universal banks with everything in them, the kind of big banks that we have. But even when you talk about the basic bank, which gets its funding from depositors, of--first and foremost, depositors are very special kinds of lenders. They don't even think of themselves as lenders. They may give--I mean, and not only that--it gets, in the bankers' mind, especially now with deposit insurance, you know, you can get--and I like to use that quote to kind of explain to people how ridiculous it can get--the CEO [Chief Executive Officer] of Wells Fargo Bank, ex-CEO at the time a couple of years ago, John Stumpf, he said this in 2013, so shortly after our book came out, he said the following to a reporter: 'We, in Wells Fargo Bank,' he said, 'We have a lot of retail deposits.' He called it even 'self-funding by deposits.' That's my money, by the way--

Russ Roberts: Yours and mine--

Anat Admati:'And therefore,' he said--now listen carefully. 'And therefore we don't have a lot of debt.' That's what he said. Now, you know, when I present now, I sort of put a big 'Huhhh?' on it. Like, 'What did you just say? You mean, you forgot you owe me the money?' I expect--we expect this money to be in the ATM, right? We trust that. But he forgot he owes it. Because it seems to him, it feels to him, like play money. It feels to him like--and the reason is that we feel safe because of deposit insurance. We do not monitor him. We do not breathe down his neck.

Russ Roberts: Correct.

Anat Admati: And we are the nicest creditors in the whole economy. Even though--and we don't have any collateral. We don't have any safety there. We just have the safety of the FDIC [Federal Deposit Insurance Corporation]. Now, as a result of that, what happens is, in banking, banks can be--especially today with safety nets in place--they are forever, you know, heavily indebted--although we can go back to history when they weren't, before safety net, as indebted. But, critically, normal borrowers in the economy, especially normal other corporations but even the kind of borrowers to which the banks themselves lend, if they become heavily indebted, they feel it. You were just saying: The interest you invest in loans, you basically start having your lenders be concerned with what you are doing with your money, with whether you can pay or not. They are going to choke you. So that companies that are very heavily indebted end up seeking bankruptcy protection or defaulting. Now, here's what's special about banks. Banks can stay insolvent for a very long time. Because nobody really calls them on it--

Russ Roberts: Nobody knows--

Anat Admati: nobody [fault]? So this hidden insolvency, to my mind right now, I have every reason to believe that many banks are either insolvent or very close to insolvency. And nobody really knows it. And then when we panic--when we think something's wrong--then we see who is swimming naked in the language of Warren Buffett, you know, when the tide goes down. So, in other words, we live in this make believe where, you know, they might even flaunt all kinds of capital ratios and regulatory ratios and or, you know, some kind of accounting number, to me. But what I see, I see the symptom of heavy indebted and distressed: there's no companies as indebted as banks. I mean, they have single-digit equity in a good day, relative to total assets. And a lot of balance sheet exposures that would not allow companies to actually survive in markets anywhere but banking. But, there are coddled, and they don't live in actually markets; which is how you can hear these ridiculous, entitled things that they say. And then, the somehow acceptance that that's okay for a company to live like that, just because it can.

18:32

Russ Roberts: So, the insolvency--just to clarify this--it very well may be the case that there are not enough assets--

Anat Admati: yep--

Russ Roberts: available for the bank to pay off everybody's creditors. But because we are not all asking for it at once--

Anat Admati: exactly--

Russ Roberts: or even close--you know, I go in and make my 150 or 200 [?]--

Anat Admati: Yep. We have excess deposits. Notice, by the way, that they can take the excess deposit, because they always have them, because we always leave extra money in the bank, and use assets that they buy with them as collateral to get the next person to lend to them. And so you have, then, on top of the deposits, a whole, huge, you know, high rise into the stratosphere of debt funding where everybody feels safe. And that's how you get to borrow as much as banks--you get people to lend to you and you get to live on almost no equity. And when you make money, when you have profits take the money out without any creditor screaming.

19:34

Russ Roberts: So, one way to look at that claim you've made--which I agree with--is you are saying that, just because everything looks okay, means actually it's not; there's no reason to think that it's okay. In, fact, because of the incentives in place, it's probably not okay. Which means that some bump in the road, in the case of the housing crisis it was the drop, unexpected drop in housing prices that forced the water to go down and people could fine out who was swimming naked. But that's coming potentially in some other market. So, you are worried.

Anat Admati: Yep. Yeah. I mean, right now you can read--I mean, I was just looking at that story and saving some of the graphs. So, now there we are talking about leveraged loans. I mean, if you go and look now, they are saying that there's huge--you know, there's a lot of what's called yield chase, you know, in the days of zero interest rates people want to take risk. And so there is a build-up of all kinds of risk. I mean, you know, I'm worried about cyber-security risk, but there are other risks that come and especially we're back to the days of what's called leveraged loans. Meaning, you make a loan to somebody who is heavily indebted themselves. Just like subprime homeowners were. In other words, a big risk of default. And these are very opaque loans. They are not like--you know, they overtook what's called Junk Bonds, actual bonds in markets that are rated and all that. They are called leveraged loans, and then they securitize them, very similar to the way they handled subprime lending. So, now we have a huge increase in that to the levels that are beginning to worry all the regulators. So, if you read now, everybody is saying, 'Oh, this is where the risk is going to come from. I was just looking at a Bloomberg story, literally before we talked, which says--the title is "As Fed to Oaktree Fret Risks, Leveraged Loans Hit New Milestone." This is just a story from October 18th, and it has various graphs, and it quotes somebody at the end, Michele at JP Morgan Chase Asset Management saying, 'There is potentially overextension of cheap borrowing. That's always what seems to get the system in trouble.' A year ago, just on a normal day where we are looking at mid-term election or whatever else and not paying attention, and here is the risk building up. Same as it was, you know, 2006 was a wonderful year. And I often go through what the regulators were looking at and what the regulators were missing. And all the measures that they were using that proved completely useless and how all of a sudden, you know, panic hits; and if you listen to Ben Bernanke, they pulled out all the stops, so if you read Adam Tooze now, spectacular things were done to save the system.

Russ Roberts: Well, I find those--to be honest, I find those very depressing and a little bit offensive. Because, what they did was they enshrined the rules of the game that were in place to help make money for those folks, instead of questioning them, instead of forcing a reassessment of what they're role was and the problem being there in the first place. And so, I feel like, my profession--I was going to say 'our' profession; I don't know if we consider ourselves in the same profession--but my profession of economists, not just finance--

Anat Admati: Yep, economists--

Russ Roberts: have done a great disservice to the country in saluting Bernanke and others--Geithner, Paulson--for saving the country, when in fact the mistakes that had been made along the way helped create the problem. And then, to think, congratulate the people who started the fire for putting it out seems like a bad thing to do.

Anat Admati: Exactly. And so, when Bernanke wrote his book, you know, when I only knew the title of the book before it came out, you know, The Courage to Act, you know, this self-congratulations; and then when you hear the narratives now--'they brought back the team: Geithner and Paulson.' And they were the heroes for the banker; but they are starting the story from when the implosion happened, and that's when they were heroes; and if you hear about the heroism, I mean it was really unbelievable what they did to help, not just U.S. institutions but the entire--because there is, currency and there was so much exposure to dollar debt in Europe and other--there was a select set of institutions, and it was selected even politically--to whom the spigots were opened, and the Fed, beyond the government bailout themselves, TARP [Troubled Asset Relief Program], etc., the Fed was just, you know, throwing trillions of, you know, they call liquidity, to prop up a system that they've allowed to become as fragile as it was. And then, so I wrote an op/ed at the time called "Where Is the Courage?" and it was really about the courage they didn't have before the crisis; and since the crisis to really question, as you said, whether this system is okay, and what can be done. They will have the story, 'Yeah, yeah, yeah--we didn't have enough equity and we figured that out and now we have more.' But, I mean, the 'more' is like the smallest tweaks--it means nothing. The 'more' is like in Martin Wolf's world, tripling zero. Which is still zero. In other words, you go from nothing to a little bit more than nothing, and you call it 50% increase or triple or something like that when you started with--you know, I don't want to get technical into these details but I can speak to them. You started from just an unfathomable set of standards and when you now tell me that it's stronger, which is just--is not asking the question, 'Is it the system we want? Is it as strong as it can be? Is it the right system? Does it continue to have the same ills that it had before?'

25:52

Russ Roberts: So, let's back up a little bit and let's talk about a couple of the things that I think are at the heart of the problem, which you may or may not agree with--but, you may. So, I want to hear your take on it. So, the FDIC [Federal Deposit Insurance Corporation], the insurance of deposits, of course means that, as you pointed out: I, as the depositor, person putting money into the bank, I don't want to have to worry about whether the bank is going to take too much risk with my money. And that worry gets transferred onto the Federal government, which gets usually implemented via various regulations restricting how risky banks can be. For the investment banks, there is no explicit FDIC, but there is an implicit bailout promise of, 'If things get really crazy, of course we are not going to let you lose all your money as lenders, because that will have too many ripple effects.' That, of course, encourages banks to be very leveraged, to have very little skin in the game; as you point out, to have, say 1% in equity and 99% borrowed. And then, so, of course, then they say things like, 'Yeah, so the assets'--

Anat Admati: Stuff happens--

Russ Roberts:'assets have to be safe.' That's the whole Basel set of regulations--

Anat Admati: Yep. Risk points--

Russ Roberts: about how much Triple A, and weights, and how much of each kind you can have. And that whole hierarchy of, that infrastructure of supervision, monitoring, regulation, and implicit promise seems to me to be an utter failure. There's no reason to think that that's a good system. And I would just add: That has nothing--to me-to do with markets. It's not a market system. You have profits to be made and losses to be put on other people. That's just like the opposite of markets. And that's a destructive, inequitable, despicable, wasteful system. And that's what we keep perpetuating.

Anat Admati: Yes. That's right. So, Martin Hellwig and I, who wrote a number of pieces on this, recently thought to write yet again to explain, the following paper--it's called "Bank Leverage, Welfare, and Regulation." And it basically says that the inefficiency of banking is fundamental to banking, and it really has to do with--you know, they always say banking has always been fragile. To which, basically we are saying banking has never been efficient. At the start, when banks were partnerships--and you mentioned partnerships--and people who wanted to have that kind of liquidity thing--like, they wanted to put deposits in the bank--you know, really demanded that the bank had 50% equity and that the owners of the banks were personally liable. It's as if Jaime Dimon had his assets on it, would insure his deposits with his own apartment in New York or whatever. And then--but of course, then, the banks had to be very small. And, you know, they couldn't provide as much funding for the state and for everybody else. And so, but they the last to become even limited liability corporations, and they were even--they were double and triple unlimited liability in the United States even through the Great Depression until the FDIC was created. So, fundamentally what you need is somebody that--you know, the lender or the collective of lenders, or regulators--to ensure that the bank doesn't do what it has incentives to do: which is to endanger the deposits and everybody else and say, 'Oops, sorry,' and then there is a collateral harm. So, the problem really is that banking has never been effectively regulated, and markets are repeatedly failing, because it's hard for a depositor to really know what the bank is doing--you know, going to yet another depositor and sort of increasing the risk of default. And so, you know, we kind of delegated that to the regulators: it's just the minor problem that they keep failing and keep maintaining a bad system. So, yes: I think that Basel--Basel, the way it was coming into the crisis was a spectacular failure. And I can just tell you how many things were wrong with it. And that what they called a 'major revision' was really just tightening a few screws. But it really didn't improve it that much. And it remains this game of, you know, of playing around with the risk weights and finding ways to increase, you know, to kind of game it; and this whole thing; and putting it off balance sheet; and what's called Regulatory Arbitrage--this cat-and-mouse game that continues to go. And that's because it's all so complicated and so unfocused on the right things. And it doesn't ask the big question, which is--there's no science behind it, for sure. I mean, the papers they wrote to justify it are just completely flawed. And we've been taking them on for literally a decade. But yet, you know, they just keep saying these things. They just keep doing these things. So, you know, you asked what I learned. I learned that there is so much of this wrong stuff of bad policy that can persist.

31:15

Russ Roberts: I want to go back to this issue of the role of economists and academic business professors in this kind of situation. And, I'm going to be a little bit cynical. You could debate whether it's legitimate or not, the cynicism. But, let me put it out here. It seems to me that everybody knows what you are talking about. I know what you are talking about. We're not alone. There's at least two of us. But I think there's a lot more than two of us that understand that there are many, many ways--I could say, 'Well, I'd like to have a system with no bailouts and no deposit insurance, and therefore let all the costs fall on the people who make bad decisions.' And that's a lovely thought. It's unlikely; but that's my--

Anat Admati: Right. Not credible--

Russ Roberts: It's not credible right now. We don't have a cultural reason to have--

Anat Admati: No, no; and I think it's not even good. I don't even--I'm not even against deposit insurance and stuff.

Russ Roberts: Okay. So, that's fine. But, we all understand that, given the current reality, where there is deposit insurance, and where there is an implicit promise of a bailout, even when we legislate against it by the way, we end up doing it anyway--

Anat Admati: Yeah--

Russ Roberts: So, we had FDICIA [Federal Deposit Insurance Corporation Improvement Act], which is a way of dealing with bankruptcies that was basically short-circuited, because--

Anat Admati: from corrective action--

Russ Roberts: Right. Because we can't just--it was too risky. So, that incentive is going to always be there when powerful people have a chance to be bailed out. They are going to get bailed out. So, it seems to me that those of us who understand those incentives should call out and say: 'Well, given this reality, the only way to deal with this is to have very low levels of leverage; very high levels of equity.' Which is what you've come out for.

Anat Admati: Yep.

Russ Roberts: Now, that, to me, you can debate--and I know you have--whether that's got a cost or not. I don't really care. The cost of it is small compared to the costs of the ongoing failures of the financial system that happen and then lead to cynicism on the part of the public--correctly so--about how the system is rigged against the little person in favor of the big person. So, why isn't it the case that your colleagues and my colleagues who know this and instead say, 'Ben Bernanke did a great job,' instead of saying 'This whole system is corrupt'? It's corrupt. It's not just like, 'I think we have a better policy.' No. It's corrupt. It allows a group of people--you can debate whether they should have gone to jail or not: I don't think there's that much criminal activity. But what they did was shameful. They took advantage of rules that they themselves had influenced tremendously. It's not just that they played by the rules of the game. They influenced the rules. They made enormous sums of money. And the people who lost money were left with enormous sums anyway. So, Jimmy Cayne, the CEO [Chief Executive Officer] of Bear Sterns--he lost a billion dollars. Which sounds horrible. But he was left with 500 million. So, it's not like he was a pauper after it was over. He was not a pauper. So, the downside for these folks is glorious wealth that is beyond human imagining, through most of history. And I don't understand--well, I do; there's theory--but I want to hear your reaction. It seems to me that our colleagues should be out there saying, 'There's only one way to fix this that's reasonable,' which is higher requirements of equity and lower allowed leverage. And get away from all this sophistication which is a smokescreen about weights and sophisticated leverage rules. That's just nonsense.

Anat Admati: Well, I mean, this is, this was what I thought. So, when I told you my lessons, I told you effectively my deep disappointment that some people would speak up, but many wouldn't. So, when I came in, that was kind of the obvious thing I thought. It's not like it's a silver bullet. We still need to discuss all kinds of disclosure issues and derivatives and other things. And there is, you know, there is a lot of consumer fraud. There is a lot of other things that we can talk about--

Russ Roberts: Sure--

Anat Admati: you know, if we get to corporate governance, especially in this kind of area. But, yeah. And so, I wrote a paper in which I discuss, based on my many experiences engaging with people in various ways, publicly and privately, from across the system--the private sector, the policy sector, the people who did not want to engage, who did want to engage--and what I learned, the paper is called "It Takes a Village to Maintain a Dangerous Financial System." The inspiration of the title was actually at the same time that the movie The Big Short came out. Which ends with a question people want to ask. And, so, if you saw the New York Times 10-year Anniversary Business Section of the Sunday of like, September 15th or 16th this year, it had a blank page for the 10th Lesson. And it had a complete list of all the executives that went to jail, and the entire full page was blank. And it said, 'This page is intentionally blank.' It was very powerful. So, ask why people didn't go to jail, and of course, I'm asking about what was legal. I'm asking--

Russ Roberts: Exactly--

Anat Admati: about. And most of that was described, even in the movie The Big Short, was legal. So, nobody would go to jail for that. And so, even beyond the question of fraud, which we can discuss why, you know, [?], or other people, why there was, seemed to be some evidence of mortgage fraud and others ended up just settling and just moving to comfortable retirement. You know, what was legal was most outrageous. And so then, what's the [?], so it takes a village, in the movie spotlight which came at about the same time, about sexual harassment of the Catholic Church--

Russ Roberts: Sexual abuse--

Anat Admati: Sexual abuse, sorry, abuse. We are talking serious abuse, criminal abuse. In the Catholic Church. In Boston. And then it turned out in many other places where they were recycling these abusive priests. The lawyer tells a reporter, at some point, 'If it takes a village to raise a child'--which is a famous saying, I love Hillary Clinton's old book, It Takes a Village to raise a child: It takes a village to abuse a child. And he meant people looking away. People enabling, you know, if you think now of [?] Weinstein or any kind of wrongdoing that persists, people are not speaking up. Or not of, in history, obviously, atrocities that persisted, you know, with people being afraid sometimes to speak up. But, all this stuff. Well, so why aren't--so, I go through the enablers of the system. The enablers in the private sector, including people inside the firms, the people around the firm, the private watchdogs, the credit-rating agencies, the auditors. All of that. All the way to the policy-makers. To the people in government, the politicians; and then of course the people who have some connection or sometimes are indistinguishable from the policy-makers, and academically[?] like Ben Bernanke and others. And the media. For, you know, the toxic mix of confusion and sort of willful confusion. And I had to go read about, you know, all kinds of terms in psychology: about willful blindness and moral disengagement. And all of those things that allow people to kind of do harm and still feel okay about themselves. And so, you've written to ethics; and it does become ethical. And I gave a talk here at Stanford about lessons from the Crisis in which I quoted extensively from Ken Arrow--who knew from the beginning that this was, the Crisis was a big crisis. Was a big point to ask a lot of questions about the very system, and indeed the very financial system with all these securities that he himself wrote about, back in the 1950s. And I discovered just recently that Ken Arrow wrote an op/ed on October 15th, 2008, called 'Risky Business.' It's saying this presents a challenge to standard economic theory. And, you know, asymmetric information is key precisely in the complex securities that standard theories called for. Which is his theory. And he knew there was a problem right back then. And he then was thinking about ethics. Well, in my ethics, in my enablers, I go to the academics, and I see the kinds of things that I discovered 10 years ago, which is completely false statement in a banking textbook by a big shot named, you know, Mishkin, of all people. False statement. And then a whole slew of misleading and flawed statements and reverse-engineered models. Which I can go on and on about into the night. By experts, academics, with clever models, and all of that, to reverse-engineer somehow why what we see must be good, because we see it. And it's a bias, somehow: What we see must be good. Because we see it. And it's a bias that they have that, you know, somehow, what we see must be good. And it's sort of cultural, sociological attempt to belong, to assist them, because it's more convenient. And, you know, when I stepped into it, somebody said to me, you know, when a policy-maker talks to an academic, they know the answer they want to hear. So they will talk to certain academics that, you know, tell them what they want to hear. And the academic, he said to me, wants to feel important. And so, it was--I from the start call it the Big-Shot-ness syndrome. And, you know, you get rewarded for providing the narratives to people who find it convenient to tell the story in a particular way, such as to start the story from their heroism of saving a system that they were very much part of, and tolerated, before and since. And to basically say, to us, that this system is inherently fragile and we got a foot in place, you know, the ambulance[?], they would allow us to say that next time it implodes.

41:53

Russ Roberts: So, I want to read a quote from a presentation you gave recently. It starts with a quote from Upton Sinclair, and then you have a number of different applications of it. The Upton Sinclair quote:

"It is difficult to get a man to understand something when his salary depends on not understanding it."

Then you write,

It is difficult to get politicians to get a politician to understand something when his campaign contribution depends on understanding it.

And, my footnote to that is that: You know, my cynicism grew after the 2012 election, when Mitt Romney and Barack Obama both had a chance to campaign along some of the lines we've been talking about. They could have spoken out against the current financial system. Mitt Romney could have done it--

Anat Admati: Nobody spoke--

Russ Roberts: Mitt Romney could have done it, because here was his chance to show he wasn't just a rich plutocrat--

Anat Admati: yep--

Russ Roberts: he actually was going to say something that hurt his rich friends. And Obama, who was coming from the Left, could say it because he was going to be representing the little guy and that would have been great. And neither one of them said a word--

Anat Admati: yep, not a word--

Russ Roberts: There was not an issue in that campaign.

Anat Admati: I remember that election very well, because I was writing the book at the time. And it actually--interestingly, I was following who would ever say a word: not in the debate, not any time did it come up at all.

Russ Roberts: It should have been the single biggest issue of the campaign, in my view.

Anat Admati: And it wasn't Sheila Bear[?] wrote a book right around that time, screaming about this. Literally, Sheila Bear's[?] book came right before the election. There was a book by Neil Barofsky about the way that bailouts went, and how much corruption there was, in the way that TARP was managed. And, a few other books of that sort. And of course ours, trying to scream, you know, a bunch of academics. And the academics, you know, there were 20 academics across the board that did sign a petition that, you know, that we sent to the Financial Times, which, by the way, was moved into the "Letters Section." The next quote you were going to, the last quote you were going to read was going to be about the media and their incentive--

Russ Roberts: It's difficult to get a journalist to understand something when his access to the news depends on that understanding.

Anat Admati: Yeah. They have access. That adds--there is a whole layer of incentives there. And our letter was pushed into the Letters Section. And the next day there was a really stupid op-ed by Pandit[?] from City, saying the same nonsense that we debunked on the more minor pages the day before. But anyway--

Russ Roberts: So--

Anat Admati: what I was going to say was that, at the time in 2012, interestingly, the only one who said something about the big banks and unhealthy they are and how there would have to be something done about them was actually Paul Singer, saying that if Romney is elected--

Russ Roberts: A hedge fund manager--

Anat Admati: something about, this is Elliot, you know, vulture[?], the hedge fund guy saying--and he was one of the only people who really spoke. In 2016 there was in the Democratic Party more talk of that, because you had the anger bubbling into, you know, into Bernie Sanders, and Elizabeth Warren and all that. But Trump was speaking about it, too. Only to, you know, to totally fill his Cabinet with the same people.

Russ Roberts: Yeah. So, you know, my joke is that the Republicans and Democrats are the same. They both like to give money to their friends. They just have different friends. But they do have one friend in common, which is the financial sector. So both sides take care of--

Anat Admati: Yes. It's bipartisan [?]. And it's bipartisan opportunity, too. So, you have a situation in which Senator Sherrod Brown, who was among the best on this, teamed up with the no-longer, you know, Senator David Vitter, of all. And you had a Brown-Vitter proposal to end Too Big to Fail in which, before it actually said anything to do, 99 senators unanimously decided, around, I don't know, 2013, 2014, to end Too Big to Fail and end the subsidies of Too Big to Fail. Unanimous. And then Brown and Vitter had a proposal to have 15% equity for the top banks. And it never got discussed. It was bipartisan, from, you know, a Democrat and very right-wing Republican; and they could agree on that.

46:01

Russ Roberts: So, my question is: I want to restate your, I want to riff on your quote. It is difficult to get an economist to understand something when his, ____ what? depends on it? Not understanding it. His ego?

Anat Admati: Oh, well, his--

Russ Roberts: his, or is it--

Anat Admati: big shotness. It could be data--

Russ Roberts: or is it his consulting?

Anat Admati: I tell you--

Russ Roberts: Is it consulting?

Anat Admati: It's some of that, yes. I can tell you that after the original--I sent three, I organized three multisignatory, around 20 academics, letters to Financial Times during 2010, 2011, before going down to write the book for a year and a half. And the second one was related to allowing the banks to pay dividends, which depletes their equity and is just the most outrageous, really, think you could imagine. The equity is already there, and they are paying it out. Which, you know, before--anyway. I organized this, and I called--yeah, I don't want to get personal about naming the person, but I can tell you--

Russ Roberts: Please don't--

Anat Admati: two conversations I had with academics. I'll suppress their names right now. One was to--an academic, a very prestigious colleague who didn't sign the previous but I felt would sign a letter that's very narrow on the payouts of, to shareholders, who I know agrees with it, the statement. And I said, 'Would you sign this letter?' And he said to me, 'Well, I have some paper going with some people from Citi'--I think it was. 'I'll get you somebody else to sign.' I said, 'Thank you. I already have people. I don't need your help'.

Russ Roberts: Yeah.

Anat Admati: Another one, I asked about this who knew for sure what is going on, and knew for sure we were perfectly right. I asked, 'Would you sign this letter?' And, he said, 'Well, I would frame it a little bit differently.' I said, 'Okay. So you write your own letter, then.' Because it was in response to some nonsense that was being said. When he did it.

Russ Roberts: But, we have to face the possibility--

Anat Admati: [?] Even right here: Would Hoenham[?] and, say, perfunctory statements but would not actually--and it was the same, with the, you know, report written by, you know, 15 academics called the Squam Lake that was hawing[?] and humming and making all kinds of really, really, you know, false, misleading statements about a lot of things that we took on in the book and elsewhere. And, they wanted, you know, their book got endorsed by Ben Bernanke, because it was just like, you know, 'We have these minor, little statements that don't go anywhere and don't criticize the system.' And, you know, 'We will only--say this and not that.' And, it's that is not criminal, and nobody goes to jail, as you said, for that. But, you know, the nonsense can live or the things you don't say, you know, don't get you into as much trouble as challenging.

Russ Roberts: I encourage listeners to go back, we'll put a link up to it, with the episode I did with Luigi Zingales on the fact that economists assume everyone is self-interested except for themselves--who are of course--

Anat Admati: Yup. [?] economic capture--

Russ Roberts: who are of course dis[?]--totally objective observers of what's been for the people in the world.

Anat Admati: Yeah. Yeah.

49:37

Russ Roberts: Now, we do have to entertain the possibility, I think, Anat--I mean, you don't, but I do, and I think you should, that we might be wrong. That their objections are legitimate and that the system is not nearly as badly structured as we think it is. So, you said the statement in a textbook is wrong. There are a lot of things in textbooks that are wrong. But, I think the crucial question is--

Anat Admati: ah, heh, heh--

Russ Roberts: Do the people who don't, who are not willing to go to the ramparts, to the barricades--and you know, for me, I'm just a talk show host of sorts, a podcast host who is--I'm not in the halls of power. It's easy--it is easy for me to be critical. And I've often admitted that even though I think the bailouts were a mistake and the ones that preceded it--

Anat Admati: I actually don't agree with that. I don't agree with that. And we are agnostic about the bailouts. We just--you know, we say you shouldn't commit to things that would, you know--we just want to learn the lessons.

Russ Roberts: Fair enough. In which case, did they just00you think that's a chance that "other side," the people who don't want to sign the letter--I'm not a letter-signer, I probably wouldn't have signed it either. Even if I'd agreed with it. But a lot of people would say, 'I don't think that's right.' 'I think there are better ways to get it done'. I think there are better ways--

Anat Admati: I [?] I challenge these people. I said to them, 'Okay, so fine: you don't agree with, uh--'. I mean, I was, you know staffers of the Fed when they kind of were reluctantly kind of meeting. And it was, 'Okay you don't like my solutions.' Ben Bernanke said that there is a Too Big to Fail Problem. So, what's your solution to it? You know, you can tell me all day long that there is--you know, you can find, you know policy-makers that, when they say that these companies can fail without harm, I mean, that's, you know, that defies credibility. And so they, you know, then I say, 'Fine.' You are saying, you know, 'Oh, I'm worried they'll go to shadow banking.' I said, 'Okay, that whole shadow banking is a failure to enforce. So, what do you propose to do?' So, in other words, they can sort of say on Internet consequences and say all these things but they are not proposing things to do. And, by the way, about the wrong textbook and stuff, we are talking about things that we fail students in basic corporate finance for saying. So, when I challenge some of the academics, I said, 'Okay. Wait a minute. Are we teaching something wrong in the standard courses of Finance?' Or, is the banking textbook wrong? And, you know, they would just, like, you know, resign from an advisory board to a trade organization clearing house rather than challenge bank law, being, I mean, sometimes--I mean they just would avoid doing that. So, yeah, I mean, I'm open to engaging with anybody and take the intellectual challenge. No problem. The problem is that, you know, the people just don't have real answers. And then they just walk away. So, I've been very disappointed with the level of engagement of the people who disagree. They just don't engage. Or they just change the subject. Or they just start saying, 'Let's go and estimate the subsidies.' I'm like, 'Why do we estimate the subsidies if we can reduce them and we agree that they are distortive?' Etc. Etc.

52:51

Russ Roberts: So, I have my essay on the Crisis, "Gambling with Other People's Money," is coming out in a book form in January. So I've been forced to think about these issues again. And I decided not to change anything in that book. It was written in 2010. I wrote an introduction with some of the things I've learned. But I haven't learned that much since 2010 I've learned a lot between 2008 and 2010. But one of the challenges you could make of my perspective, and it's the one I've been pushing here--it's, again, very similar to yours: One of the challenges would be: If things are so bad, and if Too Big to Fail is still in place--which I believe it is and you believe it is--Why have we not seen another crisis in 10 years? Ten years seems like a relatively long period of time. Why hasn't this implicit safety net which I think is at the root of the problem, why hasn't it caused another crisis? Is there one that's imminent?

Anat Admati: I will tell you. Look. You can--to me, it's not about a crisis. To me, the system is bad every day. I mean, for example, I think the system is too bloated. And just inefficient. So, it extracts from the rest of the economy for giving us the things that we like. But, there is, the reason to believe that this is not the most productive system we can have: that it just can--so, it doesn't have to go into crisis to see--the crisis is when we see that it's wrong. The crisis is an inflection point. But, the system is unhealthy every single day, because there are loans that are made: there might be too much, there might be loans that are not made. All of these things are invisible about the distortions about this system. So, I think a Crisis is not--a system like this can persist for a long time. And a Crisis is just when, you know, it's as if you are burning your engine driving at 200 mph and you know, you might fall off the cliff, but you might make it, you know, along, just living dangerously. So, I think we just live dangerously. Look, I started the presentation off by Jamie Dimon telling the financial crisis inquiry commission that he told his daughter, who I think was in elementary school, who asked him, you know, 'Daddy, what's a financial crisis?' He said to her, 'It's just stuff that happens every 3, 5, 7, 10 years.' And so now, when I talk about it, I say, 'Oh, it's been 10 years.' So, what is it? Where is it going to come from? And I give these headlines, indeed, that one is about "Seelo [? CLO]" one is about Italy. One is about Cyber Security. You know--July 31st 2017 Financial Times--the sequel to the Financial Crisis is here. Then we have, you know, the Crisis is closer than you think. You know. You are going to have people say the crisis is coming and then they are going to be heroes when it does come. But people are saying that Italy, political crisis, it's financial crisis. This is not just financial crisis just now. So maybe it will come from Italy, from Eurozone, imploding again. Or--

Russ Roberts: What is CLO? Is that what you said?

Anat Admati: CLO is Collateralized Loan Obligations. Which is a close cousin of CDO, Collateralized Debt Obligation. In Finance, you often just change the names. And it's the same thing. So, CLO, CDO--they are basically the same. Collateralized Loan Obligations: that's the leveraged loans that I was discussing earlier. And so, you know, risky debt, pay securitized and all of that. And the crisis would come from somewhere we don't know, and we're going to say, 'Ooops, we didn't see it coming.' But I think again, focusing on crisis prevention of loan is not really where my problem is. What I noticed, and we are now running out of time to talk too much about corporate governance, is: Once you have a status where you can't fail, and this is true for a lot of large corporations in other industries, too, kind of the so-called 'too big to jail'--you know, I have only so much legal remedies when you break the law as a large corporation producing things I like--you know, you are above the law. We can't enforce laws on corporations. So we see repeated recidivist corporate fraud or other bad practices. And it can cause serious harm from opiods crisis to, you know, to pollution, to other harms. Which, you know, we are having other violations of other laws, in a corporate context. And so, you know, going back to corporate governance, where I was 10 years ago, and back to your question from the beginning about what has changed, I now think the biggest--we now have to rethink all kind of basic things: Why are we allowing so much anonymity to shell corporations to evade the law? Why are corporations allowed so many rights and so few responsibilities, in general? Why is there no accountability to top people in scandals such as Wells Fargo or others, or indeed, Purdue Pharmaceuticals or other, and nobody ever goes to jail who was complicit or responsible for major harm to other people? So, but for street crime, we incarcerate, you know, a huge fraction of the population. But when you are a corporate executive, you get away with a lot of things.

Russ Roberts: Yeah--well, that's a much bigger issue, as you pointed out.

58:24

Russ Roberts: Let me raise--and it is a concern, and it's a fascinating question to me of tradeoffs--of, as you say, 'They give us what we like.' And I would say, more or less. Sometimes they give us some things we don't like--

Anat Admati: Right. Yep--

Russ Roberts: But I want to--

Anat Admati: Or dictate things.

Russ Roberts: Yeah. Well, 'dictate things' are tougher issues for me; I'm a big believer in personal responsibility. But, they were, some of those things were--

Anat Admati: But people don't know. You know, people didn't know how addictive opioids were.

Russ Roberts: Right. Well, they were sold in ways--

Anat Admati: [?] They had the information; they [?] the FDA [Federal Drug Administration]--

Russ Roberts: Again, as--

Anat Admati: So, it's an information problem.

Russ Roberts: Well, we did a phenomenal interview with Sam Quinones on Dreamland, his book. And I encourage people to read that book; and I'll put a link up to the episode as well.

59:13

Russ Roberts: But I want to close with another criticism I sometimes get of my work, and I'm curious if you agree with it and whether it applies to your work. Which is: 'Look, all these stories about what caused the crisis: The fact is, people are just irrational. There's going to be bubbles in financial decision-making because people get exuberant, and irrationally exuberant,' and, 'You don't need Too Big to Fail. You don't need any of these leverage issues to explain why sometimes financial markets blow up, so don't oversell that.' What's your reaction to that?

Anat Admati: Well, I mean, you just gave the example of the Internet Bubble. I actually think that, you know, I give students--during the Internet Bubble, I was teaching in a business school, and we were asked, 'How come, you know, they are worth so much without earnings?' or sometimes with tiny bit of earnings? And we did an exercise of, you know, fortunately we chose e-Bay, which is sort of still around, and to try to rationalize the huge, you know, e-Bay selling for 130 dollars with 0.08--8 cents--of earnings--you know, what does it take for growth projection, all that. And you know, it wasn't--it was just very sensitive to assumptions. You know, if you project dividends to the end of time, even if you do not paying dividends for the next 10 years, what the cash flow would be in perpetuity. And people, you know, can make mistakes about that honestly in terms of just assessing uncertainty for the future. So, yes. I mean, obviously, assessing the future is difficult. And, you know, I'm from the field of finance, so I know, and I've worked on Information and how it gets into prices and all that early in my career. So, I appreciate, you know, the stories about bubbles and mistakes and all of that. But then, we go back to, you know, protecting from the unknown unknowns, and how easy and obvious that is to do in the context of financial markets. You know, to say, 'Oh, there's going to be exuberance,' what the exuberance is, in the context of these financial institutions, is, is based on people's compensation structures. And in a chapter of our book that's called 'Paid to Gamble,' and to your 'gambling with other people's money.' And in the last chapter it's called 'Other People's Money,' which is about governance in general. And everybody just being loose with other people's money, and irresponsible, which is sort of a fundamental governance problem of the lack of trust. And so, the issue is: You can--all of these things are true, and may be true, and maybe doesn't change the fact that we don't have to suffer so much from these financial fragilities. That, they are--you know, because a few people benefit from them and all the rest are harmed. And the markets are failing to fix that. And therefore we need good, simple rules that would make a system kind of correct the market failures and protect us from this recklessness, and so, you know, it's all no problem for what I'm saying.

Russ Roberts: I wouldn't call it a market failure. I'd call it a government failure.

Anat Admati: Well, I mean, it's a market failure in that you put depositors in with bankers. And the depositors, you know, the market for the kind of contracts that depositors want, you know, is failing: the depositors are unable to monitor the bankers. And they, they are fragmented and dispersed, and the banker has incentives to harm them. And they get away with harming them. And the outcome is inefficient. So, the last paper just said, 'Laissez faire banking is fundamentally inefficient.' And that the government can help by creating effective commitment and taking the role of like a debt governance for the depositors, which don't have good contracts for that. We just want to have the money in the ATM [Automatic Teller Machine]. So, you can make a system more efficient when it can't kind of create the right commitments, or the issue is just the ability to commit through contracts and through markets. Markets do fail in banking. Banking is just, you know, to create an efficient outcome basically.

Russ Roberts: But, my point is that--maybe you don't agree with me--but that many of the problems that we've been talking about are the intervention--

Anat Admati: yeah--

Russ Roberts: of government within the reward system that would exist in a market, in a real market--

Anat Admati: The original safety nets were meant to create stability. Okay. You created Central Bank to prevent pure inequality promise[?] from taking down a bank. Okay. Pure panic. Okay. So, now they have liquidity support. We connected all these safety nets because the system was too fragile on its own. But now that we've created the safety nets, we forgot to accompany them with a correction to counter the even worse incentives that they create, that the safety nets create. So, my solution is: Yes, you can have safety nets to a point. But then you have to make an efficient, effective, you know, counter to the incentives that get created. Some of these incentives would be there with laissez faire, and these incentives get only worse when we try to fix the system with these interventions that you don't like. So, I--my position is a little more nuanced, therefore. I say that, you know, to a point, you want, you know, the government to, you know, do, to provide certain things and certain protections. And then, at the same time to not allow the abuse of those systems. And that's what you definite--what banking needs. Instead what you have is the politics only distorted further. So, you know--and when we do--and I speak to that in my slides, which are all public and I can send you links to a lot of them--I summarize the politics of banking, which is where the politicians see banks as a source of funding for whatever it is they like and not a social risk. You know, 'Banks are where the money is,' as the robber said, when asked why they robbed the bank. It's a kind of lame joke, but it's very deep--

Russ Roberts: It's Willie Sutton's line, and he was onto something. My guest today has been Anat Admati; and thanks for being part of EconTalk.

Anat Admati: Thank you very much.

(29 COMMENTS)

A.J. Jacobs on Thanks a Thousand

Journalist and author A. J. Jacobs talks about his book, Thanks a Thousand, with EconTalk host Russ Roberts. Jacobs thanked a thousand different people who contributed to his morning cup of coffee. In this conversation, Jacobs talks about the power of gratitude and different ways we can express gratitude in everyday life. He and Roberts also explore the unintended web of cooperation that underlies almost every product we encounter in a modern economy.

This week's guest:

• A. J. Jacobs's Home page
• AJ Jacobs on Twitter.

This week's focus:

• Thanks a Thousand: A Gratitude Journey, by A.J. Jacobs. Amazon.com.

Additional ideas and people mentioned in this podcast episode:

• My Grandfather's Blessings: Stories of Strength, Refuge, and Belonging, by Rachel Naomi Remen on Amazon.com.
• "It's a Wonderful Loaf," by Russ Roberts. Poem and Video.
• Robert Wright on Meditation, Mindfulness, and Why Buddhism is True. EconTalk, October 2017.
• "I, Pencil: My Family Tree as told to Leonard E. Read," by Leonard E. Read. 1954. Introduction by Milton Friedman.
• "The Story of My Life," by Russ Roberts at Medium.com. July 13, 2018.
• The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger, by Marc Levinson on Amazon.com.
• "A Marvel of Cooperation: How Order Emerges without a Conscious Planner," by Russ Roberts. Library of Economics and Liberty, February 7, 2005.
• "The Reality of Markets," by Russ Roberts. Library of Economics and Liberty, September 5, 2005.
• "Treasure Island: The Power of Trade. Part II. How Trade Transforms Our Standard of Living," by Russ Roberts. Library of Economics and Liberty, December 4, 2006.
• "Production and Producers." Chapter 7 of Protection and Free Trade, by Henry George. Library of Economics and Liberty.

A few more readings and background resources:

• "Chris Rock: Tamborine" (2018). Documentary, comedy. IMDB.com.
• "Larry David. Wikipedia.
• "Fred Rogers. Stage name: Mr. Rogers. Wikipedia.
• "The Lanyard," by Billy Collins. Poemhunter.com.
• Joe's Coffee.
• Facilitating trade: Specialization and the division of labor
• Mike Munger on the Division of Labor. EconTalk, April 2007.
• Russ Roberts on Smith, Ricardo, and Trade. EconTalk, February 2010. Contrast between the terms "division of labor" and "specialization."
• Division of Labor and Specialization. College Economics Topics, Library of Economics and Liberty. Intro and related links.
• Exchange and Trade. College Economics Topics, Library of Economics and Liberty. Intro and related links.
• Friedrich Hayek. Biography. Concise Encyclopedia of Economics.

A few more EconTalk podcast episodes:

• Bill James on Baseball, Facts, and the Rules of the Game. EconTalk, January 2015.
• John McWhorter on the Evolution of Language and Words on the Move. EconTalk, August 2017.
• Russ Roberts on the Information Revolution, Politics, Yeats, and Yelling. EconTalk, July 2018.

| Time | Podcast Episode Highlights | | --- | --- | | 0:33 |

Intro. [Recording date: October 22, 2018.]

Russ Roberts: My guest is author A. J. Jacobs. His latest book is Thanks a Thousand: A Gratitude Journey, and that is our subject for today's conversation.... What's the idea behind the book?

A. J. Jacobs: Well, the idea is, it came about because for a couple of years I'd been saying these sort of secular prayers of thanksgiving before meals. And they are not traditional prayers, because I'm not very religious. So, instead of thanking God, I would thank some of the people who helped bring my food to the plate. So, I'd say, 'Thank you to the farmer who grew the tomatoes, and the woman at the store who sold me the tomatoes.' And that was going okay. My kids were tolerating it. Until one day, my son, who was 10 at the time, said, 'You know, Dad, what you are doing is kind of lame. Because, they can't hear you. These people are not in our apartment. If you really cared, you would go and thank them in person.' And I thought--that is an interesting idea. It's a good book idea: Thank you for helping me with my career. And that sent me off on a journey that took months. And it took me around the world. And I thanked--ended up thanking--over a thousand people who had even the smallest role in making my morning cup of coffee. And, it was really revelatory, because you realized there are hundreds of people we take for granted. And I love that you've talked about this on your show in various ways--that it takes--it doesn't take a village to make a cup of coffee. It takes the world.

Russ Roberts: A horde. An army. One of the most beautiful things. And there is something lovely about knowing everyone or being able to thank everyone easily who serves you in different ways. But, in the modern world, of course, we are served by thousands of people we don't see. But, you made it an actual effort to thank them face to face. Which is a very cool experience. So, talk about the lengths you went in your book. And you start with your barista on the corner, at Joe's, the coffee shop you like. Talk about some of the range of ways that you went to be grateful to those folks.

A. J. Jacobs: Well, right. I started, but then I worked my way backwards. And I tried to thank people in person if possible, but also by phone, and by email. And what you realize very quickly is, just, 6 degrees of gratitude is just a never-ending chain. Because, I could thank the truck driver who drove the coffee beans to the store. But, he couldn't have done his job without the roads. So, I would thank the people who paved the road. And they couldn't have done their job without the people who painted the yellow lines on the road so the truck didn't crash into oncoming traffic. And it was just--I could have spent a hundred years doing it. I could have gotten to over a million people, thanking. And it was--and I would--it was a little awkward, because you know, it's not a normal thing we do in society is thanking these people who are very vaguely connected to what you are doing. But, it was wonderful. I mean, you had a range of reactions. You had some people who were like, you know, I'd call them up and they'd be like, 'Is this a pyramid scheme? What's going on? What are you trying to sell? But, by far the majority were delightfully and pleasantly surprised. So, I remember I called the woman who does the pest control over at the coffee beans at the warehouse where my coffee is stored. And, I said, 'I know this sounds strange, but I just want to thank you for keeping the bugs out of my coffee.' And she said, 'Well, that is strange; but I really appreciate it. I don't get a lot of gratitude.' And, it was like an anti-crank-phone call, is the way I--sort of penance for the obnoxious prank phone calls I made in high school. And, if it's done well, if it works, it's good for both the thanker and the thankee. You know--you feel better and they feel better.

Russ Roberts: Yeah. I'm a big fan of gratitude; and we'll talk about the whole concept. Because it's woven into the book. I do want to mention though, when I was interested in industrial processes, I called the people who made the gamma ray detector that is used to make sure that cans of soda are filled to the top. So, cans of soda are filled to the top--which is amazing; you almost never get a can that's not. And that's because every can has gamma rays shot through the top, and there's a detector--through the top part of the can. And if there's liquid there, fewer get through. And if it's empty, more get through; and then they know that the can is defective--hasn't been filled correctly. And I had a very long and interesting conversation with that person. But, as you experienced, a lot of these folks don't get a lot of contact from the public. Some of them are very happy and thrilled that someone's actually paying attention to their job. And others are like, 'What's wrong with you?'

A. J. Jacobs: Well, I love that--I did not know about that gamma ray; but it's just one of thousands of examples. And yeah, I loved talking to the guy who designed the lid for my coffee cup, because the amount of passion and thought that went into this--he's an entrepreneur and he's sort of like the Elon Musk of coffee lids. He's hopefully a little more emotionally stable. But he's very innovative and passionate it. And he designed it so there's a hole in the middle to let out the aroma, because the aroma is such a big, important part of coffee. So, yeah, it was remarkable. And, as you say, people don't often acknowledge that. And I think that's a shame.

| | 7:00 |

Russ Roberts: Yeah. The other part of it which I love, which I think is a big part of life satisfaction that's missed is that not only did you have the satisfaction of thanking these folks and giving them a pleasant moment--ideally a little more than a moment, but at least one pleasant moment--but it reminded them that what they do isn't just punching out lids or punching out steel or driving a truck: that they are actually improving people's lives. In my experience, most of us tend to reduce our lives, the work part of our lives, to a very narrow set of actions that we then say, 'I did those well,' or 'I'm good at my job.' But they don't--I think it's a tremendously lost thing, that we don't think enough about how we affect other people. My sister is a real estate agent, and when I was thinking about this a few years ago, I asked her how often she stopped to think about, you know, what she did. Obviously, she works hard; she tries to make a lot of money. That's normal and human. But I said, 'How often do you stop and think about the fact that people who come to your town, scared and uneasy, and you comfort them and find them something that's appropriate for them that makes their lives better?' And she said, 'Never.' And 'Thank you,' because it moved her. She's actually doing something that's more than just earning a commission.

A. J. Jacobs: Right. Yeah. Absolutely. Seeing it as part of the bigger picture. And it reminds me of the story of JFK [John F. Kennedy], which I actually don't think is apocryphal. I looked into it, it looked real--but when he was touring NASA [National Aeronautics and Space Administration] he ran into a janitor, and he asked the janitor, 'What is your job here?' And the janitor said, 'I am helping man get to the moon.' Like, he realized that his keeping the NASA offices clean was a small part in their big mission. And that must have given him a lot of meaning. Which is wonderful.

Russ Roberts: Yeah. Actually, I just want to reference the book, My Grandfather's Blessings, by Rachel Naomi Remen, which is where I first saw this idea. And she tells the story of someone who is terminally dying of cancer. And they gathered all the people in the room--it was a doctor--and they gathered all the people in the room who had benefited from some procedure or some treatment that he had created. And, you know, it was an incredibly powerful evening. But the tragedy of the evening was a beautiful thing. But something of a tragedy is: You have to spend a lot of time thinking about that. And, he was more focused on developing a device where the treatment, whatever it was. And it's really important, I think, that we think about what we do. You and I are doing this strange thing: You write a book. You do get occasional emails from people who I'm sure thank you, and who probably curse you out sometimes. But some of them[?] are pleasant. And, but 90%, 99%, 99.99% of the people who love your book will never tell you.

A. J. Jacobs: Mmm. I know. And it is so motivating trying to remember. And actually that's what inspired me as part of the marketing of this book. I decided to do a project where I would write 1000 thank-you notes to readers: Anyone who had ever read a book or an article by me. And they--you can go on the Internet and fill out a form and say anything you want, and I'll respond with a personalized, hand-written paper note. And, you know, it's been a pain the butt. But at the same time it's been wonderful. It's so lovely to get feedback, and how the books have touched people. And, you know, it reminds--it's very inspiring. Because, if you--I think if you can remember that what you are doing is not just for yourself, that it's improving society--hopefully, and it's touching other people, hopefully--that to me is the most inspiring part of work.

| | 11:06 |

Russ Roberts: You mention your parents. That's an obvious example where, for me, when I first had, when I was blessed with a child, one of the things that it does to--it does a lot of things to you--but one of the things it does to you is it makes you realize what your parents did for you. Because--tragically or not, realistically, you don't spend a lot of time thinking about it. And when you have your own child, you realize, 'Oh my gosh.' And you should be overwhelmed by gratitude. And I think how often you tell you tell your parents how grateful you are for what they did for you. It is an open question. But, telling them is a really good idea, I think.

A. J. Jacobs: I love that. And I hope my kids are listening to this podcast. But, yeah. And it's not--that was just one way I could have gotten to a thousand people--is, I could have thanked the parents of the barista, and then their parents, and then their parents. And, you know--it's a chain. So, yeah, just another example of interconnectivity, which I think is a theme of your show. And, by the way, I love your poem about the "Loaf of Bread,"--

Russ Roberts: Thank you--

A. J. Jacobs: which has a similar, sort of a similar vibe about all the people involved in making one loaf of bread that we don't think about.

Russ Roberts: Yeah. I like to say, self-sufficiency is road to poverty. It's very hard to have a modern lifestyle, with all of its superficiality but all of its greatness and implications for our health, and our enjoyment if we take advantage of it correctly--

A. J. Jacobs: Mmm.

Russ Roberts: But it's very hard to have that lifestyle without relying on millions of people.

A. J. Jacobs: Yeah.

Russ Roberts: And people don't really realize that. And there's no one to thank for that. That's something that I want to come back to.

| | 12:56 |

Russ Roberts: But, let's talk about--one of the things I really loved about the book was you thanked a lot of people who played a small role. And you talk about one of the people you encounter is a bass player in a band. Which is not the most glamorous parts of a band. Talk about the role of the bass player.

A. J. Jacobs: Yeah. The bass player is actually--his real job was that he was the taster who chose the coffee beans that my coffee. And, it was wonderful. Because, you know, now the amount of passion, again, that went into this; and he would take a sip and be transported--and 'I sense notes of maple syrup and jasmine'--and I would take a sip and be like, 'Well, I'm sensing coffee. I'm tasting coffee.' But the amount of thought that he put into it actually makes my life better. Whether or not I realize it, I'm tasting better coffee. But he, in his spare time, he's the bass player for a band. And he said, that these players don't get the same recognition. Everyone wants to be the lead singer. But you can't do, you can't have a good band without a bass player. And I love that. And I ran across a term from psychology: the responsibility bias. And that we, we focus on the one person; and it's just an error. I say, in my book: For instance, I am perpetuating that error by having my name on the cover, as the only name--

Russ Roberts: Sure.

A. J. Jacobs: If this were a more honest book, it would say, 'By A.J. Jacobs,' and then it would list the 100--you know, my Editors, the people who designed it; the people who cut down the wood to make the pages. You know, there are hundreds of people. And I actually brought it up, as like, 'Maybe this would be interesting.' And the editor was like 'That would just confuse the heck out of people.' So, we're not going to do that. But I loved his point of, that we need more bass players. And I think, in society, like, even just in science, we need more--not everyone should be trying come up with a brilliant new hypothesis. We need people to replicate experiments. We need people, it's not as glamorous, but it's so important.

Russ Roberts: Yeah, I wrote an essay recently called 'The Story of My Life,' where I think many of us tend to see our own personal experiences as a movie where the star. And that sometimes it might be better--it may be most of the time--to think of ourselves as part of an ensemble: that is creating someone that is grander than just my lead story. I think about people who sing in the chorus of a musical. They get zero recognition, often--very little. And yet, they are totally devoted to it. And--

A. J. Jacobs: Mmm--

Russ Roberts: it's--once you've been in that role and you realize how deeply satisfying it can be to "merely"--and I put that in quotes--be part of the ensemble, it's changes the way you look at life. It changes the way you think about a lot of things that you do, from both parenting to the workplace.

A. J. Jacobs: Yeah. I love that. And, yeah. Finding meaning and being part of the community, being part of something bigger. And it reminds me, of, I thought, Chris Rock's standup, especially a couple of months ago where it's called 'Tamborine,' and it's because he's saying, 'In marriage, sometimes you get to be the lead singer. But a lot of times you are playing the tamborine in the background; and you've got to enjoy that tamborine.' Like, you can't be complaining and rolling your eyes about the tamborine. You better embrace the tamborine. And he actually says he did not embrace the tamborine, and that's why he's divorced.

Russ Roberts: Yeah, that's a beautiful--I would have said, we need a t-shirt: "More Tamborine." Or "Less." I don't know. But it's funny that he used tambourines [?] a cowbell, but I guess it was it's own. Tambourine--that's a great example, right? You're just adding something nuanced that most people won't notice; but if it weren't there, it wouldn't be as good. And that, I think, is the way to think about a lot of these interactions.

A. J. Jacobs: Absolutely.

| | 17:18 |

Russ Roberts: I want you to talk about the role that your gratitude practice played in reducing annoyance. So, I don't know successful it ultimately was; it makes the book more interesting, certainly. But talk about how you hoped, at least, to have gratitude replace annoyance.

A. J. Jacobs: Yeah. I think my default mode, like many people's, is to be annoyed: Find the three or four things wrong with everything and focus on them. I think of it almost like a battle between my inner 'Larry David' and my inner 'Mr. Rogers.' And I think my Larry David is very strong. So, this was partly an attempt to strengthen my Mr. Rogers. And I do think it was successful. I mean, I still get annoyed a huge amount. But, just doing a practice of focusing on the hundreds of things that feel right in every part of our lives, it really is a radical shift in perspective. And, trying to--you know, when you get in an elevator and press the elevator button and the elevator goes up instead of plummeting to the basement, you know: Focus on that. I'm particularly--one of my most irrational biases is that I'm obsessed that there's a conspiracy that when I go to the airport, my gate is always 2 and a half miles from the security. But it's--not.

Russ Roberts: That happens to me, too. Incredibly.

A. J. Jacobs: I know. Well, you'd think--but it's just because I remember those--you know, I focus on those. And, so, I make a very--nowadays, I try to make a very clear point, to myself. Almost saying out loud, like 'I'm at Gate Number 1, and I walked out of Security and here it is: So, Remember that next time you are complaining to yourself.' And I find--as I say, my Larry David remains strong. But Mr. Rogers is coming back.

Russ Roberts: It's such a challenge. And I--at one point you mention--you use the phrase 'First World Problems.' Most, of course--those of us who live in the First World--have First World Problems. We don't have the worst problems that billions of people have around the world. We're very lucky, to me, in where we are. But I think what's fascinating to me psychologically is how hard it is to talk yourself into that perspective.

A. J. Jacobs: It is. Because it's so--the annoying things are so present. And I think, if you believe in evolutionary psychology, you believe that they, we were--built--to notice these things. Because it's more important you notice the lion that might attack you. But, yeah. I would say that it is key to just try to focus on all the things. It's almost a creative gain, thinking of all of the things that go right. And, even--you know, there's the cliche: Half glass full, half glass empty. I actually have tried to reframe that. And maybe that's not the right perspective. The right perspective is: Can you believe that we can turn on a tap, turn a lever, and have clean, drinkable water? And, so it's not just [?] that the glass half full. It's that we astounding have any water in there at all. And billion, millions of people--and throughout history, 99% of human history, we did not have this. So, it is--yeah. It's a challenge. Because my default, I think, is not that. But, it does make your life better if you really practice that.

Russ Roberts: And give one--you talk, you give a very nice example about lying in bed before you fall asleep, and use of going from A to Z. Describe that.

A. J. Jacobs: Right. This was a ritual a friend of mine told me about that I love; and it's that: To go to sleep, instead of sheep, count things that you are grateful for. And I do it alphabetically. So, you start with A. And it could be--the example I used in the book was very related to coffee. So, A is for Arabica, which is the type of beans that taste really good. And B is for--I can't remember what B is for. But,

Russ Roberts: Beans.

A. J. Jacobs: Beans. There you go. Or the Boat. The boat--the fact that we have shipping, and we have containers. I mean, I learned all this about the astoundingness of pallets and containers. I never thought I would be so blown away.

Russ Roberts: It's incredible.

A. J. Jacobs: Yeah. By the chain. So, yeah: I do find that a good way--no sheep. Don't do sheep. Try counting your blessings or what's going right.

| | 22:16 |

Russ Roberts: So, I want to add one, which I experience. For me, I don't know whether it's getting older or whether it's the role of meditation and prayer in my life. But I feel more grateful. I don't know if I actually am and whether I really am less annoyed. But I feel less annoyed. Maybe it's impending death. It could be that. I like to think it's the meditation/prayer. But in case of meditation: I went on a silent meditation retreat; and we had an exercise--this was 45 minutes; and I encourage listeners to do this. Forty-five's hard, so maybe just--at this point in the episode, if you are not driving, you could just pause this, close your eyes, and think about this. What they encouraged us to do was to go back to our earliest memories and think of times people were kind to us.

A. J. Jacobs: Mmm.

Russ Roberts: And, I thought, 'Well, this is silly.' First of all, I thought, 'Okay, my parents. How long am I going to be able--45 minutes?' But he's--the advice was 'Go slow.' So, I tried to go slowly. And, I accumulated a remarkable set of kindnesses that people had done to me that I had literally--I hadn't literally forgotten. I just didn't remember them on a day-to-day basis. And, it was very moving.

A. J. Jacobs: Do you remember an example?

Russ Roberts: Oh, yeah; I'll tell you a couple. And then I'll tell you the post-, the after-effects, which were really amazing. So, one of them one when my sister was born. I'm three and a half years older than my sister. When was three and a half years old, my Mom and Dad went to the hospital; and I had to no one to stay with. We were living way far away from any relatives. My parents had a friend. And he took care of me during that time. And, after that, of course, he was a family friend, he was extremely generous to me. He gave me my first guitar. And because of that, I became a guitar--I could play the guitar. I don't call myself a guitarist. That would be a lie. But I do play the guitar from time to time. But he gave me a different perspective on music. That's just one of the many, many things he had done for me. Well, he doesn't live near us any more. He's 80-something years old. And he's not on the Internet. I hadn't emailed him and I got--I asked my Dad to find his number. And I called him. And I thanked him. And he cried. I cried, too. It was deeply moving, that he had been remembered and appreciated. I tracked down my 8th grade teacher, Miss Kineen, who I've mentioned on this program before. And it was really hard to do, but I finally found someone who knew her and someone who knew someone and finally got her letter. And wrote her a letter, about how she changed my life. And she wrote back a beautiful letter that was, you know, incredibly moving. So, I--if you do that exercise, it should engender deep feelings of gratitude. And, then you should act on it. It's incredibly empowering and powerful.

A. J. Jacobs: I love that. And I have the same experience. I remember, a couple of years ago, calling out of the blue my first editor at a tiny, tiny newspaper in suburban California. And it was a little awkward, because I hadn't spoken to him in 15, 20 years. But again, it did turn out to be moving, I think for both of us. And there was just a study--I'm skeptical of single studies in general in Social Science--but--

Russ Roberts: not [?]. I'm sure this is the absolute truth. Go ahead.

A. J. Jacobs: Well, since I like the study, I'm going to marry[?] it--

Russ Roberts: There you go.

A. J. Jacobs: But, they said that the, we overestimate the awkwardness of thanking people; and we underestimate the meaningfulness to them. And I think that that is true from my personal experience.

Russ Roberts: No, I agree with that. I think that is true of my personal experience. A beautiful thing. Has writing the book and going through this exercise--do you think it's made you a more grateful person? Because, now you are done. Now you can write a book on ingratitude.

A. J. Jacobs: Take everything for granted.

Russ Roberts: Yeah. The book's done. So, has it changed you, you think?

A. J. Jacobs: I do think it had a pretty big impact. And, as I say, I still get annoyed all the time. But I've become a much more grateful person, partly because I think from a selfish point of view. It's much better way to live. You know, from an outside point of view, being annoyed is funny. It's funny to watch on TV [television]. It's funny to listen to other people complain sometimes. But when you are seeing the world that way, it's not always that pleasant. And, being able to appreciate the hundreds of amazing things that are in our lives is really a much better way to live. And there's a phrase--I didn't make it up--but, 'Gratitude--happiness does not lead to gratitude. Gratitude leads to happiness.' And I find that to be quite true, in my case.

Russ Roberts: Yeah. No, I agree. I think the challenge is that--and this fascinates me: I don't know if it's the evolutionary psychology point. But, I kind of find myself at times reveling in getting annoyed. Reveling in getting angry. And Twitter does this to me sometimes, right? Social media I think does this to us, occasionally. Sometimes--like, sometimes it feels good to "work yourself up into a state."

A. J. Jacobs: Yeah.

Russ Roberts: And you try the other, just saying, 'I'm not going to get mad,'--but it does take, I think it does take some form of meditation or mindfulness, prayer, writing a book--all those things, they are not unrelated--to help you keep it in mind. Because it's so easy for your mind to grab you and take you in a different place.

A. J. Jacobs: Absolutely. And, yeah. You are right. It's like junk food. It just--

Russ Roberts: yeah--

A. J. Jacobs: it gives you a momentary boost. But I think in the long term, is quite harmful to us. And I did love--I talked to one of my friends who is a philosopher at Oxford. And I asked him, 'What are you grateful for?' And he had a very interesting answer. He said, 'Sometimes I'm just grateful that I have arms. Because, it's easy to be grateful, you know, if you get a big promotion--that's easy to focus on. But, remembering the things that we take totally for granted, like arms--which do come in handy.' It would have been much harder to write this book without arms. So, I love that mindset, of really focusing on what we take for granted. And another thing that I think you would agree, because I love the way you talk about the past, is: You know, we should be grateful that we live right now. We've got a lot of problems. It's a very challenging time. But the 'good old days' were not good. The 'good old days' were terrible. They were disease-ridden and they were poverty filled. And it was just not a place you wanted to be.

Russ Roberts: Yeah. If you ever have root canal--you do appreciate. Of course, if you want to be a half-empty glass kind of guy, you can certainly say that 'I resent that I am not living 100 years from now when we'll live to be 200 with no infirmities.' But, I don't know. I do think we romanticize the past. I often take it to a more basic level, which is: I'm just happy to be alive, at 64 years old, and to be blessed with all the lucky things that I have. And, any time I think of those, it's a good thing. I think the more you think about those things, the better.

A. J. Jacobs: Absolutely. Yeah. What you said. When I try to--when I get annoyed--my three-word mantra is: Surgery without anesthesia. And just think about that, and it will wake you up.

Russ Roberts: That's good. I like that. I have a whole bunch of them.

| | 30:18 |

Russ Roberts: But I do think what's interesting about this is how hard it is to rationally decide: I'm going to be more appreciate of what I have. That's hard. And I think you need some kind of regimen, whether it's mindfulness or reading A. J. Jacobs' book, Thanks a Thousand--which, I'm serious, by the way. It's a short book, by the way. Spending an hourish or a little more than an hour, or maybe two, with A. J. Jacobs, about the virtues of gratitude is probably one way of engendering a little more gratitude, a little less annoyance, a little more Mr. Rogers.

A. J. Jacobs: Well, I am of course very grateful to you for saying that. But, I agree: You definitely need to concentrate. It doesn't come naturally. I wish it did. But, you really do need to make it a practice. And, you know: They have--there are studies. Again, I'm skeptical of any single study; but there are lots of studies about keeping a gratitude journal and writing down three things you are grateful for every day. And I do--I actually trade emails with my mom every day on what I'm grateful for and what she's grateful for.

Russ Roberts: That's a great idea.

A. J. Jacobs: Yeah. I find it very--she likes it; I like it. And it assuages my guilt for not being in touch with her more. So, it all works.

| | 31:37 |

Russ Roberts: So, I'm going to read a poem. I apologize. Indulge me. Because it kind of captures this Mom-gratitude thing which I love. It's by Billy Collins, and it's called The Lanyard.

The other day as I was ricocheting slowly off the blue walls of this room bouncing from typewriter to piano from bookshelf to an envelope lying on the floor, I found myself in the 'L' section of the dictionary where my eyes fell upon the word, Lanyard. No cookie nibbled by a French novelist could send one more suddenly into the past. A past where I sat at a workbench at a camp by a deep Adirondack lake learning how to braid thin plastic strips into a lanyard. A gift for my mother. I had never seen anyone use a lanyard. Or wear one, if that's what you did with them. But that did not keep me from crossing strand over strand again and again until I had made a boxy, red and white lanyard for my mother. She gave me life and milk from her breasts, ...

A. J. Jacobs: Oh, I love that. What a fantastic poem!

Russ Roberts: Such a good poem. Thank you for the excuse of letting me read it on EconTalk.

A. J. Jacobs: And it reminds me, I think I mentioned this in the book: My feeling on birthdays--

Russ Roberts: Oh, yeah. I loved that.

A. J. Jacobs: Yeah. I think that we've got it all wrong. Because we congratulate the person who was born. But that person--yeah, they didn't do the hard part. They just got out and they screamed for milk; and maybe took an Apgar test. But the one that did all the work was the mom, who was pushing and, you know--

Russ Roberts: suffering--

A. J. Jacobs: suffering like I can't even imagine. So, yeah. I think we should combine birthday, which is the person born and the birther herself. I mean, 'Labor Day' was already taken as a word, so we can't say "Happy Labor Day." But, the same idea, I think.

Russ Roberts: Well, I like that. I'm going to take Labor Day and use it to thank my wife and my mom. I love that. That's even better.

| | 34:40 |

Russ Roberts: Let's go back to coffee for a minute. Just for fun. How did this project change your morning experience of drinking a cup of coffee?

A. J. Jacobs: Well, one thing is, you know, I still no sommelier of coffee. But it did force me to at least--let's think about the taste of coffee for two seconds. All these people put in thousands of hours to make my coffee. The least I can do is focus for two seconds on the taste. And it's--you know, and I don't have to spend long time, but just think about the acidity and the sweetness and the texture. And I do that with a lot of different food, now. And I think it does help. And psychologists talk about savoring as a very important part of life, and just stretching out a moment for a little normal than normal. Because if you don't, then everything just goes by in a flash. And that's it. So, trying to focus on a moment. And I actually--I try to do this a lot in life--is, pick out a moment of the day and try to remember it. I have a list on my computer called 'One Thing.' And it's a document, one thing I remember from a meal, one thing I remember from a conversation, a book, a podcast. And I find it very helpful because otherwise it all just blurs together.

Russ Roberts: So, explain that in a little more detail. You say you have a document called 'One Thing'?

A. J. Jacobs: Yeah. And--

Russ Roberts: And it's just a list of any--

A. J. Jacobs: It's just a list of what I've found most interesting or most memorable. Here, I can--I'll try to open it up. But, after listening--on your podcast, actually--well, this is a good way to do it. I've listed things from your podcast that have really stuck with me. One of them was similar to what we've been talking about. It was when you asked Bill James, the saber-metrics baseball guy, what he had learned. And he talked about how many people it takes to make a championship baseball team. And, you know, the minor league coach, the parents who nurture the kid--you know, the, whoever did the carpool to bring the kid to practice. And I loved that. So that went in the One Thing file.

Russ Roberts: That's beautiful. But then you just listed--the next thing might be one thing you remember from dinner last night that was special.

A. J. Jacobs: Right. Like something my kids did. Or, it could be a conversation at a party I went to, one thing someone said. And I love it. I go back to it every few days. Because, again, otherwise, I don't know about everyone, but my brain just turns all into mush, and you don't remember the high points.

Russ Roberts: That's really a beautiful idea. And you think about, there are people who are religious note-takers in class; and sometimes you wonder if they get anything out of it, because they write everything down. So, it's not the one thing. Maybe it could be two things, sometimes. I assume that sometimes you put more than one thing from the same thing--

A. J. Jacobs: I have. I have veered from the one-thing path.

Russ Roberts: Yeah. Because, what's interesting to me is that I'd forgotten that Bill James insight. Which I loved when I heard it. So, thank you. But I also--the one I remember from that was when I asked him if we'd plumbed the depths fully of our knowledge of baseball; and he says something like, 'We know nothing.' And here is the person who I think has done more than any one person to help us understand the analytical aspect of this weird game. And I was--on October 22 today I say, 'Go Red Sox'--tomorrow night is their Game 1 of the World Series. But here's a person who has done more than anything, and yet he feels he's knows nothing. And that's the one that stuck with me. Even though I didn't write it down. But I wish I had written it down, because he said it better than that. And I can go back to the transcript and get it. But, I love that. Do you do it at a particular time each day? Or do you have a routine?

A. J. Jacobs: I do it before I go to bed. Yeah. So, I go through the day, you know, what podcast I listened to and what was the one thing that stood out? And I'll try, while listening to a podcast, I'll be like, 'Okay, that's going to be the one thing.' And it's funny, because I love the point that Bill James made about epistemological humility, because I'm obsessed with that, too. So, I'm going to add that, even though it was two things. And I have another one from your podcast. You talked about--I've never seen this cartoon, but you talked in one episode about a cartoon or a comic where it was just a broom sweeping and a steering wheel for the bus without any people to show how much in life we take for granted and don't acknowledge the people. Which is also very much in the theme of my book.

Russ Roberts: Yeah. I try to thank--when I get off the shuttle from the airport to the parking lot, I always thank the driver. And I try to thank the driver face-to-face rather than just calling out 'Thank you.' But sometimes I call out 'Thank you' because I'm in the wrong place. But, I wonder how much that--it's better than not doing it, for sure. But I often wonder how much it matters. But, it matters for me by the way. Because I think encouraging that sense of gratitude makes you a better person. Even if the other person didn't hear it--so, I'm going to disagree with your son a little bit. But, I think it's better to tell them face to face, for sure. But I think having that emotion is a helpful thing.

A. J. Jacobs: I agree. I think it helps the thanker and the thankee. And I do think, at least from my limited, you know, interviews with people that it does--it does matter. When I interviewed the barista, she said--well, first of all, it's a tough job.

Russ Roberts: It's hard.

A. J. Jacobs: It's very [?]. You are encountering people in a very dangerous state, which is pre-caffeination. So, they are not at their best. But, she said: The worst part is that so many people treat her like a vending machine. They don't even acknowledge that she's a human. They just are looking at their phones. They handle the credit card without looking up. They take it back and don't say anything. So, even just the two seconds of making eye contact, acknowledging she's a human, makes a huge difference for her. And, I'm not expecting a Nobel Prize. But I have started to make eye contact. Because, I realize I'm that putz--I'm the one who doesn't look up when dealing with people. And, you know, maybe in a few decades there won't be people to deal with--just robots. But, for now, we should treat them like the humans that they are.

Russ Roberts: Yeah. It's a--I totally agree. Definitely. It's just an easy way to make the world a better place without having to really suffer very much. You can look up from your phone. Really, you can. It's not that big a deal.

A. J. Jacobs: It is, exactly: low impact. Low output but high impact.

| | 42:01 |

Russ Roberts: Is the book out?

A. J. Jacobs: It is out November 13th.

Russ Roberts: Okay.

A. J. Jacobs: But it is available for pre-order, in case anyone is interested.

Russ Roberts: I'm not sure when this will air, but I think it will be close to November 13th. I'm interested in how this book will affect your coffee shop. Because, I have to confess--you talk about the logo of the coffee shop, how that was designed. And that's part of the experience, and I looked up--I wanted to see it. So, I googled Joe's Coffee--which is interesting--Joe Coffee. And I found it. Which is surprising because 'Joe' is a slang word for coffee and I thought I'd have trouble finding it. But it came up right away--because Google's so smart they know I'm reading your book, probably. Creepy, but it's smart. But I did find it. And, it's a beautiful logo, like you described it. It gave me an urge to go to that coffee shop. Which is just interesting. And I wonder if that will happen.

A. J. Jacobs: Well, yeah. I think they do a good job and they are very thoughtful. You know, they, they deal with small farms and, so--listen, I would be delighted if it helped. And it is interesting, you know. The crossover between business and gratitude, because I am writing a piece for LinkedIn for about how, you know, gratitude can help your business, in many ways. You just--there are all these CEOs [Chief Executive Officers] like Mary Kay, the founder of Mary Kay Cosmetics, would write 10 hand-written thank-you notes a day. And she credited it with helping her business. But yeah, and being thoughtful and thankful for your customers. That, I think--it allows you to, it motivates you to try to do well by them. You are not just trying to make money. You are trying to help your customers. And then they'll come and you'll make more money. But, anyway--that was a sort of a tangent. But, semi-related, I do hope that it helps Joe Coffee, because I like them.

Russ Roberts: Yeah. Well, that's cool. By the way--it's interesting--I have at least four things so far from this conversation; and I think I am going to--I like that one thing, I'm going to write some of them down. One of them I'm going to mention is that, I've always liked this bumper sticker: 'Wag More, Bark Less.' And it's a beautiful, simply statement. But, I'm thinking about yours now, which is maybe even better: 'More Mr. Rogers, Less Larry David.' You know. It's the same idea. And I'm a big Larry David fan: I think he's a very funny man. But--

A. J. Jacobs: I wouldn't want to be inside his mind. But I love watching it--

Russ Roberts: Or at least--that, wagmore[?]. I thought you were going to say because I mentioned, a bumper sticker in the trucking--the [?], transportation. And the guy said there was a bumper sticker that was, you know, America, moves on trucking. Or something a little better. But the idea is that we definitely don't acknowledge how every--almost everything in our lives was on trucks. And on these pallets. These wooden, these just plain old wooden platforms. You know, this laptop I'm looking at, this microphone, this, you know, this modern, the modern canister, they were all at one point on pallets. And I've given zero thoughts to pallets. So I just want to shout out to pallets. I learned, in, from the history of pallets, they held us in World War II, because we were efficient in packing our supplies, to the Pacific Theater. So, a shout-out to pallets.

Russ Roberts: Yeah. Pallets are cool. And containers are cool. Boxes are cool. They are all amazing.

A. J. Jacobs: Right. There was a great book, and I read it, a book on Containers, the birth of containers. It's amazing.

| | 46:07 |

Russ Roberts: So, now, I have to give you a little bit of a hard time, AJ, because--

A. J. Jacobs: I'm ready. I'm ready.

Russ Roberts: Because you picked on one my favorite things in the world.

A. J. Jacobs: I, Pencil?

Russ Roberts: Yeah, I, Pencil.

A. J. Jacobs: I, just want--I want to hear--I don't want to say I picked on it, because I think it's a wonderful piece. I just have a couple of disagreements with it. But I want to wag the tag for I, Pencil as well as couple parts.

Russ Roberts: So, I, Pencil is the poor man's version of your book, in some dimension. Obviously. And, what you point out in your book--so, I'm going to let you make your point first--if I may use a bad phrase, 'make your point,' about a pencil. But I'll let you sharpen your point. You, very appropriately in my view--perhaps surprising to you--but you very appropriately in my view thank the people who provide government services that make coffee better. So, talk about that. And then how they are left out of I, Pencil.

A. J. Jacobs: Right. Well, I have a section on safety--the fact that I can drink my cup of coffee and not die. Which is not something that I should take for granted, because a couple hundred years ago, the ingredients in coffee were, you know--there was lead, there was arsenic, there was baked horse liver; there was anything you can think of. And so, I was thankful for the birth of the FDA [Food and Drug Administration]. And other government agencies that try to keep us safe. And I--um, you know, that was my critique of I, Pencil, which, as I say, was wonderful in many ways. I--it's more of a matter of degree. I feel that that we need to acknowledge that there should be some regulation to keep us safe in places like the FDA. And that, maybe you and I diverge a little on this, of how much regulation there should be in capitalism. So, that was sort of my only critique--that of, I, Pencil, is that they kind of left out--the people who, the government who funded the roads, you know, the police force who kept the pencil factory safe. That government made lead illegal, which I think was a great think--not illegal, but, so, now pencils are made with graphite instead of lead. So, that's where I diverge from the lovely I, Pencil essay.

Russ Roberts: Well, talk about water.

A. J. Jacobs: Talk about--why?

Russ Roberts: Talk about water. And the water supply that connects it to the coffee in New York.

A. J. Jacobs: Right. Well, I realized that coffee is 98.8% water. It's just a little bit of this ground up beans. So--and I totally took for granted how much goes into the production of water. And that I get it for free. And maybe that's not the best system, but it is still astounding. And so, I went up 200 miles north of New York, where we have the Catskills reservoir system. Which is huge. And almost twice as big as Rhode Island. And it's just a mindboggling amount of water. And all these people who keep it safe, who sterilize it, who built the pipes, who--there are hundreds of scientists testing it millions of times a year.

Russ Roberts: Literally.

A. J. Jacobs: Literally. Millions. And, you know, there are people whose jobs are not fun. There's the--you know, a ranger who goes around picking up what is euphemistically called 'organic matter'--which is like, you know, deer poop and cow poop near the reservoir so it doesn't run into the reservoir. And it just made me realize that I give zero thought to these people when I turn on the tap. So, yeah. I guess that's where the chapter was on that government does provide services that can be important and good for you and that I take for granted.

Russ Roberts: And, of course, I totally agree with that. I'm not an anarchist. And I think the--the FDA, it's a mixed track record. They [?] from some things, and it's probably prevented us from having some things that would have been good for us, because it's overly cautious in my view. But, that's a legitimate discussion. I think some of those services could be provided by third parties more effectively. Not just cheaper--I don't care so much about cheaper. Cheaper is nice, but I really care about more effectively.

A. J. Jacobs: Mmmhmm--

Russ Roberts: But certainly the infrastructure--it's interesting. I often get this--I consider it a straw-man argument--that somehow I don't appreciate, as a free market person, the role of government. And of course, government is crucial for making many aspects of your cup of coffee or the pencil effective and powerful. Including the roads, including some safety regulations--some of which might not be necessary, but many of them are productive and effective. So, I don't have any problem with that. I don't think Milton Friedman did, either, or Leonard Read did--who wrote "I, Pencil." And we'll of course put a link up to "I, Pencil." It's on our site, on the Library of Economics and Liberty.

| | 51:50 |

Russ Roberts: But I think the other point, that I think is--is sort of orthogonal to your book--and is not part of this debate over how much regulation and that reasonable people can disagree over--but, I think the other point that's in "I, Pencil" is this idea that you can't thank anybody for the system that provides your cup of coffee. So, for example, the example I like to use is, my wife likes coffee a lot more than I do. And she's a lot more discriminating. And you are probably similar, between--it sounds like you are between you and--

A. J. Jacobs: Right--

Russ Roberts: I'd hate to say you've come between you and my wife. But it appears to be the case.

A. J. Jacobs: I don't want to do that.

Russ Roberts: So, my wife is very serious about her coffee. So, when we are staying somewhere, on a vacation or a trip, she wants to have a good cup of coffee. And, of course, she can bring her own equipment if she needs to. If she has to. But generally she doesn't. For her, Starbucks is a minimum standard. Right? It's not what she prefers. But she will drink Starbucks, at least, thank goodness. Probably won't drink Duncan Donuts--just for the record. But, when you are in a major American city--even a minor American city, now--you can walk out of your hotel room and you will find a pretty good cup of coffee, sometimes a great cup of coffee, within a 10-minute walk. And usually it's a 2-minute walk. And that's--who do you thank for that? There's no one person. There's no--the whole system of competition which keeps Joe in line--your coffee shop. If Joe were the only coffee shop in New York, I don't think they'd be very good at it. That's my--that is what I think the contribution of "I, Pencil" is--to make you recognize that it's the--and it's in Hayek, as well, of course, that this incredible network of cooperation between the truck driver and the coffee bean roaster and the maker of the equipment for all those things--that, that network is held together by a set of prices and the freedom to shop where you want, that keeps things in line that no agency has to do--

A. J. Jacobs: Mmm--

Russ Roberts: No one deliberately has to do. And that's just--that's what makes me romanticize capitalism. Not--

A. J. Jacobs: Mmm--

Russ Roberts: I recognize there are things that go wrong. I recognize it needs government to work well. But that whole phenomenon for me is something else to be grateful for, without having anyone to thank, because no one's in charge of it.

A. J. Jacobs: I love that. Yeah. And, well, first of all, I think when the coffee professionals I talk to agree with your wife about Starbucks, they are not--they think it's too bitter. But I love what you said about that. And maybe I didn't give enough weight in my book to that part of "I, Pencil." Because, I do--I am, of course, as I say--I think capitalism is the best system humans have come up with. And it is astounding how all these things work together. And I do agree with Steven Pinker, who says capitalism has lifted billions of people out of poverty, even in the last 50 years. So, I certainly wouldn't want to replace it. And that is one thing that I also loved about "I, Pencil," is that he, again, endorses humility. Because, sort of the arrogance of saying, 'I know what, I know how to plan an economy. I know what people are going to want,' and 'I can do it all centrally.' That kind of arrogance has just led to disaster. So, I'm a fan of intellectual humility, and I guess systemic humility.

Russ Roberts: Of course, your book is, in many ways, a tribute to the power of specialization. Because, you have all these crazy jobs that you encountered where people are doing one thing. And, that's the nature of what the modern world is about, to some extent, right? It's this inability to do everything for yourself. This recognition that it's good to "rely on others." But in a different way than we normally think of it--

A. J. Jacobs: Mmmhmm--

Russ Roberts: through this decentralized system. And since we specialize--I'm the economist; you're the writer, and the dreamer, and the creative guy. So, I have this little piece without--you can accept it without shame, I think, that you didn't get every bit of economics into your book that I would have if I'd written it.

A. J. Jacobs: Agreed.

Russ Roberts: Because I would have missed a lot of things that you have.

A. J. Jacobs: Mmmhmm, hmm, hmm.

| | 56:36 |

Russ Roberts: Did anything--is there an aftermath to this story for your family? You have, youngish children. Obviously, parents often try to inculcate gratitude into their kids. And, you started this conversation with a story from a dinner table conversation. I didn't notice it in the book--maybe I missed it--where your kid said you need to thank these people face to face. Has anything that you experienced and then shared with your family changed the way you treat them, parent them--your kids? Or their experience?

A. J. Jacobs: Well, absolutely. I mean, first of all, I think it's good for patience, which is something--my kids are 12 and 14. And you need a huge amount of patience. And try to--you know, there's a saying that, you should try it: for every criticism you have of your wife and kids, or spouse, partner, you should try to have 5 good things to say. Which is an incredibly high standard. I don't know if there's any science behind it. But I do like the message there. And, yeah. And I think it has sunk into my kids a little. I think, in general--and I was this way until just a few years ago--you know, we're very self-centered--so, trying to get them out of their own little minds and realize how connected. And I think it's sinking in. Not totally; but I think it's sinking in. I'm very proud of them. And one of my sons, when we were at my mom's house, he said 'Thank you, Grandma, for buying this sugar cereal,' and 'Thank you,' your parents, for having you. And thanking their parents for having them. And I love that he was sort of thinking about the chain. So, yes. It definitely has had an impact. I mean, I'm always wary to say--I have friends who write books on happiness or how to have the perfect family. And I'm like, 'How do you do that?' Because, the pressure--in your family, if your kids turn out terribly, like, there goes your career. So, I'm not going to boast that I am the perfect parent. But it has made me a better one.

Russ Roberts: Did you tell your children about your adventures, say, when you went to the coffee bean growers in Colombia--it was Colombia, right?

A. J. Jacobs: Yeah. Yeah. I went there.

Russ Roberts: Did you tell them those stories? Did you keep them up to date? Or do you just hope that they'll read your book?

A. J. Jacobs: Oh, no. I think they're not going to read it, because I told them everything. So, no. I did all the spoilers. But, yeah--I made sure, every adventure, I came home, and like--with the water, when I went to visit the people who--you know, my son has a tortoise, and he squirts the tortoise with water from our sink, and I say, 'You know, there are hundreds of people who made that water possible, so you and Sheldon--the tortoise--should be very grateful.' And, you know, they might roll their eyes. But, again, I do think it sinks in a little. I'm interested for Thanksgiving, because instead of going around and just--if you don't give specific instructions at Thanksgiving it's just like, 'I'm thankful for my family,' or 'I'm thankful for my Nintendo game system.' But I'm going to ask them to try to be as creative as possible in who they thank at Thanksgiving. You know, it could be the person who, you know, who invented the nitrogen fixation process so they could grow the cranberries so we can have cranberries on the table. They might not go with nitrogen fixation. But maybe I will. But I want them to be creative in thinking of who to thank. Because, that way it's not just automatic, not just rote.

Russ Roberts: My guest today has been A.J. Jacobs. His book is Thanks a Thousand. A.J., thank you for being part of EconTalk.

A. J. Jacobs: Thank you, more than a thousand, Russ.

|

(14 COMMENTS)

Julia Belluz on Epidemiology, Nutrition, and Metabolism

Science writer Julia Belluz of Vox.com talks to EconTalk host Russ Roberts about the state of epidemiology, nutrition, and the relationship between obesity and metabolism.

This week's guest:

• Julia Belluz's Home page
• Julia Belluz on Twitter.

This week's focus:

• "Is one drink per day really unsafe? That new alcohol study, explained," by Julia Belluz. Vox, August 29, 2018.
• "What I learned about weight loss from spending a day inside a metabolic chamber," by Julia Belluz. Vox, September 14, 2018.

Additional ideas and people mentioned in this podcast episode:

• Alcohol intake
• "Study Causes Splash, but Here's Why You Should Stay Calm on Alcohol's Risks," by Aaron E. Carroll, The New York Times, August 2018.
• "Moderate Alcohol Intake and Cancer Incidence in Women," by Naomi Allen, Valerie Beral, Delphine Casabonne, San Wan Kan, Gillian Reeves, Anna Brown, and Jane Green, Journal of the National Cancer Institute, Volume 101, Issue 5, March 4, 2009, pp. 296-305.
• Emily Oster on Pregnancy, Causation, and Expecting Better. EconTalk, October 2013.
• Daniel Okrent on Prohibition and His Book, Last Call. EconTalk, June 2010.
• Global Burden of Disease Home page.
• John Ioannidis
• John Ioannidis on Statistical Significance, Economics, and Replication. EconTalk, January 2018.
• "This is why you shouldn't believe that exciting new medical study," by Julia Belluz. Vox, Updated February 27, 2017.
• Brian Wansink
• "Why the Joy of Cooking is Going After a Cornell Researcher," by Brian Resnick and Julia Belluz. Vox.com, February 28, 2018.
• "This Ivy League food scientist was a media darling. He just submitted his resignation, the school says," by Eli Rosenberg and Herman Wong. The Washington Post, September 20, 2018.
• "Why do dieters succeed or fail? The answers have little to do with food," by Julia Belluz. Report on the DietFits Study. Vox, March 13, 2018.

A few more readings and background resources:

• Sheila Jasanoff. Homepage.
• Time Management. FranklinCovey.com.
• The China Study. Medicinenet.com.

A few more EconTalk podcast episodes:

• Brian Nosek on Truth, Science, and Academic Incentives. EconTalk, September 2012.
• Brian Nosek on the Reproducibility Project. EconTalk, November 2015.
• Gary Taubes on the Case Against Sugar. EconTalk, February 2017.
• Gary Taubes on Why We Get Fat. EconTalk, July 2012.
• The Economics of Obesity. Darius Lakdawalla. EconTalk, September 2006.
• Arthur De Vany on Steroids, Baseball, and Evolutionary Fitness. EconTalk, March 2010.
• EconTalk Health Archives.

| Time | Podcast Episode Highlights | | --- | --- | | 0:33 |

Intro. [Recording date: October 16, 2018.]

Russ Roberts: My guest is Julia Belluz.... Our topic for today is epidemiology, and if we get to it I hope we can talk also about metabolism and diet--two concepts and issues you've written a lot about, especially recently. According to the U.S. Department of Veteran Affairs, epidemiology is "the study of health in populations to understand the causes and patterns of health and illness." We're going to be looking at a number of articles you've written on epidemiology that challenges of actually figuring out the truth about these issues, which is quite hard--as listeners know from our past conversations. I want to start with an article about a recent study in Lancet that argued that the safest level of drinking--and this is talking about alcohol--is none. Zero. Do you agree with that conclusion?

Julia Belluz: I don't. And, interestingly, this study didn't even show that, so it's kind of an easy one to pick apart. Yes, so these researchers were looking at many, many studies--I think it was something like 700 or 800 research papers on health effects of alcohol. And they found--they had like a really nice graph where they collated, I guess, the findings of all these studies, to show you where your risk of death starts to increase based on the number of drinks you are consuming each day. And, that risk looks like it only goes up after one drink a day. Or even one and a half drinks a day. And yet they came to this really striking conclusion which was that the only safe level of alcohol consumption is no alcohol at all. So, as you can imagine, that upset a lot of people who are reading about that. And others were upset because we know that there are really strong and terrible health effects from drinking too much alcohol. And they kind of missed the opportunity to have a more nuanced message about that and went for this 0-drinks--yeah, went for the guttural[?], like no drinks at all.

Russ Roberts: So, I looked at that chart, which you reproduce in your article--and we should mention for our listeners that Lancet is one of the premier medical journals in the world. Top three, probably. That chart--it's flat at zero in terms of extra risk between 0 and 1. And then, at 1, it doesn't like jump up. It just slowly starts to climb. Which of course means--who knows what. Because it's referring to all kinds of different kinds of risk that are probably very complicated: Could depend on the kind of alcohol you consume. I assume the number of drinks is some constant, some metric like 'an ounce,' or something, because--you know, I have a friend whose joke is that he only had one beer. I say, 'How big was it?' 'Well, it was 48 ounces.' So, you know: What's the--I assume it meant an ounce of alcohol, some standardized measure.

Julia Belluz: Yes. A drink. Yeah, that's right. I think it's a little more than an ounce.

Russ Roberts: Yeah. It's not much of a drink, I guess. But the idea is that it does move up slowly. It doesn't jump dramatically at any point. Right?

Julia Belluz: Absolutely. Yep. That's right. And I think one thing we are talking about, epidemiology, it's really important to know about these types of observational studies, is that they are just looking at phenomena in a population. So, you are looking at, you know: How do people who already drink alcohol and who have been drinking alcohol look different from people who don't drink at all? Or, how do heavy drinkers look different from light drinkers? And, what we know is that these groups of people are so different, right? So, people who drink no alcohol at all might be less likely to smoke, or might have other really healthy lifestyle behaviors, or might live in different communities from people who are heavier drinkers. So, yeah--you have [?] you know all about confounding factors and how these other attributes make it really hard to tease out what the actual effect of the drinking was, in and of itself. And so, these studies are only supposed to be hypothesis-generating. So, they're supposed to kind of be the start of a conversation about what--the start of a line of research into what might be, like, what does healthy, moderate drinking actually look like? And you'd want to run experimental studies to really tease out cause and effect there. But, of course, yeah: When it comes to anything that has to do with what we drink and what we eat, it's just--it takes a long time for these nutrition-related deficiencies and diseases to show up. And, there's all kinds of challenges with them. But, I guess the main point is that in the media, we often talk about these observational studies like they do have causal conclusions. And in this case, even the researchers did in their own conclusion. But this is an example where, you know, they can talk about associations between things but not that one thing causes the other. If that makes sense.

Russ Roberts: Right. Yeah, no. Exactly. I think that's the most important point for people to remember. We talk about it a lot here, but I think it's easy to forget that what we're really interested in is: What would happen if you took one more drink? And: What would happen to the average? The correlation between, in a population of people who drink a little bit more than everyone else does not necessarily, and may be grossly inaccurate for telling you if you had one more drink. Or if everyone chose to have one more drink. It's just--it's misleading.

Julia Belluz: Yeah. And it's probably important to be clear: Like, that, again, I think no one quibbles about the fact that heavy drinking is associated with all kinds of terrible health outcomes--disease, increased risk of accidents. Yeah, and normally death. So, no one argues about that. But there is a lot of debate about what does healthy, moderate drinking look like? Like, how much is safe? And, is a little bit of alcohol protective in some way? And that's kind of this hugely heated area of research. And one for which--yes, getting these really nuanced--getting the kind of studies we'd need to equivocally[?] answer that is almost impossible.

Russ Roberts: Right. You'd need a really, some kind of randomized control trial where you also had a lot of control over consumption, as opposed to just asking people in a survey after the fact. Which is what this kind of observational study typically does.

| | 7:38 |

Russ Roberts: I just want to reference an early EconTalk guest, a friend of mine down at Cox who when at a meeting in a discussion of causation someone had the courage to suggest there might be another factor involved, besides in this case, say, alcohol--and someone else at the meeting says, 'You mean the dreaded third thing?' And in the case of these kind of studies, it's third, fourth, fifth, sixth, seventh. There's many, many factors, as you point out, that might be the underlying causal variable. And which would mislead us in drawing an accurate conclusion about the impact of a little bit more alcohol in our consumption.

Julia Belluz: Totally. And then it's also, like, what kind of alcohol are we talking about? So, there was another study that came out, also in The Lancet this year, and they were looking at the health effects of alcohol; and then in the supplementary materials they broke down--and it was also a meta-analysis so they were basing their conclusions on many, many studies. And in the supplemental materials they looked at the health effects by alcohol type. And you could very quickly see that beer drinkers had much worse health outcomes than wine drinkers. But they also collated the socioeconomic characteristics of the beer drinkers versus wine drinkers--

Russ Roberts: Yeah. Not the same.

Julia Belluz: Yeah. So, unsurprisingly they look completely different. Different levels of education, different types of work. Yeah.

Russ Roberts: Weight.

Julia Belluz: Exactly. And poverty.

Russ Roberts: Age. Everything. Gender.

Julia Belluz: Yeah. So, basically everything was different. Yeah. So it's a really--I really feel for nutrition researchers; and there are so many people who are doing great work. But I think, yeah: Sometimes they themselves go too far in the conclusions of these studies, and then we in the media often completely just misrepresent what the research actually shows.

| | 9:34 |

Russ Roberts: But not you, Julia, because I've read a lot of your work, and you're actually--I'm half-teasing you; but I think it's true that you are more careful than the average--certainly than the average person in the media, who often has the natural temptation to get on the front page and to dramatize a finding. And of course, that's what these scholars did who did the study. I'm curious if you have any thoughts on why they said 'None,' given that their results suggested 'One' is where the danger kicks in--to the extent it kicks in. And it's still, again, extremely low risk, at low levels.

Julia Belluz: Right. I think--yeah. I don't know what was going through their minds, but I can guess that they might have been trying to draw attention to the very-well-known health risks associated with drinking. And, this was, if I'm remembering correctly it was a Global Burden of Disease study. So, this is where they are very carefully trying to get a measure on how--like, what kind of health impact is alcohol having on populations around the world. And, so, you could imagine that they were trying to draw attention to the very serious and awful health risks of alcohol and of drinking too much. And so maybe, yeah, they were just tempted to take it a little bit further and kind of exaggerate the finding, to draw attention to those risks.

Russ Roberts: Yeah. And you could argue it was well-intentioned: they were just better safe than sorry. But that's a bad sign. It might be good parenting--

Julia Belluz: Yeah--

Russ Roberts: Maybe. Maybe. But it's certainly not good science. Which is a shame.

Julia Belluz: And I think, yeah, some people felt like they were moralizing as well.

Russ Roberts: Yeah.

Julia Belluz: And, yeah.

Russ Roberts: Well, I always misquote--I don't get this quote exactly right, but it's close. H. L. Mencken said, 'Puritanism is the haunting fear that someone, somewhere is having a good time.' So, there is an aspect of that, I think in these--sometimes these kinds of preaching aspects of a study.

Julia Belluz: Right. Yeah. Absolutely. But I think one other interesting nuance to this alcohol story is the New York Times has done this incredible reporting on the influence the industry has had on shaping alcohol research, even within the National Institutes of Health. And, this is all about, you know, the industry wanting to say, moderate, a couple of glasses of wine can actually make you live longer and protect your heart, or whatever it is. And funding studies. And, you know, having influence over--as we know, the way you design a study, the questions you choose to ask, the people you include, how you interpret those findings shape what the conclusions end up being. And the Times investigations have shown that the alcohol industry has had a hand in that.

Russ Roberts: Not surprised.

Julia Belluz: Not surprised, at all, yeah. I guess when you look at how much--

Russ Roberts: A lot of money at stake.

Julia Belluz: Totally. And how much industry shapes many different areas of research. But, so, yeah: It is this like very contentious question and one of ongoing debate. But one, I'm afraid we're not going to have any satisfying answers to any time soon.

Russ Roberts: Well, this study could have been funded by the cannabis--the growing-cannabis association. But, looking for, to make a competitor less attractive. More expensive.

Julia Belluz: Right. Big Cannabis. Yeah.

Russ Roberts: Yeah. Big Cannabis. It's comin'. It's comin'.

Julia Belluz: Right.

| | 13:15 |

Russ Roberts: Do we learn anything from this study? By the way, I just want to mention--it's important. There is a temptation--we've talked about this before, I think, with John Ioannidis, that when you do a meta-analysis that, 'Oh, it had 800 studies! It must be really reliable.' But, of course, if the 800 studies all used the same flawed methodology, you don't get any more light shed than if you only had one bad study. They are all kind of the same. Do we learn anything from this? Did you learn anything from this meta-analysis that was helpful?

Julia Belluz: I think one place it was helpful was in estimating that Global Burden of Disease aspect. So, I actually, I called John Ioannidis about this, because it, when the paper came out, he had just come out with this fantastic critique of nutrition science, and [?] find out what he says, in this paper he talks about how like the absurdity of all the health claims that are made based on these really shaky studies, and how like eating 12 hazelnuts a day can prolong your life by 12 years, according to some papers. And, 1 egg reduces life expectancy by 6 years. And, he pulls out all these really spurious findings that are based on observational studies. But, anyway, so those are side notes. So, I was talking with him about the value of the paper, and he was saying--and I agree with him--that it wasn't estimating alcohol, the disease burden of alcohol. You know, that it was a reminder about how it increases liver disease, and the risk of high blood pressure, injury, memory, many other health problems. So, I think, yeah, that was--yeah, kind of a big value to this, to have those Global Burden of Disease studies. But, yeah--

Russ Roberts: You mean to quantify, in some way, what the full impact might be--

Julia Belluz: Yes--

Russ Roberts: at the current levels of drinking, say.

Julia Belluz: Right. Yeah. And they were looking at 195--they were looking at data from 195 countries. And, yeah. So that was the main purpose of this study. So, this study was really valuable in that it estimated the burden of alcohol-related disease in 195 countries. But then, that one striking conclusion that zero drinking is the only safe level is what everyone grabbed onto and what everyone reported about. Instead of what the actual purpose of the study was, which was estimate alcohol's disease burdens.

Russ Roberts: Well, I think when John Ioannidis was on this program, I think he said that we should never take seriously any observational study about the impact of one food or drink on human health.

Julia Belluz: Right.

Russ Roberts: And I assume, when you said that, I assume he--I'm sure he believes that excessive drinking is a bad idea. As is, say, eating 10 or 12 pounds of broccoli every day. But, the sort of normal range of human experience is not reliably measured by these observational studies. And yet they continue to be done constantly.

Julia Belluz: Right. Yeah. And there's so many questions, like when you look at studies, for example, on the impact of eating meat, there's a lot of question about the preparation that you're using. So, is there something about the way we cook the meat that increases its toxicity and the way it's processed in the body. Or, with any type of food--if you are adding one thing to your diet you are subtracting another, so even if you randomize people to fish- and meat-eating, that means that the people who are eating the fish are eating less meat, and the people who are eating the meat are eating less fish. So, is it the effect of the new food you are introducing or taking out the other food that's having that impact; and how is eating more fish changing the rest of your diet? And obviously, we're eating foods in all these different kinds of combinations and they are prepared in many different ways. And when we add more of one thing, we are taking away another thing, so teasing out, as John suggests, the effect on one health outcome of one particular food is almost impossible, through observational studies. And even otherwise: if you want to run a big randomized control trial on, say, like blueberries--really--

Russ Roberts: It's fabulous. Fabulous--

Julia Belluz: Yeah; are you going to randomize people from birth to eating more blueberries? And then if they are eating more blueberries, what aren't they eating, otherwise. So it goes on and on, and it's a really tricky area.

Russ Roberts: I just want to make clear that, of course, here on EconTalk we do not give health advice. So, anything you hear today, you must take with at least a grain of salt. Some people think salt is bad for you. I don't particularly, but that's just my personal opinion, and I would not encourage you to rely on it. And the same goes for drinking, say, or anything else we're discussing. So, I do want to make that disclaimer. Consult your local nutritionist, doctor, or statistician before acting on anything you've learned in today's episode.

| | 18:39 |

Russ Roberts: But before we move on, I just want to mention my favorite alcohol-related study, which was about, maybe 12 or so years ago. It made the front page of the New York Times; it made the front page of many papers and magazines and websites which I think were existing at that point. And it showed, purportedly, that alcohol consumption by women, particularly I think wine, led to an increase in certain types of cancers. And, I looked at the study fairly carefully--I may have mentioned this before, but it's always--to me this is such a horrible study it's worth repeating. They threw out from their study non-drinkers. And the justification was--I'm going to tell you the justification in a second, but in the raw data, people who drank small amounts had better health and less cancer than the zero-drinkers. And that, of course, is an example potentially, not for sure but potentially, of what's called hormesis--the idea that the dose makes the poison, and many things that could kill you in large amounts are actually not just benign but beneficial in small amounts. Alcohol has been suggested as being one of those; we don't know for sure, as we've been talking about. But, there is some evidence that that might be true. So here they have this awkward conclusion: They want to tell you that drinking causes cancer, but it appears that at very low levels, drinking reduces your risk of cancer. So, they were out the people who didn't drink at all. So, the only people in their population were drinkers. And they found that among drinkers, higher levels of alcohol were, of course, very bad for you--that's not, again, very surprising. The question is what happens at low-ish levels: If you have one and a half or two drinks a day, does that raise your risk? By how much? How do you offset that against, perhaps, the reductions in stress, which are also beneficial to your health that alcohol might provide? Etc., etc. But, what I loved is their justification for why they eliminated the non-drinkers. And, what they said was: We have to eliminate the non-drinkers because some of them could be non-drinkers today, but in the past they could have been heavy drinkers, and that will contaminate the data. Of course, the problem with that is that, in the past, the people who were drinking 5 glasses of wine a day could have been teetotalers, drinking zero. So, once you've opened that Pandora's box, that past--data based on past memory is suspect--the whole study is suspect.

Julia Belluz: Right. Wow. I didn't see this. So, you said that was like a dozen years ago?

Russ Roberts: Yeah; I'll try to dig it up for you. It drove me crazy. They didn't control for cancer in the family. They had those data; I don't know why they didn't control--I don't know.

Julia Belluz: Do you think it's the--so this wasn't just a case of the media going, over-interpreting the results?

Russ Roberts: No. The researchers--

Julia Belluz: It was just really bad--

Russ Roberts: Yeah. Because the incentives for the media are not so healthy right now; the incentives for scholars are not healthy. You want to get tenure; you want to get attention; you want to get love from funders, from your university, from your hospital--your natural incentive is to exaggerate, dramatize. That's where we are.

Julia Belluz: Yeah. A little while back we did this chart showing, like, from the moment an idea in science is generated to the time it's published in the media--all the places it goes off the rails. And there's so many places.

Russ Roberts: Give some examples.

Julia Belluz: Yes. So, I guess, from the beginning, from when you're conceiving a study--so, when you're thinking about what population are you going to use, the really representative population, the one that really makes sense studying, and then how many people are you going to put in this study? Will it be enough to show a real result, or is it going to be too small? And, so yeah, from the study design; and then interpreting your data; and if you have a multisite study, making sure did everyone at these different sites follow the protocols for the study properly and in the same way to make sure we are all doing the same, making sure we all have the same intervention and what we're suggesting is what we're looking at here. And then from that, so then that's--running the study and then interpreting the results, so we have all these incentives and reasons, including our own biases and things we're not even aware of when we're looking at data; and that might shape how we interpret the results. And then you are publishing the study, and you might have co-authors who are tweaking things, or the journal might be tweaking things. And then a press release comes out about this study, and that might water down or shift the findings in some way. And then the media report on the study, and we might mis-interpret or over-interpret or misrepresent. So, there are all these places where research can go off the rails. And, I think--have you ever talked to Sheila Jasanoff?

Russ Roberts: No.

Julia Belluz: So, she pioneered this science technology study, this program at Harvard in the Kennedy School there, and she's really interested in this idea of science as a human process. And, you know, it's obviously, I think, the best way we have at getting at the truth, but it is done by humans; it is conceptionalized [sic] by humans; and these all these places where it can go off the rails. And we need to build in protections for that and make sure that we account for that.

Russ Roberts: Yeah. We've had Brian Nosek on talking about the replication crisis in psychology, and of course now beyond psychology: The natural incentives to hide results that aren't interesting, that don't come out well, means that the studies we do observe probably are not as reliable; they tend to come from the right-hand tail or the left-hand tail of the possible results. There's a lot of error. And that's just the reality.

| | 25:04 |

Russ Roberts: You wrote an essay for Vox--I think it was in the last 5 years--but it's one of my favorite pieces of journalism, partly because of the visual representation that you give in there. You looked at--I think it was your chart; I don't know, maybe you created it, but maybe you got it from somewhere else, but it's basically--you took a whole bunch of pieces of our diet--caffeine, broccoli, meat, carbs, etc., and you showed which studies, how many studies showed that they increased the risk of cancer and which studies showed that the decreased the risk. And basically for every single item in the list--and there were probably 15 or 20--there were lots of studies that showed, 'Oh, my gosh: this causes cancer,' and then there were also lots of studies that showed that they reduced cancer. And I think that's a very sobering and thoughtful finding that should create skepticism among thoughtful readers of the media, in terms of what you think about one's own diet.

Julia Belluz: Totally. And I wish we could take credit for that, but that was also John Ioannidis. We did reproduce it in that story, but it was another John Ioannidis came up with this idea of, I think it's the one where he flips through the Boston cooking school cookbook and randomly selects foods and then looked at what's been published showing that that food causes or protects cancer; and then they had this amazing chart in that study. Really, really fun idea.

Russ Roberts: We'll put up a link to your version of it, which is extremely accessible, which is probably less accessible; but he's pretty accessible.

| | 26:43 |

Russ Roberts: Before we move on--we're going to move on in a minute to metabolism and diet, which you've got some really interesting personal and I think scientific insights into, but I want to ask before we do that: What's the single biggest fallacy about health, or nutrition? If you could just clear this up--you think this is--everybody should know this, but they don't. Is there anything that jumps out at you from your reading of the nutrition space or the health space more generally?

Julia Belluz: I think one--this maybe isn't--I don't know if this is what you're thinking of, but I think we make things way too complicated, especially in this country--like, there are so many vested interests, and people who are trying to profit off making certain diet claims or exercise claims, and what we actually know and research to be like, what does it mean to live a healthy life? It's, like, don't smoke, don't drink too much; eat a diet that's pretty rich in fruits and vegetables; make sure you get an adequate amount of sleep; make sure you have a strong social network, and people that love you and that you can depend on. And, am I forgetting one? So, smoking--

Russ Roberts: That's pretty good--

Julia Belluz: drinking--

Russ Roberts: Stay active: be a little active. You don't have to be a marathoner.

Julia Belluz: Yeah. And I guess that's another one, actually, that--I think this idea that if you want to lose weight you have to join a gym and start to exercise like a fiend--

Russ Roberts: Well, that's a belief that's held by people who have never visited a gym. When I started going to a gym a couple of years ago and I saw the people there, I thought, 'I hope they're new like me.'

Julia Belluz: Right. Okay. There we go. But, what we know--so, exercise is the closest thing we have to a magic pill, I think. Like, it does so many incredible things for us. And it helps people maintain their body weight. But it's actually not that effective for weight loss. And that's because people--researchers have found that when people ramp up the amount of exercise they do, they tend to think, 'Now I can go home and have a big slice of pizza,' when really you don't actually burn off, unless you are doing hours and hours of exercise, you don't burn that much, as much as you think you do, as much as exercise machines say. And, it's really easy to undo that calorie deficit you've created with a single slice of pizza or a Frappuccino at Starbucks or whatever it is that people are eating these days. So, I think that makes it like over-complication and then relying on this one silver bullet for health, be it exercise or a certain food or a certain diet I think is where we're often going wrong.

Russ Roberts: Yeah, we have such a--you said, I think, it doesn't burn as many calories as we think it does. I would just put a slight amendment to that: I'd say it doesn't burn as many calories as we'd like to think it does.

Julia Belluz: Totally. Yeah.

Russ Roberts: So, the ability to self-deceive there, honestly, just thinking you've actually earned a lot when you just really want that Frappuccino, is a huge problem. As is the quest for the magic solution. My favorite of this example is the 7-minute workout, you know: I don't really have to exercise. I just work for 7 minutes. And there's an app on my phone I can get. We're always looking for the shortcut, the magic food that will solve our problems. And, like most things in life it's mainly hard work and sacrifice which leads to lower weight and health; and that's not as much fun as believing that this new book with this new diet is going to take care of me.

Julia Belluz: Totally. And that's sustained work. It's like something you kind of have to think about, even if--like, I am someone who did lose weight over--I was chubbier as a teenager, and slowly lost weight. And it's been a sustained effort, and something that I still think about every day. And I think that's true for a lot of people who lose weight and keep it off. It's not like suddenly you discover this magic solution and you never need to think about it again. It's something that lingers there. And I think on the flip side, it's like, if you have one day or even two days in a week where maybe you eat a little bit too much or, yeah, an extra slice of cake that you shouldn't have, or whatever it is, it's not the end of the world. Like, what really matters is how you are eating over many months in a year, and how does that look on balance, not, you know, like obsessing about every little micro-decision that you make about what you are putting in your body.

| | 31:41 |

Russ Roberts: Yeah. Mark Twain said, 'It's easy to stop smoking. I've done it a score of times.' I feel that way about losing weight. It's easy to lose weight: I've done it--I'm really good at it. And I forget that I'm really good at putting it back on, too. And, they say that's not good for you either. I've always been attracted to the Kingsley Amos line, 'Inside every fat person is a fatter person trying to get out.' I sometimes think of myself that way. It's like, 'Let's just go to my natural weight.' You know--that's probably about 20 or 30 pounds above what I'm already way above right now. So, it does take some discipline. It takes long-term discipline. And I think the behavioral insight, which I've talked about before on the program, is, sometimes you need very black-and-white rules that are very different from, 'I just won't have too many potato chips.'

Julia Belluz: Right.

Russ Roberts: I can't keep that rule, unfortunately: 'I'm just going to only have a little bit of the ice cream.'

Julia Belluz: I guess, I should say, and I hope I'm not contradicting what I said earlier, but I do think that, after writing about this for so many years, like where I am really coming out is, our food environment here is a nightmare. And it does make it really hard for people to make, you know, the correct, maybe choices that are the best choice for themselves. So, I think--yeah. I guess, yeah, it is discipline; it is sustained effort. On the other side, we are living in a food environment where obesity does have a chance to express itself on a much more frequent level than it did a hundred years ago, say. And, you know, our genes--there's a researcher on this at NIH [National Institutes of Health] called Kevin Hall, and he always talks about how our genes haven't changed in the last, you know, half century; but what has changed is the Frappuccinos and the pizzas and the sheer ubiquity of these things. And the fact that you almost have to--I personally feel like I have to think, be quite judicious and think very deliberately about where I buy my food, and, yeah, exposing myself to these things, you have to make a really conscious effort not to. And so, it is on the individual. But I think it's also very much a massive environmental problem.

Russ Roberts: Well, we're really good at food. We're really good at making inexpensive, really yummy food. It's a triumph of human creativity and ingenuity; but it's not necessarily what we want in the long run. We very much want it in the short run. I have a thing with my wife--I think this is an example of what you're talking about--where she will sometimes say to me after a meal, 'Would you like a little ice cream for dessert?' And the answer is, 'Well, of course, I do! What kind of a question is that?' And, the second point being, 'Don't ask. Please don't ask.' Because it's so hard to say no. Even though I don't want it--I mean, even though I don't think I should eat it, it's very hard to say no to that. And part of it, by the way, I think is just human interaction. My wife offers it with a full heart. She doesn't offer it because, 'Oh, you want some ice cream?' Correctly, it's a festive moment. It's dessert. It's part of the joy of being human is to--

Julia Belluz: Human ritual--

Russ Roberts: eat good things. Yeah, and human ritual. And, I want to, we want to do this together: 'Let's have some ice cream. 'So. Anyway.

Julia Belluz: Totally. We could talk about Brian Wansink, too, who had, who just his old research program--I don't know if you followed this--

Russ Roberts: Oh, yeah. You can mention that. Go ahead.

Julia Belluz: Brian Wansink is an eating behavior researcher at Cornell. And he published these really interesting studies showing how these little nudges and environment cues cause us--they shape our food choices and they cause us to eat less or a little bit more in certain circumstances. And he had just really creative studies to demonstrate that. And, of course, when some other researchers looked into the data and the methods that he was using, they found a lot of problems. And now he's stepped down from his position; and he's being investigated, and all of that. But I think--yeah, he's not the only researcher to show that, yeah, that the things that were offered and the things that we have in our environment shape the choices we make. And, like, you know, if you have ice cream at home, if it's there it's on you, then, to say no to the ice cream. And the ice cream is designed, meant to be over-eaten--

Russ Roberts: It's the Alice-in-Wonderland dessert. 'Eat Me,' it's yelling.

Julia Belluz: Exactly. And it's so hard to say no. And I think, yeah, as much as Brian Wansink's research might be hugely problematic statistically and methodologically, but--

Russ Roberts: He's onto something--

Julia Belluz: Yeah. The ideas--he's not the only one who is talking about these subtle environmental cues, and like how important it is to think about them, even in our own homes and in our workplaces. And yeah.

Russ Roberts: So, we keep our ice cream with a neighbor. Who we don't like. And so, when my wife says, 'Do you want some ice cream?' and I say, 'Sure,' she's, 'Well, we've got to go over to the Johnsons, and they don't, they're not really happy to see us, so maybe we'll just skip it tonight?' No. I'm kidding. But it is important to not buy something that should not be bought. Because, they've got, like a--I remember when I was learning time management--which I couldn't implement, but it was fun to study it anyway. I couldn't keep any of the rules. But I loved learning about them. I even taught them for a while until I realized I couldn't keep them: I thought, 'This is probably inappropriate.' But someone classic insight in the Franklin Time management--the teacher would say, 'Do you wish you read more books?' And everyone's hand goes up. 'Yes, of course, I wish I read more books.' And the teacher would say, 'Well, why don't you?' And probably we all looked kind of down at our shoes. And his answer was, 'Books don't ring.' When the phone rings, it grabs your attention, and you answer it even though it's not--of course we've gotten better at not answering our phones in America--but, yeah, it's an old seminar. But, the things that grab our attention because they stimulate our appetites or our juices or whatever it is, they grab us. And sometimes the healthier things are just sitting there quietly, [?] ignored, 'What about me?'

Julia Belluz: Absolutely. Yeah. And people--I always think about this how--and maybe it's helpful to other people to think about this--like, the bag of chips and the ice cream: It was designed by incredible scientists at these big food companies to like--they tested it on different people to see which formulation would cause people to not be able to stop themselves, and to want to--what was the most pleasing to our brains and reward systems. It's a pretty tough thing, individuals to be up against.

Russ Roberts:'You can do it, out there! Come on.' But on the other hand, we don't want to be saying you shouldn't have any fun in your life.

Julia Belluz: Right. Of course.

| | 39:23 |

Russ Roberts: Let's shift gears. I want to talk about something you wrote about that really fascinated me. It's related to what we're talking about now, so it's an easy segue. Which is: You spent 23 hours in a metabolic chamber. So, explain what a metabolic chamber is, and what that was like, and what you learned from it.

Julia Belluz: My husband thought I was crazy. So, that's the first thing. But, no--so, the National Institutes of Health, they have these rooms here on the outskirts of Washington, D.C., and they are designed to measure these chemical processes we call 'metabolism' second by second. So, essentially, the food we eat and the amount of work we are doing, the amount of physical activity we are doing, corresponds to how quickly our body is breaking down the food that we're eating to use for energy to power ourselves. And, the way that's measured is by, in these air-tight rooms, researchers track how quickly you are respiring CO2. So, how much oxygen you are consuming and how much carbon dioxide you are letting out. It gives a measure for how quickly you are burning energy. So, they have an ongoing study where they take people who have a normal body weight and people who are overweight and obese, and they put them through different types of measurements to better understand the characteristics of their condition, their body size. And one of those is this, what's called the metabolic chamber. And that's where--yeah, it's this airtight room that measures your gas exchange, second-to-second. And so, I went in thinking one of the reasons, you know, again, like I struggled with my weight, especially when I was a teenager. And I really thought I could forgive my brothers--they were both skinny and they seemed to be able to eat whatever they wanted, and same with my friends. And I thought, 'There's something going on in me.' And I thought it was a slow metabolism. I thought, like, there was this sluggish--like I wasn't converting the food I was eating or using it very quickly, and it was being stored as fat, and therefore I could gain weight more easily than they could. And so, I went into the chamber to both better understand this hugely important scientific tool that has led to some of the discoveries we've been talking about today, like the relative importance of physical activity for weight loss; and many, many other things. And also to get a better read on my own body and whether I had this slow metabolism I thought I was cursed with.

Russ Roberts: And? And, by the way--you only were in--'only'--for 23 hours. Did other people go for longer?

Julia Belluz: I think they don't keep people longer than 2 days, if I'm remembering correctly, in the chamber.

Russ Roberts: Because, they don't know what you ate before you got in there, or how much exercise you did. It's like the guy who told me that--I think it was a doctor who told me--that somebody came in for cholesterol measurement, and it was a horrible, frighteningly, like a record; and then he found out the guy had been eating French fries beforehand, and [?]. So it was a bad read. But you'd think there would be things you could do before that test that would kind of mess it up.

Julia Belluz: Before the metabolic chamber?

Russ Roberts: Yeah.

Julia Belluz: So, one of the big, fascinating takeaways of spending this time researching the metabolism and with these researchers at NIH, was that many of the things we do that we think--you know, there's this whole, like, popular mythology, discourse--yeah, it is mythology around metabolism boosters and doing certain things to speed up your metabolic processes. And you know, you burn off food faster and make sure you are, you know, like I think the underlying thread is that we can exert some degree of control over our metabolism. But what they see in the chamber, and what they've shown through these different fascinating studies, is that we actually--there's very little we can do to control it. And these metabolic processes are adapting second to second to our environment in ways over which we have little control. So, for example, they put people inside the chamber in very cold temperatures. And they found that--and then they also--sorry--and then they tracked them, and then they put them back in the chamber in normal temperatures. And I think they--so they slept in the chamber in cold temperatures for a significant period of time: I can't remember how long it was. But it was enough time to show that our bodies build up brown fat in response to that cold. So, brown fat is the type of fat that helps us stay warm. And, so, you know, this is a metabolic process. Your body is taking the food that you're eating and converting it into brown fat to keep you warm because you are exposed to cold temperatures. And so this is something you are not thinking about, and you have no, like absolutely no control over it. And then in the study--

Russ Roberts: You can think about it as much as you want, but you're not going to change it.

Julia Belluz: Right. And then you're, then in this study they were allowing people, the same people, to sleep in normal, like, warmer temperatures and the brown fat--their brown fat reserves--went down again. And so there's all these things happening in our bodies, at any given moment. Sorry, just to be clear now: Don't go and sleep in very cold temperatures and think you are going to lose a lot of weight. It was a very, like, insignificant amount of change in their energy burn. But it is something now they are trying to see if they can try to create a drug that has a more dramatic effect to similar pathways. But, sorry. The main message was that there really wasn't much I could do before going into the chamber that would have, like, a big effect, a significant effect, on my metabolism--you know, that I could deliberately do--

Russ Roberts: And what--

Julia Belluz: So, they've shown that, like, eating dark chocolate or caffeine or chili peppers, these don't speed up people's metabolisms in ways that lead to weight loss. It's just like what Dr. Oz says every day.

Russ Roberts: I like--I just try to read about thin people. That's what works for me. And my body thinks, 'Oh. I could do that. Let me try.' So all of this stuff is, again, more hope than reality. But, what did you find out about yourself?

Julia Belluz: So I found out I'm a very boring research subject. I had a very, like, perfectly normal--I did the exact--my metabolic rate was exactly what they'd have predicted for someone my height, my size, and my age and sex. So, I was boring. And, I was surprised by this. I really thought--like, I definitely, you know, exercise, and I'm careful about my diet and all these things. I don't just play my metabolism for when I gain weight. But I did think it was this contributor--that I really thought I had this sluggish metabolism and that explained, like, why it's a little bit harder for me. And so, I debunked that. And, yeah, it caused me to think about where we get these narratives from and this messaging. And, how much how they affect how we think about ourselves, and how sometimes I can be completely wrong.

| | 47:13 |

Russ Roberts: So, you've lost this crutch. Are you less happy now?

Julia Belluz: Am I less happy? Um, I would say I'm happier. I think there's some liberty in knowing the truth, right?

Russ Roberts: Sure. I like what you wrote. You said--going back to our gym discussion. And of course, in the gym, you do have people slowly peddling an exercise bike with not much resistance. And I'm always thinking, 'I wonder what they think they are doing here.' But, you write--because there was an exercise bike in the little room, because they want you to exercise. So, you say,

What's more, the 405 calories I burned during 90 minutes on the exercise bike was both less than is advertised in spinning classes and just 17 percent of the total calories I had used, validating once again that workouts typically account for a relatively minor part of total energy expenditure.

Well, that's true. But you could--one could up in theory, one could up one's exercise and over a long period of time, make a big dent. But--it's just hard to do.

Julia Belluz: Yep. And it--I think you can absolutely do that. I think the question is, is that a sustainable method of weight loss relative to thinking a little more about the food you put in your body, which we know has much more of an impact on how--yeah--how much weight you gain or lose. So, prefer--like, I have a friend here who, he had a period of kind of between jobs and had a lot of free time, and he was exercising like crazy. And he lost a pretty good amount of weight. But now he started to work again, and he doesn't have time to do, you know, one hour of running and then an hour of weightlifting every day. And I think most people don't. So, like using that as your exclusive way to control your weight isn't really a reasonable approach for people who have normal lives, jobs, and families, etc.

Russ Roberts: We've had Gary Taubes on this program. And he's--I'd say, known for two things, among others. But the two that come to mind that he's talked about on the program: He's not a big fan on the program: He's not a big fan of sugar. Which you probably could add, join your list of things we know: probably excessive amounts of sugar are not particularly good for you. Maybe no amount is particularly good for you. And he's also known for advocating a low-carb diet as potentially at least a way to reduce weight. You wrote, I think in this article on the metabolic chamber,

When it comes to diets, the researchers have also debunked the notion that bodies burn more body fat while on a high-fat and low-carb ketogenic diet, compared to a higher-carb diet , despite all the hype. [boldface per original--Econlib Ed.]

Do you think that's a pretty iron-clad conclusion?

Julia Belluz: So, I think that's--I don't know if it's ironclad. Like anything in science, it's a measurative[?] process, and maybe I know these researchers are also working on comparative studies where they look at low-carb--they look at more head-to-head outcomes. Sorry. People following different diets. Compare them and look at their different outcomes. I think where I diverge from Gary--I think he's absolutely right that when we talk about the changing food environment, the big thing that has changed is this--we're inundated with processed, cheap calories. And many of them are taking the form of sugary, you know, carbohydrate--

Russ Roberts: Carbs--

Julia Belluz: Yeah. However, at the same time, people have been eating a lot more of other things, too. So, our fat consumption has gone up. We are eating more calories generally. I think it's simplistic to say it's only, like sugar is the only problem; and I think it's reductionist. I think there are many other things that have changed about our diets. And, people are consuming more of--and we're also consuming more protein, for example. So, meat consumption continues to go up. Cheese--we eat a ton of cheese. I don't think it's just the sugar. I would love if there was just one simple thing that we could say is the problem, but I don't think it's just not.

Russ Roberts: But that's a stronger claim, that the low--many listeners who have written me after the Gary Taubes episodes said they cut down carbs. Many, I'm sure, listening right now. And they write me and say, 'I lost 40 pounds and I've kept it off for 3 years.' Which blows me away. Because, for me, when I reduce my carb consumption, it does--I do tend to lose weight. I just, my body, it gets so unhappy with me that it says, 'Give me back that first potato chip.' It goes crazy for it. And responds, of course, very strongly by adding a lot of fat. And I--I'm curious whether you think that that's open and shut about just low carbs in general.

Julia Belluz: Okay. So, yeah. Where you are asking about that specific study, as well. So, what they were testing was this claim that some people who, yeah, proponents of the ketogenic diet make, which is that once you go keto, you can kind of eat whatever you--sorry--whatever you want of certain food types. And your fat burn will accelerate. You don't need to worry too much about the calories. There was a recent diet book by a doctor at Harvard who, I think he said, 'You can retrain your fat cells and stop worrying about calories forever, if you just follow the ketogenic diet.'

Russ Roberts: And what is--explain what the ketogenic diet is?

Julia Belluz: It's a very--so, you are eating, oh God, I'm going to mess this up. But it's a very low-carb, high-fat diet. So, you are eating, you are staying away from, definitely, like processed carbs, processed breads, sugary foods. And even fruits, by the way. And you are subsisting mainly on protein-rich foods and fats.

Russ Roberts: It's a paleo-like diet.

Julia Belluz: Exactly. Absolutely. And so, what they are testing in the study at NIH was fat burn and whether your calorie and fat burn really accelerate when you are following a ketogenic diet. And they found that wasn't the case. And so, I think--I think, for some people it's absolutely a wonderful way to live. Like, some people do need these--and Gary is one of them--like, he's talked to me about needing these strict parameters. You know, like he can't[?] have just a little bit of chocolate. He has to just like--I don't know if the chocolate completely--and so for some people I think it can absolutely work. And it sounds like it's worked for some of your listeners. I think for the majority of people, or many other people, it's very hard to live that way. And it's very hard to live that way in our current food environment--

Russ Roberts: Of course, I have friends who believe the China study--which I don't; I think it's really bad science. But they tell me that they believe the China study. They've cut out blah, blah, blah from their diet--they would say they are vegetarian now. And they've lost all this weight, and they've kept it off. So--

Julia Belluz: All the more power to them.

Russ Roberts: Yeah. One of my theories is: If you believe the diet, it might work. But otherwise, the average person, it doesn't. I don't know.

Julia Belluz: Yeah. And that is the difference. So, in every diet study, they find this massive individual variation. So, like every time--there was a recent study at Stanford called the DietFits Study, and they compared people following a low carb versus like just a regular, like a higher-carb diet. And the results were virtually superimposable. And what they looked like was that on average people didn't lose that much weight, but in both groups there were people who lost a lot, and gained some. And so there was this variation. And I think that's true for every diet. And I think for many people, it's like a matter, it's experimenting with different things, finding out what works for you. But I think the bottom line is that you need to eat fewer calories. Like, you can just eat what, you know, like on a ketogenic diet, you can eat, as the NIH studies showed, as much as you want and be able to magically accelerate your fat burn, and lose weight. So, that's where I come out. But I think the science is still evolving, and maybe we'll find out that ketogenic diets are what we should all be eating. I don't know. But for now I'm not convinced.

| | 55:41 |

Russ Roberts: It's not surprising that your response to carbs might be different from mine; your response to fat might be different from mine. And one of the lessons, I think of nutrition and diet and metabolism--very similar to the lessons in economics--you have complex systems. Policy intervention that might work in one town might not work in another. It might work for one group but not for another. It might not work at all: It's an illusion based on reverse causation and the problem of confounding variables that you talked about. And it's a complex system. Which means, also, that the body--which means that changing one thing can lead to changes in the other thing that you don't control. And you have a beautiful example of this in your summary of what we know about metabolism--another piece you wrote--where you say, "Dieting can slow down your metabolism." It's like--Whaat?

Julia Belluz: Yeah. That one we have to be careful with, because that's also another study that came out of this group at NIH; but they found that--so, your diet, your metabolism does slow down a little bit. It recalibrates when you are losing weight. But it normalizes again. So, if you don't have as many fat cells in your body, you don't have--if you are shrinking, you don't require as much energy to sustain, to, you know, require as much energy to live. And your metabolism will slow down a little bit. But, where that claim came out of: There was a big study of The Biggest Loser, TV [television] show participants at NIH, of all places. And they found that these people who--they went on crash diets. So, they vastly cut their calorie intake and ramped up like to hours' of exercise a day. And they destroyed their metabolisms in the process. So, they saw what looked like a permanent decrease in their metabolic rate. And so their body was like fighting to hang on to every calorie they were eating. And it made their weight--it made maintaining their weight loss almost impossible. And over the long term, when these TV show contestants were followed up by the NIH, researchers, many of them had regained their weight, and some of them even gained more weight than they went in to the TV show with. So, and I think the big message there was: That might have been more of a response to the extreme intervention that they put themselves through, than what everyone might experience by just trying to eat a little bit less each day. You know what I mean?

Russ Roberts: Sure. But it wouldn't be surprising if you when you were losing weight, your body were thinking, 'Uh oh. Famine. Uh oh. Food supply not available'--

Julia Belluz: Right.

Russ Roberts:'Conserve. Take it easy. Take care.' So, my point is that, you know, there are these unintended consequences in our bodies that are not that different from the unintended consequences of public policy that don't turn out the way we expect because things change that we don't expect to change. It's a complex system.

Julia Belluz: Absolutely. Yeah.

| | 58:50 |

Russ Roberts: So, we're almost out of time. I just--I want to close with--you can talk a little bit more about exercise and what you learned from--you know, I think we do have a romance about the opportunity of exercise. And, in your time in the chamber you learned some things about that. When you were riding that exercise bike, I'm curious how hard you were pedaling. That's number one. But, more generally: Is there anything we've talked--we've gone all over the place; it's all been interesting. But, are there any lessons for losing weight other than eating a little bit less every day?

Julia Belluz: From--okay. Hmmm. I think the one other thing I did in the study was I had to estimate my calorie consumption. And, I thought I was being so thorough and generous; and, again, I'm quite careful about what I am eating or aware of what I am putting in my body, I think. And yet, I had massively underestimated--I think by the percentages in the story, but it was like 30% or something? Like, I really underestimated my calorie consumption. Because, based on, basically what I reported, it would be impossible for me to maintain my current body size if that's really what I was eating.

Russ Roberts: That's fascinating.

Julia Belluz: And so I think the lesson there is like--yeah. Exercise: Fantastic for health. Exercise as much as your time allows. And you'll reap so many rewards. Including, potentially, even a longer life. Like, it basically doesn't get any better than that. But I think sometimes in our quest for this, like, magic solution or this one simple answer, we overlook, you know, the salad dressing we put on our salad at lunch. And, you know, all these little things that add up in a day to many, many calories that, yeah, we're not even aware we're eating that might be making losing weight or maintaining our weight much harder than we'd like.

Russ Roberts: Because, when you were in that chamber, you were able to find out basically how many calories you were burning through just sitting, resting, your normal sleep patterns, working on a computer, etc. Which we all have a fantasy about, I think inaccurately as you say--and similarly we have a fantasy about how many calories we take in to offset all those changes.

Julia Belluz: Right. Exactly. And yeah. So, they were able to measure that. And it looked like--yeah, I got this very precise reading on how much I'm burning. And they also feed you three meals while you are in the chamber, and they know exactly--

Russ Roberts: Darn--

Julia Belluz: Yeah. They measure down to the gram. And then you have to send through the chamber wall anything you don't eat. Which they then record, to get this precise measurement of your calorie consumption. So, I had a pretty good sense; and I was surprised by, yeah, how much we sometimes, we might underestimate or we are putting in our bodies.

Russ Roberts: Did you smuggle anything in? Just in case?

Julia Belluz: You know, I was surprised I could have. I realized they don't bring any food in. And actually I should say they also watch you through--so there's like a Plexiglas window in the chamber. And they watch you through that and check in on you. And there's also a video camera in a corner of the chamber. So, they are watching you through that, as well. And I'm sure if I was, like, eating chocolate bars, they would have discounted me as research--

Russ Roberts: Enng--enng--enng.

Julia Belluz: I got in trouble when I wasn't resting enough. Like, you have these rest periods where they want to see what's happening with your metabolism at rest; and I definitely--sometimes I was too jittery. I wasn't resting enough. And I got scolded.

Russ Roberts: Last question: How did that experience--and, like you discovered you were eating more, probably, than you thought you were. Did it change you in any way? In terms of your behavior? Did you find yourself--how long ago was it, and what's happened since then? Besides you got a very nice article about it. Which we'll link to.

Julia Belluz: Yeah. I don't know if I changed my behavior. I think like that now my health routines are pretty set in. But again, it did make me think about how--there was a big gap between the reports I was getting about my health and sometimes how I feel about, you know, my health. And it did make me think about all this messaging in our society from like, yeah, the Dr. Ozes and the Gwyneth Paltrows, and the gym conglomerants, and the healthy food purveyors--

Russ Roberts: and the water industry--

Julia Belluz: The water--yes. Big Water. And Big Blueberry. And all these--yeah--we are constantly bombarded with messages about how we could be a little bit healthier. And how we should be doing x or y. And I guess, yeah--it made me a little more aware of how those messages might affect you. And even if you are a critical thinking, you know, informed person about these issues, somehow, yeah--they can affect you and shape how you think about yourself. And so, I guess that's the one thing that--that and thinking a little more about maybe some times that I'm underestimating my calorie consumption. So, what I'm eating, a little bit more that sometimes I'm underestimating it. And it also gave me a whole new appreciation for the research they are doing at NIH and how difficult it is--going back to our first conversation--how difficult it is to do this kind of research.

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(9 COMMENTS)

The 2008 Financial Crisis

It was, according to accounts filtering out of the White House, an extraordinary scene. Hank Paulson, the U.S. treasury secretary and a man with a personal fortune estimated at 700m (380m), had got down on one knee before the most powerful woman in Congress, Nancy Pelosi, and begged her to save his plan to rescue Wall Street.

    The Guardian, September 26, 20081

The financial crisis of 2008 was a complex event that took most economists and market participants by surprise. Since then, there have been many attempts to arrive at a narrative to explain the crisis, but none has proven definitive. For example, a Congressionally-chartered ten-member Financial Crisis Inquiry Commission produced three separate narratives, one supported by the members appointed by the Democrats, one supported by four members appointed by the Republicans, and a third written by the fifth Republican member, Peter Wallison.2

It is important to appreciate that the financial system is complex, not merely complicated. A complicated system, such as a smartphone, has a fixed structure, so it behaves in ways that are predictable and controllable. A complex system has an evolving structure, so it can evolve in ways that no one anticipates. We will never have a proven understanding of what caused the financial crisis, just as we will never have a proven understanding of what caused the first World War.

There can be no single, definitive narrative of the crisis. This entry can cover only a small subset of the issues raised by the episode.

Metaphorically, we may think of the crisis as a fire. It started in the housing market, spread to the sub-prime mortgage market, then engulfed the entire mortgage securities market and, finally, swept through the inter-bank lending market and the market for asset-backed commercial paper.

Home sales began to slow in the latter part of 2006. This soon created problems for the sector of the mortgage market devoted to making risky loans, with several major lenders—including the largest, New Century Financial—declaring bankruptcy early in 2007. At the time, the problem was referred to as the “sub-prime mortgage crisis,” confined to a few marginal institutions.

But by the spring of 2008, trouble was apparent at some Wall Street investment banks that underwrote securities backed by sub-prime mortgages. On March 16, commercial bank JP Morgan Chase acquired one of these firms, Bear Stearns, with help from loan guarantees provided by the Federal Reserve, the central bank of the United States.

Trouble then began to surface at all the major institutions in the mortgage securities market. By late summer, many investors had lost confidence in Freddie Mac and Fannie Mae, and the interest rates that lenders demanded from them were higher than what they could pay and still remain afloat. On September 7, the U.S. Treasury took these two GSEs into “conservatorship.”

Finally, the crisis hit the short-term inter-bank collateralized lending markets, in which all of the world’s major financial institutions participate. This phase began after government officials’ unsuccessful attempts to arrange a merger of investment bank Lehman Brothers, which declared bankruptcy on September 15. This bankruptcy caused the Reserve Primary money market fund, which held a lot of short-term Lehman securities, to mark down the value of its shares below the standard value of one dollar each. That created jitters in all short-term lending markets, including the inter-bank lending market and the market for asset-backed commercial paper in general, and caused stress among major European banks.

The freeze-up in the interbank lending market was too much for leading public officials to bear. Under intense pressure to act, Treasury Secretary Henry Paulson proposed a 700 billion financial rescue program. Congress initially voted it down, leading to heavy losses in the stock market and causing Secretary Paulson to plead for its passage. On a second vote, the measure, known as the Troubled Assets Relief Program (TARP), was approved.

In hindsight, within each sector affected by the crisis, we can find moral hazard, cognitive failures, and policy failures. Moral hazard (in insurance company terminology) arises when individuals and firms face incentives to profit from taking risks without having to bear responsibility in the event of losses. Cognitive failures arise when individuals and firms base decisions on faulty assumptions about potential scenarios. Policy failures arise when regulators reinforce rather than counteract the moral hazard and cognitive failures of market participants.

The Housing Sector

From roughly 1990 to the middle of 2006, the housing market was characterized by the following:

• an environment of low interest rates, both in nominal and real (inflation-adjusted) terms. Low nominal rates create low monthly payments for borrowers. Low real rates raise the value of all durable assets, including housing.
• prices for houses rising as fast as or faster than the overall price level
• an increase in the share of households owning rather than renting
• loosening of mortgage underwriting standards, allowing households with weaker credit histories to qualify for mortgages.
• lower minimum requirements for down payments. A standard requirement of at least ten percent was reduced to three percent and, in some cases, zero. This resulted in a large increase in the share of home purchases made with down payments of five percent or less.
• an increase in the use of new types of mortgages with “negative amortization,” meaning that the outstanding principal balance rises over time.
• an increase in consumers’ borrowing against their houses to finance spending, using home equity loans, second mortgages, and refinancing of existing mortgages with new loans for larger amounts.
• an increase in the proportion of mortgages going to people who were not planning to live in the homes that they purchased. Instead, they were buying them to speculate. 3

These phenomena produced an increase in mortgage debt that far outpaced the rise in income over the same period. The trends accelerated in the three years just prior to the downturn in the second half of 2006.

The rise in mortgage debt relative to income was not a problem as long as home prices were rising. A borrower having difficulty finding the cash to make a mortgage payment on a house that had appreciated in value could either borrow more with the house as collateral or sell the house to pay off the debt.

But when house prices stopped rising late in 2006, households that had taken on too much debt began to default. This set in motion a reverse cycle: house foreclosures increased the supply of homes for sale; meanwhile, lenders became wary of extending credit, and this reduced demand. Prices fell further, leading to more defaults and spurring lenders to tighten credit still further.

During the boom, some people were speculating in non-owner-occupied homes, while others were buying their own homes with little or no money down. And other households were, in the vernacular of the time, “using their houses as ATMs,” taking on additional mortgage debt in order to finance consumption.

In most states in the United States, once a mortgage lender forecloses on a property, the borrower is not responsible for repayment, even if the house cannot be sold for enough to cover the loan. This creates moral hazard, particularly for property speculators, who can enjoy all of the profits if house prices rise but can stick lenders with some of the losses if prices fall.

One can see cognitive failure in the way that owners of houses expected home prices to keep rising at a ten percent rate indefinitely, even though overall inflation was less than half that amount.4Also, many house owners seemed unaware of the risks of mortgages with “negative amortization.”

Policy failure played a big role in the housing sector. All of the trends listed above were supported by public policy. Because they wanted to see increased home ownership, politicians urged lenders to loosen credit standards. With the Community Reinvestment Act for banks and Affordable Housing Goals for Freddie Mac and Fannie Mae, they spurred traditional mortgage lenders to increase their lending to minority and low-income borrowers. When the crisis hit, politicians blamed lenders for borrowers’ inability to repay, and political pressure exacerbated the credit tightening that subsequently took place

The Sub-prime Mortgage Sector

Until the late 1990s, few lenders were willing to give mortgages to borrowers with problematic credit histories. But sub-prime mortgage lenders emerged and grew rapidly in the decade leading up to the crisis. This growth was fueled by financial innovations, including the use of credit scoring to finely grade mortgage borrowers, and the use of structured mortgage securities (discussed in the next section) to make the sub-prime sector attractive to investors with a low tolerance for risk. Above all, it was fueled by rising home prices, which created a history of low default rates.

There was moral hazard in the sub-prime mortgage sector because the lenders were not holding on to the loans and, therefore, not exposing themselves to default risk. Instead, they packaged the mortgages into securities and sold them to investors, with the securities market allocating the risk.

Because they sold loans in the secondary market, profits at sub-prime lenders were driven by volume, regardless of the likelihood of default. Turning down a borrower meant getting no revenue. Approving a borrower meant earning a fee. These incentives were passed through to the staff responsible for finding potential borrowers and underwriting loans, so that personnel were compensated based on “production,” meaning the new loans they originated.

Although in theory the sub-prime lenders were passing on to others the risks that were embedded in the loans they were making, they were among the first institutions to go bankrupt during the financial crisis. This shows that there was cognitive failure in the management at these companies, as they did not foresee the house price slowdown or its impact on their firms.

Cognitive failure also played a role in the rise of mortgages that were underwritten without verification of the borrowers’ income, employment, or assets. Historical data showed that credit scores were sufficient for assessing borrower risk and that additional verification contributed little predictive value. However, it turned out that once lenders were willing to forgo these documents, they attracted a different set of borrowers, whose propensity to default was higher than their credit scores otherwise indicated.

There was policy failure in that abuses in the sub-prime mortgage sector were allowed to continue. Ironically, while the safety and soundness of Freddie Mac and Fannie Mae were regulated under the Department of Housing and Urban Development, which had an institutional mission to expand home ownership, consumer protection with regard to mortgages was regulated by the Federal Reserve Board, whose primary institutional missions were monetary policy and bank safety. Though mortgage lenders were setting up borrowers to fail, the Federal Reserve made little or no effort to intervene. Even those policy makers who were concerned about practices in the sub-prime sector believed that, on balance, sub-prime mortgage lending was helping a previously under-served set of households to attain home ownership.5

Mortagage Securities

A mortgage security consists of a pool of mortgage loans, the payments on which are passed through to pension funds, insurance companies, or other institutional investors looking for reliable returns with little risk. The market for mortgage securities was created by two government agencies, known as Ginnie Mae and Freddie Mac, established in 1968 and 1970, respectively.

Mortgage securitization expanded in the 1980s, when Fannie Mae, which previously had used debt to finance its mortgage purchases, began issuing its own mortgage-backed securities. At the same time, Freddie Mac was sold to shareholders, who encouraged Freddie to grow its market share. But even though Freddie and Fannie were shareholder-owned, investors treated their securities as if they were government-backed. This was known as an implicit government guarantee.

Attempts to create a market for private-label mortgage securities (PLMS) without any form of government guarantee were largely unsuccessful until the late 1990s. The innovations that finally got the PLMS market going were credit scoring and the collateralized debt obligation (CDO).

Before credit scoring was used in the mortgage market, there was no quantifiable difference between any two borrowers who were approved for loans. With credit scoring, the Wall Street firms assembling pools of mortgages could distinguish between a borrower with a very good score (750, as measured by the popular FICO system) and one with a more doubtful score (650).

Using CDOs, Wall Street firms were able to provide major institutional investors with insulation from default risk by concentrating that risk in other sub-securities (“tranches”) that were sold to investors who were more tolerant of risk. In fact, these basic CDOs were enhanced by other exotic mechanisms, such as credit default swaps, that reallocated mortgage default risk to institutions in which hardly any observer expected to find it, including AIG Insurance.

There was moral hazard in the mortgage securities market, as Freddie Mac and Fannie Mae sought profits and growth on behalf of shareholders, but investors in their securities expected (correctly, as it turned out) that the government would protect them against losses. Years before the crisis, critics grumbled that the mortgage giants exemplified privatized profits and socialized risks.6

There was cognitive failure in the assessment of default risk. Assembling CDOs and other exotic instruments required sophisticated statistical modeling. The most important driver of expectations for mortgage defaults is the path for house prices, and the steep, broad-based decline in home prices that took place in 2006-2009 was outside the range that some modelers allowed for.

Another source of cognitive failure is the “suits/geeks” divide. In many firms, the financial engineers (“geeks) understood the risks of mortgage-related securities fairly well, but their conclusions did not make their way to the senior management level (“suits”).

There was policy failure on the part of bank regulators. Their previous adverse experience was with the Savings and Loan Crisis, in which firms that originated and retained mortgages went bankrupt in large numbers. This caused bank regulators to believe that mortgage securitization, which took risk off the books of depository institutions, would be safer for the financial system. For the purpose of assessing capital requirements for banks, regulators assigned a weight of 100 percent to mortgages originated and held by the bank, but assigned a weight of only 20 percent to the bank’s holdings of mortgage securities issued by Freddie Mac, Fannie Mae, or Ginnie Mae. This meant that banks needed to hold much more capital to hold mortgages than to hold mortgage-related securities; that naturally steered them toward the latter.

In 2001, regulators broadened the low-risk umbrella to include AAA-rated and AA-rated tranches of private-label CDOs. This ruling helped to generate a flood of PLMS, many of them backed by sub-prime mortgage loans.7

By using bond ratings as a key determinant of capital requirements, the regulators effectively put the bond rating agencies at the center of the process of creating private-label CDOs. The rating agencies immediately became subject to both moral hazard and cognitive failure. The moral hazard came from the fact that the rating agencies were paid by the issuers of securities, who wanted the most generous ratings possible, rather than being paid by the regulators, who needed more rigorous ratings. The cognitive failure came from the fact that that models that the rating agencies used gave too little weight to potential scenarios of broad-based declines in house prices. Moreover, the banks that bought the securities were happy to see them rated AAA because the high ratings made the securities eligible for lower capital requirements on the part of the banks. Both sides, therefore, buyers and sellers, had bad incentives.

There was policy failure on the part of Congress. Officials in both the Clinton and Bush Administrations were unhappy with the risk that Freddie Mac and Fannie Mae represented to taxpayers. But Congress balked at any attempt to tighten regulation of the safety and soundness of those firms.8

The Inter-bank Lending Market

There are a number of mechanisms through which financial institutions make short-term loans to one another. In the United States, banks use the Federal Funds market to manage short-term fluctuations in reserves. Internationally, banks lend in what is known as the LIBOR market.

One of the least known and most important markets is for “repo,” which is short for “repurchase agreement.” As first developed, the repo market was used by government bond dealers to finance inventories of securities, just as an automobile dealer might finance an inventory of cars. A money-market fund might lend money for one day or one week to a bond dealer, with the loan collateralized by a low-risk long-term security.

In the years leading up to the crisis, some dealers were financing low-risk mortgage-related securities in the repo market. But when some of these securities turned out to be subject to price declines that took them out of the “low-risk” category, participants in the repo market began to worry about all repo collateral. Repo lending offers very low profit margins, and if an investor has to be very discriminating about the collateral backing a repo loan, it can seem preferable to back out of repo lending altogether. This, indeed, is what happened, in what economist Gary Gorton and others called a “run on repo.”9

Another element of institutional panic was “collateral calls” involving derivative financial instruments. Derivatives, such as credit default swaps, are like side bets. The buyer of a credit default swap is betting that a particular debt instrument will default. The seller of a credit default swap is betting the opposite.

In the case of mortgage-related securities, the probability of default seemed low prior to the crisis. Sometimes, buyers of credit default swaps were merely satisfying the technical requirements to record the underlying securities as AAA-rated. They could do this if they obtained a credit default swap from an institution that was itself AAA-rated. AIG was an insurance company that saw an opportunity to take advantage of its AAA rating to sell credit default swaps on mortgage-related securities. AIG collected fees, and its Financial Products division calculated that the probability of default was essentially zero. The fees earned on each transaction were low, but the overall profit was high because of the enormous volume. AIG’s credit default swaps were a major element in the expansion of shadow banking by non-bank financial institutions during the run-up to the crisis.

Late in 2005, AIG abruptly stopped writing credit default swaps, in part because its own rating had been downgraded below AAA earlier in the year for unrelated reasons. By the time AIG stopped selling credit default swaps on mortgage-related securities, it had outstanding obligations on 80 billion of underlying securities and was earning 1 billion a year in fees.10

Because AIG no longer had its AAA rating and because the underlying mortgage securities, while not in default, were increasingly shaky, provisions in the contracts that AIG had written allowed the buyers of credit default swaps to require AIG to provide protection in the form of low-risk securities posted as collateral. These “collateral calls” were like a margin call that a stock broker will make on an investor who has borrowed money to buy stock that subsequently declines in value. In effect, collateral calls were a run on AIG’s shadow bank.

These collateral calls were made when the crisis in the inter-bank lending market was near its height in the summer of 2008 and banks were hoarding low-risk securities. In fact, the shortage of low-risk securities may have motivated some of the collateral calls, as institutions like Deutsche Bank and Goldman Sachs sought ways to ease their own liquidity problems. In any event, AIG could not raise enough short-term funds to meet its collateral calls without trying to dump long-term securities into a market that had little depth to absorb them. It turned to Federal authorities for a bailout, which was arranged and creatively backed by the Federal Reserve, but at the cost of reducing the value of shares in AIG.

With repos and derivatives, there was moral hazard in that the traders and executives of the narrow units that engaged in exotic transactions were able to claim large bonuses on the basis of short-term profits. But the adverse long-term consequences were spread to the rest of the firm and, ultimately, to taxpayers.

There was cognitive failure in that the collateral calls were an unanticipated risk of the derivatives business. The financial engineers focused on the (remote) chances of default on the underlying securities, not on the intermediate stress that might emerge from collateral calls.

There was policy failure when Congress passed the Commodity Futures Modernization Act. This legislation specified that derivatives would not be regulated by either of the agencies with the staff most qualified to understand them. Rather than require oversight by the Securities and Exchange Commission or the Commodity Futures Trading Commission (which regulated market-traded derivatives), Congress decreed that the regulator responsible for overseeing each firm would evaluate its derivative position. The logic was that a bank that was using derivatives to hedge other transactions should have its derivative position evaluated in a larger context. But, as it happened, the insurance and bank regulators who ended up with this responsibility were not equipped to see the dangers at firms such as AIG.

There was also policy failure in that officials approved of securitization that transferred risk out of the regulated banking sector. While Federal Reserve Officials were praising the risk management of commercial banks,11risk was accumulating in the shadow banking sector (non-bank institutions in the financial system), including AIG insurance, money market funds, Wall Street firms such as Bear Stearns and Lehman Brothers, and major foreign banks. When problems in the shadow banking sector contributed to the freeze in inter-bank lending and in the market for asset-backed commercial paper, policy makers felt compelled to extend bailouts to satisfy the needs of these non-bank institutions for liquid assets.

Conclusion

In terms of the fire metaphor suggested earlier, in hindsight, we can see that the markets for housing, sub-prime mortgages, mortgage-related securities, and inter-bank lending were all highly flammable just prior to the crisis. Moral hazard, cognitive failures, and policy failures all contributed the combustible mix.

The crisis also reflects a failure of the economics profession. A few economists, most notably Robert Shiller,12warned that the housing market was inflated, as indicated by ratios of prices to rents that were high by historical standards. Also, when risk-based capital regulation was proposed in the wake of the Savings and Loan Crisis and the Latin American debt crisis, a group of economists known as the Shadow Regulatory Committee warned that these regulations could be manipulated. They recommended, instead, greater use of senior subordinated debt at regulated financial institutions.13Many economists warned about the incentives for risk-taking at Freddie Mac and Fannie Mae.14

But even these economists failed to anticipate the 2008 crisis, in large part because economists did not take note of the complex mortgage-related securities and derivative instruments that had been developed. Economists have a strong preference for parsimonious models, and they look at financial markets through a lens that includes only a few types of simple assets, such as government bonds and corporate stock. This approach ignores even the repo market, which has been important in the financial system for over 40 years, and, of course, it omits CDOs, credit default swaps and other, more recent innovations.

Financial intermediaries do not produce tangible output that can be measured and counted. Instead, they provide intangible benefits that economists have never clearly articulated. The economics profession has a long way to go to catch up with modern finance.

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About the Author

Arnold Kling was an economist with the Federal Reserve Board and with the Federal Home Loan Mortgage Corporation before launching one of the first Web-based businesses in 1994.  His most recent books areSpecialization and Trade and The Three Languages of Politics. He earned his Ph.D. in economics from the Massachusetts Institute of Technology.

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Footnotes

1

“A desperate plea – then race for a deal before ‘sucker goes down’” The Guardian, September 26, 2008. https://www.theguardian.com/business/2008/sep/27/wallstreet.useconomy1

 

2

The report and dissents of the Financial Crisis Inquiry Commission can be found at https://fcic.law.stanford.edu/

3

See Stefania Albanesi, Giacomo De Giorgi, and Jaromir Nosal 2017, “Credit Growth and the Financial Crisis: A New Narrative” NBER working paper no. 23740. http://www.nber.org/papers/w23740

 

4

Karl E. Case and Robert J. Shiller 2003, “Is there a Bubble in the Housing Market?” Cowles Foundation Paper 1089 http://www.econ.yale.edu/shiller/pubs/p1089.pdf

 

5

Edward M. Gramlich 2004, “Subprime Mortgage Lending: Benefits, Costs, and Challenges,” Federal Reserve Board speeches. https://www.federalreserve.gov/boarddocs/speeches/2004/20040521/

 

6

For example, in 1999, Treasury Secretary Lawrence Summers said in a speech, “Debates about systemic risk should also now include government-sponsored enterprises.” See Bethany McLean and Joe Nocera 2010, All the Devils are Here: The Hidden History of the Financial Crisis Portfolio/Penguin Press. The authors write that Federal Reserve Chairman Alan Greenspan was also, like Summers, disturbed by the moral hazard inherent in the GSEs.

 

7

Jeffrey Friedman and Wladimir Kraus 2013, Engineering the Financial Crisis: Systemic Risk and the Failure of Regulation, University of Pennsylvania Press.

 

8

See McLean and Nocera, All the Devils are Here

 

9

Gary Gorton, Toomas Laarits, and Andrew Metrick 2017, “The Run on Repo and the Fed’s Response,” Stanford working paper. https://www.gsb.stanford.edu/sites/gsb/files/fin_11_17_gorton.pdf

 

10

Talking Points Memo 2009, “The Rise and Fall of AIG’s Financial Products Unit” https://talkingpointsmemo.com/muckraker/the-rise-and-fall-of-aig-s-financial-products-unit

 

11

Chairman Ben S. Bernanke 2006, “Modern Risk Management and Banking Supervision,” Federal Reserve Board speeches. https://www.federalreserve.gov/newsevents/speech/bernanke20060612a.htm

 

12

National Public Radio 2005, “Yale Professor Predicts Housing ’Bubble’ Will Burst” https://www.npr.org/templates/story/story.php?storyId4679264

 

13

Shadow Financial Regulatory Committee 2001, “The Basel Committee’s Revised Capital Accord Proposal” https://www.bis.org/bcbs/ca/shfirect.pdf

14

See the discussion in Viral V. Acharya, Matthew Richardson, Stijn Van Nieuwerburgh and Lawrence J. White 2011, Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance, Princeton University Press.

 

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Christopher Sims

Christopher Sims was awarded, along with Thomas Sargent, the 2011 Nobel Prize in Economic Sciences. The Nobel committee cited their “empirical research on cause and effect in the macroeconomy.” The economists who spoke at the press conference announcing the award emphasized Sargent’s and Sims’ analysis of role of people’s expectations.

One of Sims’s earliest famous contributions was his work on money-income causality, which was cited by the Nobel committee. Money and income move together, but which causes which? Milton Friedman argued that changes in the money supply caused changes in income, noting that the supply of money often rises before income rises. Keynesians such as James Tobin argued that changes in income caused changes in the amount of money. Money seems to move first, but causality, said Tobin and others, still goes the other way: people hold more money when they expect income to rise in the future.

Which view is true? In 1972 Sims applied Clive Granger’s econometric test of causality. On Granger’s definition one variable is said to cause another variable if knowledge of the past values of the possibly causal variable helps to forecast the effect variable over and above the knowledge of the history of the effect variable itself. Implementing a test of this incremental predictability, Sims concluded “[T]he hypothesis that causality is unidirectional from money to income [Friedman’s view] agrees with the postwar U.S. data, whereas the hypothesis that causality is unidirectional from income to money [Tobin’s view] is rejected.”

Sims’s influential article “Macroeconomics and Reality” was a criticism of both the usual econometric interpretation of large-scale Keynesian econometric models and ofRobert Lucas’s influential earlier criticism of these Keynesian models (the so-called Lucas critique). Keynesian econometricians had claimed that with sufficiently accurate theoretical assumptions about the structure of the economy, correlations among the macroeconomic variables could be used to measure the strengths of various structural connections in the economy. Sims argued that there was no basis for thinking that these theoretical assumptions were sufficiently accurate. Such so-called “identifying assumptions” were, Sims said, literally “incredible.” Lucas, on the other hand, had not rejected the idea of such identification. Rather he had pointed out that, if people held “rational expectations” – that is, expectations that, though possibly incorrect, did not deviate on average from what actually occurs in a correctable, systematic manner – then failing to account for them would undermine the stability of the econometric estimates and render the macromodels useless for policy analysis. Lucas and his New Classical followers argued that in forming their expectations people take account of the rules implicitly followed by monetary and fiscal policymakers; and, unless those rules were integrated into the econometric model, every time the policymakers adopted a new policy (i.e., new rules), the estimates would shift in unpredictable ways.

While rejecting the structural interpretation of large-scale macromodels, Sims did not reject the models themselves, writing: “[T]here is no immediate prospect that large-scale macromodels will disappear from the scene, and for good reason: they are useful tools in forecasting and policy analysis.” Sims conceded that the Lucas critique was correct in those cases in which policy regimes truly changed. But he argued that such regime changes were rare and that most economic policy was concerned with the implementation of a particular policy regime. For that purpose, the large-scale macromodels could be helpful, since what was needed for forecasting was a model that captured the complex interrelationships among variables and not one that revealed the deeper structural connections.

In the same article, Sims proposed an alternative to large-scale macroeconomic models, the vector autoregression (or VAR). In Sims’s view, the VAR had the advantages of the earlier macromodels, in that it could capture the complex interactions among a relatively large number of variables needed for policy analysis and yet did not rely on as many questionable theoretical assumptions. With subsequent developments by Sims and others, the VAR became a major tool of empirical macroeconomic analysis.

Sims has also suggested that sticky prices are caused by “rational inattention,” an idea imported from electronic communications. Just as computers do not access information on the Internet infinitely fast (but rather, in bits per second), individual actors in an economy have only a finite ability to process information. This delay produces some sluggishness and randomness, and allows for more accurate forecasts than conventional models, in which people are assumed to be highly averse to change.

Sims’s recent work has focused on the fiscal theory of the price level, the view that inflation in the end is determined by fiscal problems—the overall amount of debt relative to the government’s ability to repay it—rather than by the split in government debt between base money and bonds. In 1999, Sims suggested that the fiscal foundations of the European Monetary Union were “precarious” and that a fiscal crisis in one country “would likely breed contagion effects in other countries.” The Greek financial crisis about a decade later seemed to confirm his prediction.

Christopher Sims earned his B.A. in mathematics in 1963 and his Ph.D. in economics in 1968, both from Harvard University. He taught at Harvard from 1968 to 1970, at the University of Minnesota from 1970 to 1990, at Yale University from 1990 to 1999, and at Princeton University from 1999 to the present. He has been a Fellow of the Econometric Society since 1974, a member of the American Academy of Arts and Sciences since 1988, a member of the National Academy of Sciences since 1989, President of the Econometric Society (1995), and President of the American Economic Association (2012). He has been a Visiting Scholar for the Federal Reserve Banks of Atlanta, New York, and Philadelphia off and on since 1994.

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Selected Works

1. . “Money, Income, and Causality.” American Economic Review 62: 4 (September): 540-552.

2. . “Macroeconomics and Reality.” Econometrica 48: 1 (January): 1-48.

1990 (with James H. Stock and Mark W. Watson). “Inference in Linear Time Series Models with some Unit Roots.” Econometrica 58: 1 (January): 113-144.

1. . “The Precarious Fiscal Foundations of EMU.” De Economist 147:4 (December): 415-436.

2. . “Implications of Rational Inattention.” Journal of Monetary Economics 50: 3 (April): 665–690.

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Gordon Tullock

Gordon Tullock, along with his colleague James M. Buchanan, was a founder of the School of Public Choice. Among his contributions to public choice were his study of bureaucracy, his early insights on rent seeking, his study of political revolutions, his analysis of dictatorships, and his analysis of incentives and outcomes in foreign policy. Tullock also contributed to the study of optimal organization of research, was a strong critic of common law, and did work on evolutionary biology. He was arguably one of the ten or so most influential economists of the last half of the twentieth century. Many economists believe that Tullock deserved to share Buchanan’s 1986 Nobel Prize or even deserved a Nobel Prize on his own.

One of Tullock’s early contributions to public choice was The Calculus of Consent: Logical Foundations of Constitutional Democracy, co-authored with Buchanan in 1962. In that path-breaking book, the authors assume that people seek their own interests in the political system and then consider the results of various rules and political structures. One can think of their book as a political economist’s version of Montesquieu.

One of the most masterful sections of The Calculus of Consent is the chapter in which the authors, using a model formulated by Tullock, consider what good decision rules would be for agreeing to have someone in government make a decision for the collective. An individual realizes that if only one person’s consent is required, and he is not that person, he could have huge costs imposed on him. Requiring more people’s consent in order for government to take action reduces the probability that that individual will be hurt. But as the number of people required to agree rises, the decision costs rise. In the extreme, if unanimity is required, people can game the system and hold out for a disproportionate share of benefits before they give their consent. The authors show that the individual’s preferred rule would be one by which the costs imposed on him plus the decision costs are at a minimum. That preferred rule would vary from person to person. But, they note, it would be highly improbable that the optimal decision rule would be one that requires a simple majority. They write, “On balance, 51 percent of the voting population would not seem to be much preferable to 49 percent.” They suggest further that the optimal rule would depend on the issues at stake. Because, they note, legislative action may “produce severe capital losses or lucrative capital gains” for various groups, the rational person, not knowing his own future position, might well want strong restraints on the exercise of legislative power.

Tullock’s part of The Calculus of Consent was a natural outgrowth of an unpublished manuscript written in the 1950s that later became his 1965 book, The Politics of Bureaucracy. Buchanan, reminiscing about that book, summed up Tullock’s approach and the book’s significance:

The substantive contribution in the manuscript was centered on the hypothesis that, regardless of role, the individual bureaucrat responds to the rewards and punishments that he confronts. This straightforward, and now so simple, hypothesis turned the whole post-Weberian quasi-normative approach to bureaucracy on its head. . . . The economic theory of bureaucracy was born.1

Buchanan noted in his reminiscence that Tullock’s “fascinating analysis” was “almost totally buried in an irritating personal narrative account of Tullock’s nine-year experience in the foreign service hierarchy.” Buchanan continued: “Then, as now, Tullock’s work was marked by his apparent inability to separate analytical exposition from personal anecdote.” Translation: Tullock learned from his experiences. As a Foreign Service officer with the U.S. State Department for nine years Tullock learned, up close and “personal,” how dysfunctional bureaucracy can be. In a later reminiscence, Tullock concluded:

A 90 per cent cut-back on our Foreign Service would save money without really damaging our international relations or stature.2

Tullock made many other contributions in considering incentives within the political system. Particularly noteworthy was his work on political revolutions and on dictatorships.

Consider, first, political revolutions. Any one person’s decision to participate in a revolution, Tullock noted, does not much affect the probability that the revolution will succeed. Therefore, each person’s actions do not much affect his expected benefits from revolution. On the other hand, a ruthless head of government can individualize the costs by heavily punishing those who participate in a revolution. So anyone contemplating participating in a revolution will be comparing heavy individual costs with small benefits that are simply his pro rata share of the overall benefits. Therefore, argued Tullock, for people to participate, they must expect some large benefits that are tied to their own participation, such as a job in the new government. That would explain an empirical regularity that Tullock noted—namely that “in most revolutions, the people who overthrow the existing government were high officials in that government before the revolution.”

This thinking carried over to his work on autocracy. In Autocracy, Tullock pointed out that in most societies at most times, governments were not democratically elected but were autocracies: they were dictatorships or kingdoms. For that reason, he argued, analysts should do more to understand them. Tullock’s book was his attempt to get the discussion started. In a chapter titled “Coups and Their Prevention,” Tullock argued that one of the autocrat’s main challenges is to survive in office. He wrote: “The dictator lives continuously under the Sword of Damocles and equally continuously worries about the thickness of the thread.” Tullock pointed out that a dictator needs his countrymen to believe not that he is good, just, or ordained by God, but that those who try to overthrow him will fail.”

Among modern economists, Tullock was the earliest discoverer of the concept of “rent seeking,” although he did not call it that. Before his work, the usual measure of the deadweight loss from monopoly was the part of the loss in consumer surplus that did not increase producer surplus for the monopolist. Consumer surplus is the maximum amount that consumers are willing to pay minus the amount they actually pay; producer surplus, also called “economic rent,” is the amount that producers get minus the minimum amount for which they would be willing to produce. Harberger3 had estimated that for the U.S. economy in the 1950s, that loss was very low, on the order of 0.1 percent of Gross National Product. In “The Welfare Cost of Tariffs, Monopolies, and Theft,” Tullock argued that this method understated the loss from monopoly because it did not take account of the investment of the monopolist—and of others trying to be monopolists—in becoming monopolists. These investments in monopoly are a loss to the economy. Tullock also pointed out that those who seek tariffs invest in getting those tariffs, and so the standard measure of the loss from tariffs understated the loss. His analysis, as the tariff example illustrates, applies more to firms seeking special privileges from government than to private attempts to monopolize via the free market because private attempts often lead, as if by an invisible hand, to increased competition.”

One of Tullock’s most important insights in public choice was in a short article in 1975 titled “The Transitional Gains Trap.” He noted that even though rent seeking often leads to big gains for the rent seekers, those gains are capitalized in asset prices, which means that buyers of the assets make a normal return on the asset. So, for example, if the government requires the use of ethanol in gasoline, owners of land on which corn is grown will find that their land is worth more because of the regulatory requirement. (Ethanol in the United States is produced from corn.) They gain when the regulation is first imposed. But when they sell the land, the new owner pays a price equal to the present value of the stream of the net profits from the land. So the new owner doesn’t get a supra-normal rate of return from the land. In other words, the owner at the time that the regulation was imposed got “transitional gains,” but the new owner does not. This means that the new owner will suffer a capital loss if the regulation is removed and will fight hard to keep the regulation in place, arguing, correctly, that he paid for those gains. That makes repealing the regulation more difficult than otherwise. Tullock notes that, therefore, we should try hard to avoid getting into these traps because they are hard to get out of.

Tullock was one of the few public choice economists to apply his tools to foreign policy. In Open Secrets of American Foreign Policy, he takes a hard-headed look at U.S. foreign policy rather than the romantic “the United States is the good guys” view that so many Americans take. For example, he wrote of the U.S. government’s bombing of Serbia under President Bill Clinton:

[T]he bombing campaign was a clear-cut violation of the United Nations Charter and hence, should be regarded as a war crime. It involved the use of military forces without the sanction of the Security Council and without any colorable claim of self-defense. Of course, it was not a first—we [the U.S. government] had done the same thing in Vietnam, Grenada and Panama.

Possibly Tullock’s most underappreciated contributions were in the area of methodology and the economics of research. About a decade after spending six months with philosopher Karl Popper at the Center for Advanced Studies in Palo Alto, Tullock published The Organization of Inquiry. In it, he considered why scientific discovery in both the hard sciences and economics works so well without any central planner, and he argued that centralized funding by government would slow progress. After arguing that applied science is generally more valuable than pure science, Tullock wrote:

Nor is there any real justification for the general tendency to consider pure research as somehow higher and better than applied research. It is certainly more pleasant to engage in research in fields that strike you as interesting than to confine yourself to fields which are likely to be profitable, but there is no reason why the person choosing the more pleasant type of research should be considered more noble.4

In Tullock’s view, a system of prizes for important discoveries would be an efficient way of achieving important breakthroughs. He wrote:

As an extreme example, surely offering a reward of 1 billion for the first successful ICBM would have resulted in both a large saving of money for the government and much faster production of this weapon.5

Tullock was born in Rockford, Illinois and was an undergrad at the University of Chicago from 1940 to 1943. His time there was interrupted when he was drafted into the U.S. Army. During his time at Chicago, though, he completed a one-semester course in economics taught by Henry Simons. After the war, he returned to the University of Chicago Law School, where he completed the J.D. degree in 1947. He was briefly with a law firm in 1947 before going into the Foreign Service, where he worked for nine years. He was an economics professor at the University of South Carolina (1959-1962), the University of Virginia (1962-1967), Rice University (1968-1969), the Virginia Polytechnic Institute and State University (1968-1983), George Mason University (1983-1987), the University of Arizona (1987-1999), and again at George Mason University (1999-2008). In 1966, he started the journal Papers in Non-Market Decision Making, which, in 1969, was renamed Public Choice.

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Selected Works

 

1. . The Calculus of Consent. (Co-authored with James M. Buchanan.) Ann Arbor, Michigan: University of Michigan Press.

2. . The Politics of Bureaucracy. Public Affairs Press. Washington, D.C.: Public Affairs Press.

3. . The Organization of Inquiry. Durham, North Carolina: Duke University Press.

4. . “The Welfare Costs of Tariffs, Monopolies, and Theft,” Western Economic Journal, 5:3 (June): 224-232.

5. . Toward a Mathematics of Politics. Ann Arbor, Michigan: University of Michigan Press.

6. . “The Paradox of Revolution.” Public Choice. Vol. 11. Fall: 89-99.

1975: “The Transitional Gains Trap.” Bell Journal of Economics, 6:2 (Autumn): 671-678.

1987: Autocracy. Hingham, Massachusetts: Kluwer Academic Publishers.

1. . Open Secrets of American Foreign Policy. New Jersey: World Scientific Publishing Co.

 

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Footnotes

James M. Buchanan. 1987. The qualities of a natural economist. In Charles K. Rowley, (Ed.) (1987). Democracy and public choice. Oxford and New York: Basil Blackwell, 9-19.

 

Gordon Tullock. 2009. Memories of an unexciting life. Unfinished and unpublished manuscript. Tucson, 2009. Quoted in Charles K. Rowley and Daniel Houser. “The Life and Times of Gordon Tullock.” 2011. George Mason University. Department of Economics. Paper No. 11-56. December 20.

 

Arnold C. Harberger. 1954 “Monopoly and Resource Allocation.” American Economic Review. 44(2): 77-87.

 

Tullock. 1966. P. 14.

 

Tullock. 1966. P. 168.

 

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Division of Labor

Division of labor combines specialization and the partition of a complex production task into several, or many, sub-tasks. Its importance in economics lies in the fact that a given number of workers can produce far more output using division of labor compared to the same number of workers each working alone. Interestingly, this is true even if those working alone are expert artisans. The production increase has several causes. According to Adam Smith, these include increased dexterity from learning, innovations in tool design and use as the steps are defined more clearly, and savings in wasted motion changing from one task to another.

Though the scientific understanding of the importance of division of labor is comparatively recent, the effects can be seen in most of human history. It would seem that exchange can arise only from differences in taste or circumstance. But division of labor implies that this is not true. In fact, even a society of perfect clones would develop exchange, because specialization alone is enough to reward advances such as currency, accounting, and other features of market economies.

In the early 1800s, David Ricardo developed a theory of comparative advantage as an explanation for the origins of trade. And this explanation has substantial power, particularly in a pre-industrial world. Assume, for example, that England is suited to produce wool, while Portugal is suited to produce wine. If each nation specializes, then total consumption in the world, and in each nation, is expanded. Interestingly, this is still true if one nation is better at producing both commodities: even the less productive nation benefits from specialization and trade.

In a world with industrial production based on division of labor, however, comparative advantage based on weather and soil conditions becomes secondary. Ricardo himself recognized this in his broader discussion of trade, as Meoqui points out. The reason is that division of labor produces a cost advantage where none existed before—an advantage based simply on specialization. Consequently, even in a world without comparative advantage, division of labor would create incentives for specialization and exchange.

Origins

The Neolithic Revolution, with its move to fixed agriculture and greater population densities, fostered specialization in both production of consumer goods and military protection. As Plato put it:

A State [arises] out of the needs of mankind; no one is self-sufficing, but all of us have many wants… Then, as we have many wants, and many persons are needed to supply them, one takes a helper… and another… [W]hen these partners and helpers are gathered together in one habitation the body of inhabitants is termed a State… And they exchange with one another, and one gives, and another receives, under the idea that the exchange will be for their good. (The Republic, Book II)

This idea of the city-state, or polis, as a nexus of cooperation directed by the leaders of the city is a potent tool for the social theorist. It is easy to see that the extent of specialization was limited by the size of the city: a clan has one person who plays on a hollow log with sticks; a moderately sized city might have a string quartet; and a large city could support a symphony.

One of the earliest sociologists, Muslim scholar Ibn Khaldun (1332-1406), also emphasized what he called “cooperation” as a means of achieving the benefits of specialization:

The power of the individual human being is not sufficient for him to obtain (the food) he needs, and does not provide him with as much food as he requires to live. Even if we assume an absolute minimum of food –that is, food enough for one day, (a little) wheat, for instance – that amount of food could be obtained only after much preparation such as grinding, kneading, and baking. Each of these three operations requires utensils and tools that can be provided only with the help of several crafts, such as the crafts of the blacksmith, the carpenter, and the potter. Assuming that a man could eat unprepared grain, an even greater number of operations would be necessary in order to obtain the grain: sowing and reaping, and threshing to separate it from the husks of the ear. Each of these operations requires a number of tools and many more crafts than those just mentioned. It is beyond the power of one man alone to do all that, or (even) part of it, by himself. Thus, he cannot do without a combination of many powers from among his fellow beings, if he is to obtain food for himself and for them. Through cooperation, the needs of a number of persons, many times greater than their own (number), can be satisfied. [From Muqaddimah (Introduction), First Prefatory Discussion in chapter 1; parenthetical expression in original in Rosenthal translation]

This sociological interpretation of specialization as a consequence of direction, limited by the size of the city, later motivated scholars such as Emile Durkheim (1858-1917) to recognize the central importance of division of labor for human flourishing.

Smith’s Insight

It is common to say that Adam Smith “invented” or “advocated” division of labor. Such claims are simply mistaken, on several grounds (see, for a discussion, Kennedy 2008). Smith described how decentralized market exchange fosters division of labor among cities or across political units, rather than just within them as previous thinkers had done. Smith had two key insights: First, division of labor would be powerful even if all human beings were identical, because differences in productive capacity are learned. Smith’s parable of the “street porter and the philosopher” illustrates the depth of this insight. As Smith put it:

[T]he very different genius which appears to distinguish men of different professions, when grown up to maturity, is not upon many occasions so much the cause, as the effect of the division of labour. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature, as from habit, custom, and education. (WoN, V. 1, Ch 2; emphasis in original.)

Second, the division of labor gives rise to market institutions and expands the extent of the market. Exchange relations relentlessly push against borders and expand the effective locus of cooperation. The benefit to the individual is that first dozens, then hundreds, and ultimately millions, of other people stand ready to work for each of us, in ways that are constantly being expanded into new activities and new products.

Smith gives an example—the pin factory—that has become one of the central archetypes of economic theory. As Munger (2007) notes, Smith divides pin-making into 18 operations. But that number is arbitrary: labor is divided into the number of operations that fit the extent of the market. In a small market, perhaps three workers, each performing several different operations, could be employed. In a city or small country, as Smith saw, 18 different workers might be employed. In an international market, the optimal number of workers (or their equivalent in automated steps) would be even larger.

The interesting point is that there would be constant pressure on the factory to (a) expand the number of operations even more, and to automate them through the use of tools and other capital; and to (b) expand the size of the market served with consequently lower-cost pins so that the expanded output could be sold. Smith recognized this dynamic pressure in the form of what can only be regarded today as a theorem, the title of Chapter 3 in Book I of the Wealth of Nations: “That the Division of Labor is Limited by the Extent of the Market.” George Stigler treated this claim as a testable theorem in his 1951 article, and developed its insights in the context of modern economics.

Still, the full importance of Smith’s insight was not recognized and developed until quite recently. James Buchanan presented the starkest description of the implications of Smith’s theory (James Buchanan and Yong Yoon, 2002). While the bases of trade and exchange can be differences in tastes or capacities, market institutions would develop even if such differences were negligible. The Smithian conception of the basis for trade and the rewards from developing market institutions is more general and more fundamental than the simple version implied by deterministic comparative advantage.

Division of labor is a hopeful doctrine. Nearly any nation, regardless of its endowment of natural resources, can prosper simply by developing a specialization. That specialization might be determined by comparative advantage, lying in climate or other factors, of course. But division of labor alone is sufficient to create trading opportunities and the beginnings of prosperity. By contrast, nations that refuse the opportunity to specialize, clinging to mercantilist notions of independence and economic self-sufficiency, doom themselves and their populations to needless poverty.

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About the Author

Michael Munger is the Director of the PPE Program at Duke University.

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Further Reading

Buchanan, James, and Yong Yoon. 2002. “Globalization as Framed by the Two Logics of Trade,” The Independent Review, 6(3): 399-405.

Durkheim, Emile, 1984. Division of Labor in Society. New York: MacMillan.

Kennedy, Gavin. 2008. “Basic Errors About the Role of Adam Smith.” April 2: http://adamsmithslostlegacy.blogspot.com/2008/04/basic-errors-about-role-of-adam-smith.html

Khaldun, Ibn. 1377. Muqaddimah (Introductory) http://www.muslimphilosophy.com/ik/Muqaddimah/

Morales Meoqui, Jorge , 2015. Ricardo’s numerical example versus Ricardian trade model: A comparison of two distinct notions of comparative advantage DOI: 10.13140/RG.2.1.2484.5527/1 Link: https://www.researchgate.net/publication/283206070_Ricardos_numerical_example_versus_Ricardian_trade_model_A_comparison_of_two_distinct_notions_of_comparative_advantage

Munger, Michael. 2007. “I’ll Stick With These: Some Sharp Observations on the Division of Labor.” Indianapolis, Liberty Fund. http://www.econlib.org/library/Columns/y2007/Mungerpins.html

Plato, n.d. The Republic. Translated by Benjamin Jowett. http://classics.mit.edu/Plato/republic.html

Roberts, Russell. 2006. “Treasure Island: The Power of Trade. Part II. How Trade Transforms Our Standard of Living.” Indianapolis, Liberty Fund. http://www.econlib.org/library/Columns/y2006/Robertsstandardofliving.html

Smith, Adam. 1759/1853. (Revised Edition). The Theory of Moral Sentiments, New Edition. With a biographical and critical Memoir of the Author, by Dugald Stewart (London: Henry G. Bohn, 1853). 7/27/2015. http://oll.libertyfund.org/titles/2620

Smith, Adam. 1776/1904. An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith, edited with an Introduction, Notes, Marginal Summary and an Enlarged Index by Edwin Cannan (London: Methuen, 1904). Vol. 1. 7/27/2015. http://oll.libertyfund.org/titles/237

Stigler, George. 1951. “The Division of Labor is Limited by the Extent of the Market.” Journal of Political Economy. 59(3): 185-193

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Hoover’s Economic Policies

When it was all over, I once made a list of New Deal ventures begun during Hoover’s years as Secretary of Commerce and then as president. . . . The New Deal owed much to what he had begun.1 —FDR advisor Rexford G. Tugwell

Many historians, most of the general public, and even many economists think of Herbert Hoover, the president who preceded Franklin D. Roosevelt, as a defender of laissez-faire economic policy. According to this view, Hoover’s dogmatic commitment to small government led him to stand by and do nothing while the economy collapsed in the wake of the 1929 stock market crash. The reality is quite different. Far from being a bystander, Hoover actively intervened in the economy, advocating and implementing polices that were quite similar to those that Franklin Roosevelt later implemented. Moreover, many of Hoover’s interventions, like those of his successor, caused the great depression to be “great”—that is, to last a long time.

Hoover’s early career

Hoover, a very successful mining engineer, thought that the engineer’s focus on efficiency could enable government to play a larger and more constructive role in the economy. In 1917, he became head of the wartime Food Administration, working to reduce American food consumption. Many Democrats, including FDR, saw him as a potential presidential candidate for their party in the 1920s. For most of the 1920s, Hoover was Secretary of Commerce under Republican Presidents Harding and Coolidge. As Commerce Secretary during the 1920-21 recession, Hoover convened conferences between government officials and business leaders as a way to use government to generate “cooperation” rather than individualistic competition. He particularly liked using the “cooperation” that was seen during wartime as an example to follow during economic crises. In contrast to Harding’s more genuine commitment to laissez-faire, Hoover began one 1921 conference with a call to “do something” rather than nothing. That conference ended with a call for more government planning to avoid future depressions, as well as using public works as a solution once they started.2 Pulitzer-Prize winning historian David Kennedy summarized Hoover’s work in the 1920-21 recession this way: “No previous administration had moved so purposefully and so creatively in the face of an economic downturn. Hoover had definitively made the point that government should not stand by idly when confronted with economic difficulty.”3 Harding, and later Coolidge, rejected most of Hoover’s ideas. This may well explain why the 1920-21 recession, as steep as it was, was fairly short, lasting 18 months.

Interestingly, though, in his role as Commerce Secretary, Hoover created a new government program called “Own Your Own Home,” which was designed to increase the level of homeownership. Hoover jawboned lenders and the construction industry to devote more resources to homeownership, and he argued for new rules that would allow federally chartered banks to do more residential lending. In 1927, Congress complied, and with this government stamp of approval and the resources made available by Federal Reserve expansionary policies through the decade, mortgage lending boomed. Not surprisingly, this program became part of the disaster of the depression, as bank failures dried up sources of funds, preventing the frequent refinancing that was common at the time, and high unemployment rates made the government-encouraged mortgages unaffordable. The result was a large increase in foreclosures.4

The Hoover presidency

Hoover did not stand idly by after the depression began. To fight the rapidly worsening depression, Hoover extended the size and scope of the federal government in six major areas: (1) federal spending, (2) agriculture, (3) wage policy, (4) immigration, (5) international trade, and (6) tax policy.

Consider federal government spending. (See Fiscal Policy.) Federal spending in the 1929 budget that Hoover inherited was 3.1 billion. He increased spending to 3.3 billion in 1930, 3.6 billion in 1931, and 4.7 billion and 4.6 billion in 1932 and 1933, respectively, a 48% increase over his four years. Because this was a period of deflation, the real increase in government spending was even larger: The real size of government spending in 1933 was almost double that of 1929.5 The budget deficits of 1931 and 1932 were 52.5% and 43.3% of total federal expenditures. No year between 1933 and 1941 under Roosevelt had a deficit that large.6 In short, Hoover was no defender of “austerity” and “budget cutting.”

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Figure 1

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Shortly after the stock market crash in October 1929, Hoover extended federal control over agriculture by expanding the reach of the Federal Farm Board (FFB), which had been created a few months earlier.7 The idea behind the FFB was to make government-funded loans to farm cooperatives and create “stabilization corporations” to keep farm prices up and deal with surpluses. In other words, it was a cartel plan. That fall, Hoover pushed the FFB into full action, lending to farmers all over the country and otherwise subsidizing farming in an attempt to keep prices up. The plan failed miserably, as subsidies encouraged farmers to grow more, exacerbating surpluses and eventually driving prices way down. As more farms faced dire circumstances, Hoover proposed the further anti-market step of paying farmers not to grow.

On wages, Hoover revived the business-government conferences of his time at the Department of Commerce by summoning major business leaders to the White House several times that fall. He asked them to pledge not to reduce wages in the face of rising unemployment. Hoover believed, as did a number of intellectuals at the time, that high wages caused prosperity, even though the true causation is from capital accumulation to increased labor productivity to higher wages. He argued that if major firms cut wages, workers would not have the purchasing power they needed to buy the goods being produced. As most depressions involve falling prices, cutting wages to match falling prices would have kept purchasing power constant. What Hoover wanted amounted to an increase in real wages, as constant nominal wages would be able to purchase more goods at falling prices. Presumably out of fear of the White House or, perhaps, because it would keep the unions quiet, industrial leaders agreed to this proposal. The result was rapidly escalating unemployment, as firms quickly realized that they could not continue to employ as many workers when their output prices were falling and labor costs were constant.8

Of all of the government failures of the Hoover presidency—excluding the actions of the Federal Reserve between 1929 and 1932, over which he had little to no influence—his attempt to maintain wages was the most damaging. Had he truly believed in laissez-faire, Hoover would not have intervened in the private sector that way. Hoover’s high-wage policy was a clear example of his lack of confidence in the corrective forces of the market and his willingness to use governmental power to fight the depression.

Later in his presidency, Hoover did more than just jawbone to keep wages up. He signed two pieces of labor legislation that dramatically increased the role of government in propping up wages and giving monopoly protection to unions. In 1931, he signed the Davis-Bacon Act, which mandated that all federally funded or assisted construction projects pay the “prevailing wage” (i.e., the above market-clearing union wage). The result of this move was to close out non-union labor, especially immigrants and non-whites, and drive up costs to taxpayers. A year later, he signed the Norris-LaGuardia Act, whose five major provisions each enshrined special provisions for unions in the law, such as prohibiting judges from using injunctions to stop strikes and making union-free contracts unenforceable in federal courts.9 Hoover’s interventions into the labor market are further evidence of his rejection of laissez-faire.

Two other areas that Hoover intervened in aggressively were immigration and international trade. One of the lesser-known policy changes during his presidency was his near halt to immigration through an Executive Order in September 1930. His argument was that blocking immigration would preserve the jobs and wages of American citizens against competition from low-wage immigrants. Immigration fell to a mere 10 to 15% of the allowable quota of visas for the five-month period ending February 28, 1931. Once again, Hoover was unafraid to intervene in the economic decisions of the private sector by preventing the competitive forces of the global labor market from setting wages.10

Even those with only a casual knowledge of the Great Depression will be familiar with one of Hoover’s major policy mistakes—his promotion and signing of the Smoot-Hawley tariff in 1930. This law increased tariffs significantly on a wide variety of imported goods, creating the highest tariff rates in U.S. history. While economist Douglas Irwin has found that Smoot-Hawley’s effects were not as large as often thought, they still helped cause a decline in international trade, a decline that contributed to the worsening worldwide depression.

Most of these policies continued and many expanded throughout 1931, with the economy worsening each month. By the end of the year, Hoover decided that more drastic action was necessary, and on December 8, he addressed Congress and offered proposals that historian David Kennedy refers to as “Hoover’s second program, ” and that has also been called “The Hoover New Deal.”11 His proposals included:

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The Reconstruction Finance Corporation to lend tax dollars to banks, firms and others institutions in need.

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A Home Loan Bank to provide government help to the construction sector.

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Congressional legalization of Hoover’s executive order that had blocked immigration.

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Direct loans to state governments for spending on relief for the unemployed.

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More aid to Federal Land Banks.

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Creating a Public Works Administration that would both better coordinate Federal public works and expand them.

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More vigorous enforcement of antitrust laws to end “destructive competition” in a variety of industries, as well as supporting work-sharing programs that would supposedly reduce unemployment.

On top of these spending proposals, most of which were approved in one form or another, Hoover proposed, and Congress approved, the largest peacetime tax increase in U.S. history. The Revenue Act of 1932 increased personal income taxes dramatically, but also brought back a variety of excise taxes that had been used during World War I. The higher income taxes involved an increase of the standard rate from a range of 1.5 to 5% to a range of 4 to 8%. On top of that increase, the Act placed a large surtax on higher-income earners, leading to a total tax rate of anywhere from 25 to 63%. The Act also raised the corporate income tax along with several taxes on other forms of income and wealth.

Whether or not Hoover’s prescriptions were the right medicine—and the evidence suggests that they were not—his programs were a fairly aggressive use of government to address the problems of the depression.12 These programs were hardly what one would expect from a man devoted to “laissez-faire” and accused of doing nothing while the depression worsened.

The views of contemporaries and modern historians

The myth of Hoover as a defender of laissez-faire persists, despite the fact that his contemporaries clearly understood that he made aggressive use of government to fight the recession. Indeed, Hoover’s own statements made clear that he recognized his aggressive use of intervention. The myth also persists in spite of the widespread recognition by modern historians that the Hoover presidency was anything but an era of laissez-faire.

According to Hoover’s Secretary of State, Henry Stimson, Hoover argued that balancing the budget was a mistake: “The President likened it to war times. He said in war times no one dreamed of balancing the budget. Fortunately we can borrow.”13 Hoover himself summarized his administration’s approach to the depression during a campaign speech in 1932:

We might have done nothing. That would have been utter ruin. Instead, we met the situation with proposals to private business and the Congress of the most gigantic program of economic defense and counter attack ever evolved in the history of the Republic. These programs, unparalleled in the history of depressions of any country and in any time, to care for distress, to provide employment, to aid agriculture, to maintain the financial stability of the country, to safeguard the savings of the people, to protect their homes, are not in the past tense—they are in action. . . . No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such time.14

Some might dismiss this as campaign rhetoric, but as the other evidence indicates, Hoover was giving an accurate portrayal of his presidency. Indeed, Hoover’s profligacy was so clear that Roosevelt attacked it during the 1932 Presidential campaign.

Roosevelt’s own advisors understood that much of what they created during the New Deal owed its origins to Hoover’s policies, going as far back as his time at the Commerce Department in the 1920s. Thus the quote at the start of this article by Rex Tugwell, one of the academics at the center of FDR’s “brains trust.” Another member of the brains trust, Raymond Moley, wrote of that period:

When we all burst into Washington . . . we found every essential idea [of the New Deal] enacted in the 100-day Congress in the Hoover administration itself. The essentials of the NRA [National Recovery Administration], the PWA [Public Works Administration], the emergency relief setup were all there. Even the AAA [Agricultural Adjustment Act] was known to the Department of Agriculture. Only the TVA [Tennessee Valley Authority] and the Securities Act was [sic] drawn from other sources. The RFC [Reconstruction Finance Corporation], probably the greatest recovery agency, was of course a Hoover measure, passed long before the inauguration.15

Decades later, Tugwell, writing to Moley, said of Hoover: “[W]e were too hard on a man who really invented most of the devices we used.”16 Members of Roosevelt’s inner circle would have every reason to disassociate themselves from the policies of their predecessor; yet these two men recognized Hoover’s role as the father of the New Deal quite clearly.

Nor is this point lost on contemporary historians. In his authoritative history of the Great Depression era, David Kennedy admiringly wrote that Hoover’s 1932 program of activist policies helped “lay the groundwork for a broader restructuring of government’s role in many other sectors of American life, a restructuring known as the New Deal.”17 In a later discussion of the beginning of the Roosevelt administration, Kennedy observed (emphasis added):

Roosevelt intended to preside over a government even more vigorously interventionist and directive than Hoover’s. . . . [I]f Roosevelt had a plan in early 1933 to effect economic recovery, it was difficult to distinguish from many of the measures that Hoover, even if sometimes grudgingly, had already adopted: aid for agriculture, promotion of industrial cooperation, support for the banks, and a balanced budget. Only the last was dubious. . . . FDR denounced Hoover’s budget deficits.18

Conclusion

Despite overwhelming evidence to the contrary, from Hoover’s own beliefs to his actions as president to the observations of his contemporaries and modern historians, the myth of Herbert Hoover’s presidency as an example of laissez-faire persists. Of all the presidents up to and including him, Herbert Hoover was one of the most active interveners in the economy.

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About the Author

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University

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Footnotes

*

This entry is adapted, with permission, from Steven Horwitz, “Herbert Hoover: Father of the New Deal,” Cato Institute Briefing Papers, No. 122, September 29, 2011, at: http://www.cato.org/publications/briefing-paper/herbert-hoover-father-new-deal

 

As quoted in Amity Shlaes, The Forgotten Man: A New History of the Great Depression. New York: Harper Collins, 2007, p. 149.

 

Murray N. Rothbard, America’s Great Depression (1963; Auburn, AL: Ludwig von Mises Institute, 2008), p. 192.

 

David M. Kennedy, Freedom From Fear: The American People in Depression and War, 1929-1945. New York: Oxford University Press, p. 48.

 

See Steven Malanga, “Obsessive Housing Disorder,” City Journal, 19 (2), Spring 2009.

 

Federal government spending data can be found at: http://www2.census.gov/prod2/statcomp/documents/CT1970p2-12.pdf

 

See the data and discussion in Jonathan Hughes and Louis P. Cain, American Economic History, 7th ed., Boston: Pearson, 2007, p. 487. Hughes and Cain also note of those deficits, “The expenditures were in large part the doing of the outgoing Hoover administration.”

 

See Kennedy op. cit., pp. 43-44; Rothbard op. cit., p. 228; and Gene Smiley, Rethinking the Great Depression, Chicago: Ivan R. Dee, 2002, p. 13.

 

See Lee Ohanian, “What – or Who – Started the Great Depression?” Journal of Economic Theory 144, 2009, pp. 2310-2335.

 

Chuck Baird, “Freeing Labor Markets by Reforming Union Laws,” June 2011, Downsizing DC, Cato Institute, available at http://www.downsizinggovernment.org/labor/reforming-labor-union-laws.

 

See “White House Statement on Government Policies To Reduce Immigration” March 26, 1931, available at http://www.presidency.ucsb.edu/ws/index.php?pid22581#axzz1V7klWwZu. That statement opens with an explicit link between the immigration policy and unemployment: “President Hoover, to protect American workingmen from further competition for positions by new alien immigration during the existing conditions of employment, initiated action last September looking to a material reduction in the number of aliens entering this country.”

 

Kennedy op. cit., p. 83. The phrase “Hoover’s New Deal” is from the title of chapter 11 in Rothbard, op. cit..

 

Hoover’s higher tax rates backfired, as they further depressed income-earning activity, reducing the tax base, which in turn led to a fall in tax revenues for 1932.

 

As cited in Kennedy op. cit., p. 79.

 

Herbert Hoover, “Address Accepting the Republican Presidential Nomination,” August 11, 1932.

 

Raymond Moley, “Reappraising Hoover,” Newsweek, June 14, 1948, p. 100.

 

Letter from Rexford G. Tugwell to Raymond Moley, January 29, 1965, Raymond Moley Papers, “Speeches and Writings,” Box 245-49, Hoover Institution on War, Revolution and Peace, Stanford University, Stanford, CA, as cited in Davis W. Houck, “Rhetoric as Currency: Herbert Hoover and the 1929 Stock Market Crash,” Rhetoric & Public Affairs 3, 2000, p. 174.

 

Kennedy, op. cit., p. 83.

 

Kennedy, op. cit., p. 118.

 

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Unemployment

Few economic indicators are of more concern to Americans than unemployment statistics. Reports that unemployment rates are dropping make us happy; reports to the contrary make us anxious. But just what do unemployment!---- figures tell us? Are they reliable measures? What influences joblessness?

How Is Unemployment Defined and Measured?

Each month, the federal government’s Bureau of Labor Statistics randomly surveys sixty thousand individuals around the nation. If respondents say they are both out of work and seeking employment, they are counted as unemployed members of the labor force. Jobless respondents who have chosen not to continue looking for work are considered out of the labor force and therefore are not counted as unemployed. Almost half of all unemployment spells end because people leave the labor force. Ironically, those who drop out of the labor force—because they are discouraged, have household responsibilities, or are sick—actually make unemployment rates look better; the unemployment rate includes only people within the labor force who are out of work.

Not all unemployment is the same. Unemployment can be long term or short term. It can be frictional, meaning someone is between jobs; or it may be structural, as when someone’s skills are no longer demanded because of a change in technology or an industry downturn.

Is Unemployment a Big Problem?

Some say there are reasons to think that unemployment in the United States is not a big problem. In June 2005, for example, 33.5 percent of all unemployed people were under the age of twenty-four, and presumably few of them were the main source of income for their families. One out of six of the unemployed are teenagers. Moreover, the average duration of a spell of unemployment is short. In June 2005 it was 16.3 weeks. And the median spell of unemployment is even shorter. In June 2005 it was 7.0 weeks, meaning that half of all spells last 7.0 weeks or less.

On the basis of numbers like the above, many economists have thought that unemployment is not a very large problem. A few weeks of unemployment seems to them like just enough time for people to move from one job to another. Yet these numbers, though accurate, are misleading. Much of the reason why unemployment spells appear short is that many workers drop out of the labor force at least temporarily because they cannot find attractive jobs. Often two short spells of unemployment mean a long spell of joblessness because the person was unemployed for a short time, withdrew from the labor force, and then reentered the labor force.

And even if most unemployment spells are short, most weeks of unemployment are experienced by people who are out of work for a long time. To see why, consider the following example. Suppose that each week, twenty spells of unemployment lasting 1 week begin, and only one begins that lasts 20 weeks. Then the average duration of a completed spell of unemployment would be only 1.05 weeks. But half of all unemployment (half of the total of 40 weeks that the twenty-one people are out of work) would be accounted for by spells lasting 20 weeks.

Something like this example applies in the real world. In June 2005, for example, 42.9 percent of the unemployed had been unemployed for less than five weeks, but 16.9 percent had been unemployed for six or more months.

What Causes Long-Term Unemployment?

To fully understand unemployment, we must consider the causes of recorded long-term unemployment. Empirical evidence shows that two causes are welfare payments and unemployment insurance. These government assistance programs contribute to long-term unemployment in two ways.

First, government assistance increases the measure of unemployment by prompting people who are not working to claim that they are looking for work even when they are not. The work-registration requirement for welfare recipients, for example, compels people who otherwise would not be considered part of the labor force to register as if they were a part of it. This requirement effectively increases the measure of unemployed in the labor force even though these people are better described as nonemployed—that is, not actively looking for work.

In a study using state data on registrants in Aid to Families with Dependent Children and food stamp programs, my colleague Kim Clark and I found that the work-registration requirement actually increased measured unemployment by about 0.5 to 0.8 percentage points. If this same relationship holds in 2005, this requirement increases the measure of unemployment by 750,000 to 1.2 million people. Without the condition that they look for work, many of these people would not be counted as unemployed. Similarly, unemployment insurance increases the measure of unemployment by inducing people to say that they are job hunting in order to collect benefits.

The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a “reservation wage”—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer.

Consider, for example, an unemployed person who is accustomed to making 15.00 an hour. On unemployment insurance this person receives about 55 percent of normal!---- earnings, or 8.25 per lost work hour. If that person is in a 15 percent federal tax bracket and a 3 percent state tax bracket, he or she pays 1.49 in taxes per hour not worked and nets 6.76 per hour after taxes as compensation for not working. If that person took a job that paid 15.00 per hour, governments would take 18 percent for income taxes and 7.65 percent for Social Security taxes, netting him or her 11.15 per hour of work. Comparing the two payments, this person may decide that an hour of leisure is worth more than the extra 4.39 the job would pay. If so, this means that the unemployment insurance raises the person’s reservation wage to above 15.00 per hour.

Unemployment, therefore, may not be as costly for the jobless person as previously imagined. But as Harvard economist Martin Feldstein pointed out in the 1970s, the costs of unemployment to taxpayers are very great indeed. Take the example above of the individual who could work for 15.00 an hour or collect unemployment insurance of 8.25 per hour. The cost of unemployment to this unemployed person was only 4.39 per hour, the difference between the net income from working and the net income from not working. And as compensation for this cost, the unemployed person gained leisure, whose value could well be above 4.39 per hour. But other taxpayers as a group paid 8.25 in unemployment benefits for every hour the person was unemployed, and got back in taxes only 1.49 on this benefit. Moreover, they gave up 3.85 in lost tax and Social Security revenue that this person would have paid per hour employed at a 15.00 wage. Net loss to other taxpayers: 10.61 (8.25 1.49 3.85) per hour. Multiply this by millions of people collecting unemployment, each missing hundreds of hours of work, and you get a cost to taxpayers in the billions.

Unemployment insurance also extends the time a person stays off the job. Clark and I estimated that the existence of unemployment insurance almost doubles the number of unemployment spells lasting more than three months. If unemployment insurance were eliminated, the unemployment rate would drop by more than half a percentage point, which means that the number of unemployed people would fall by about 750,000. This is all the more significant in light of the fact that less than half of the unemployed receive insurance benefits, largely because many have not worked enough to qualify.

Another cause of long-term unemployment is unionization. High union wages that exceed the competitive market rate are likely to cause job losses in the unionized sector of the economy. Also, those who lose high-wage union jobs are often reluctant to accept alternative low-wage employment. Between 1970 and 1985, for example, a state with a 20 percent unionization rate, approximately the average for the fifty states and the District of Columbia, experienced an unemployment rate that was 1.2 percentage points higher than that of a hypothetical state that had no unions. To put this in perspective, 1.2 percentage points is about 60 percent of the increase in normal unemployment between 1970 and 1985.

There is no question that some long-term unemployment is caused by government intervention and unions that interfere with the supply of labor. It is, however, a great mistake (made by some conservative economists) to attribute most unemployment to government interventions in the economy or to any lack of desire to work on the part of the unemployed. Unemployment was a serious economic problem in the late nineteenth and early twentieth centuries prior to the welfare state and widespread unionization. Unemployment then, as now, was closely linked to general macroeconomic conditions. The great depression, when unemployment in the United States reached 25 percent, is the classic example of the damage that collapses in credit can do. Since then, most economists have agreed that cyclical fluctuations in unemployment are caused by changes in the demand for labor, not by changes in workers’ desires to work, and that unemployment in recessions is involuntary.

Even leaving aside cyclical fluctuations, a large part of unemployment is due to demand factors rather than supply. High unemployment in New England in the early 1990s, for example, was due to declines in computer and other industries in which New England specialized. High unemployment in northern California in the early 2000s was caused by the dot-com bust. The process of adjustment following shocks is long and painful, and recent research suggests that even temporary declines in demand can have permanent effects on unemployment, as workers who lose jobs are unable to sell their labor due to a loss of skills or for other reasons. Therefore, most economists who study unemployment support an active government role in training and retraining workers and in maintaining stable demand for labor.

The Natural Rate of Unemployment

Long before Milton Friedman and Edmund Phelps advanced the notion of the natural rate of unemployment (the lowest rate of unemployment tolerable without pushing up inflation), policymakers had contented themselves with striving for low, not zero, unemployment. Just what constitutes an acceptably low level of unemployment has been redefined over the decades. In the early 1960s an unemployment rate of 4 percent was both desirable and achievable. Over time, the unemployment rate drifted upward and, for the most part, has hovered around 7 percent.!---- Lately, it has fallen to 5 percent. I suspect that some of the reduction in the apparent natural rate of unemployment in recent years has to do with reduced transitional unemployment, both because fewer people are between jobs and because they are between jobs for shorter periods. Union power has been eroded by domestic regulatory action and inaction, as well as by international competition. More generally, international competition has restrained wage increases in high-wage industries. Another factor making unemployment lower is a decline in the fraction of the unemployed who are supported by unemployment insurance.

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About the Author

Lawrence H. Summers is Charles W. Eliot University Professor at Harvard University. He was previously the president of Harvard University. Before that, he was secretary of the U.S. Treasury.

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Further Reading

Feldstein, Martin. “The Economics of the New Unemployment.” Public Interest 33 (Fall 1973): 3–42.

Feldstein, Martin. “Why Is Productivity Growing Faster?” NBER Working Paper no. 9530. National Bureau of Economic Research, Cambridge, Mass., 2003.

Friedman, Milton. “The Role of Monetary Policy.” American Economic Review 58 (March 1968): 1–17.

Hall, Robert. “Employment Fluctuations and Wage Rigidity.” Brookings Papers on Economic Activity 1 (1980): 91–141.

Summers, Lawrence H. Understanding Unemployment. Cambridge: MIT Press, 1990.

Summers, Lawrence H. “Why Is the Unemployment Rate So Very High Near Full Employment?” Brookings Papers on Economic Activity 2 (1986): 339–383.

Summers, Lawrence H., and Kim B. Clark. “Labor Market Dynamics and Unemployment: A Reconsideration.” Brookings Papers on Economic Activity 1 (1979): 13–60.

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Unintended Consequences

The law of unintended consequences, often cited but rarely defined, is that actions of people—and especially of government—always have effects that are unanticipated or unintended. Economists and other social scientists have heeded its power for centuries; for just as long, politicians and popular opinion have largely ignored it.

The concept of unintended consequences is one of the building blocks of economics. Adam Smith’s “invisible hand,” the most famous metaphor in social science, is an example of a positive unintended consequence. Smith maintained that each individual, seeking only his own gain, “is led by an invisible hand to promote an end which was no part of his intention,” that end being the public interest. “It is not from the benevolence of the butcher, or the baker, that we expect our dinner,” Smith wrote, “but from regard to their own self interest.”

Most often, however, the law of unintended consequences illuminates the perverse unanticipated effects of legislation and regulation. In 1692 the English philosopher John Locke, a forerunner of modern economists, urged the defeat of a parliamentary bill designed to cut the maximum permissible rate of interest from 6 percent to 4 percent. Locke argued that instead of benefiting borrowers, as intended, it would hurt them. People would find ways to circumvent the law, with the costs of circumvention borne by borrowers. To the extent the law was obeyed, Locke concluded, the chief results would be less available credit and a redistribution of income away from “widows, orphans and all those who have their estates in money.”

In the first half of the nineteenth century, the famous French economic journalist Frédéric Bastiat often distinguished in his writing between the “seen” and the “unseen.” The seen were the obvious visible consequences of an action or policy. The unseen were the less obvious, and often unintended, consequences. In his famous essay “What Is Seen and What Is Not Seen,” Bastiat wrote:

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.1

Bastiat applied his analysis to a wide range of issues, including trade barriers, taxes, and government spending.

The first and most complete analysis of the concept of unintended consequences was done in 1936 by the American sociologist Robert K. Merton. In an influential article titled “The Unanticipated Consequences of Purposive Social Action,” Merton identified five sources of unanticipated consequences. The first two—and the most pervasive—were “ignorance” and “error.”

Merton labeled the third source the “imperious immediacy of interest.” By that he was referring to instances in which someone wants the intended consequence of an action so much that he purposefully chooses to ignore any unintended effects. (That type of willful ignorance is very different from true ignorance.) The Food and Drug Administration, for example, creates enormously destructive unintended!---- consequences with its regulation of pharmaceutical drugs. By requiring that drugs be not only safe but efficacious for a particular use, as it has done since 1962, the FDA has slowed down by years the introduction of each drug. An unintended consequence is that many people die or suffer who would have been able to live or thrive. This consequence, however, has been so well documented that the regulators and legislators now foresee it but accept it.

“Basic values” was Merton’s fourth source of unintended consequences. The Protestant ethic of hard work and asceticism, he wrote, “paradoxically leads to its own decline through the accumulation of wealth and possessions.” His final case was the “self-defeating prediction.” Here he was referring to the instances when the public prediction of a social development proves false precisely because the prediction changes the course of history. For example, the warnings earlier in this century that population growth would lead to mass starvation helped spur scientific breakthroughs in agricultural productivity that have since made it unlikely that the gloomy prophecy will come true. Merton later developed the flip side of this idea, coining the phrase “the self-fulfilling prophecy.” In a footnote to the 1936 article, he vowed to write a book devoted to the history and analysis of unanticipated consequences. Although Merton worked on the book over the next sixty years, it remained uncompleted when he died in 2003 at age ninety-two.

The law of unintended consequences provides the basis for many criticisms of government programs. As the critics see it, unintended consequences can add so much to the costs of some programs that they make the programs unwise even if they achieve their stated goals. For instance, the U.S. government has imposed quotas on imports of steel in order to protect steel companies and steelworkers from lower-priced competition. The quotas do help steel companies. But they also make less of the cheap steel available to U.S. automakers. As a result, the automakers have to pay more for steel than their foreign competitors do. So a policy that protects one industry from foreign competition makes it harder for another industry to compete with imports.

Similarly, Social Security has helped alleviate poverty among senior citizens. Many economists argue, however, that it has carried a cost that goes beyond the payroll taxes levied on workers and employers. Martin Feldstein and others maintain that today’s workers save less for their old age because they know they will receive Social Security checks when they retire. If Feldstein and the others are correct, it means that less savings are available, less investment takes place, and the economy and wages grow more slowly than they would without Social Security.

The law of unintended consequences is at work always and everywhere. People outraged about high prices of plywood in areas devastated by hurricanes, for example, may advocate price controls to keep the prices closer to usual levels. An unintended consequence is that suppliers of plywood from outside the region, who would have been willing to supply plywood quickly at the higher market price, are less willing to do so at the government-controlled price. Thus results a shortage of a good where it is badly needed. Government licensing of electricians, to take another example, keeps the supply of electricians below what it would otherwise be, and thus keeps the price of electricians’ services higher than otherwise. One unintended consequence is that people sometimes do their own electrical work, and, occasionally, one of these amateurs is electrocuted.

One final sobering example is the case of the Exxon Valdez oil spill in 1989. Afterward, many coastal states enacted laws placing unlimited liability on tanker operators. As a result, the Royal Dutch/Shell group, one of the world’s biggest oil companies, began hiring independent ships to deliver oil to the United States instead of using its own forty-six-tanker fleet. Oil specialists fretted that other reputable shippers would flee as well rather than face such unquantifiable risk, leaving the field to fly-by-night tanker operators with leaky ships and iffy insurance. Thus, the probability of spills probably increased and the likelihood of collecting damages probably decreased as a consequence of the new laws.

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About the Author

Rob Norton is an author and consultant and was previously the economics editor of Fortune magazine.

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Further Reading

Bastiat, Frédéric. “What Is Seen and What Is Not Seen.” Online at: http://www.econlib.org/library/Bastiat/basEss1.html.

Hayek, Friedrich A. New Studies in Philosophy, Politics, Economics and the History of Ideas. Chicago: University of Chicago Press, 1978.

Merton, Robert K. Sociological Ambivalence and Other Essays. New York: Free Press, 1976.

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Footnotes

Online at: http://www.econlib.org/library/Bastiat/basEss1.html.

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Urban Transportation

The defining trait of urban areas is density: of people, activities, and structures. The defining trait of urban transportation is the ability to cope with this density while moving people and goods. Density creates challenges for urban transportation because of crowding and the expense of providing infrastructure in built-up areas. It also creates certain advantages because of economies of scale: some transportation activities are cheaper when carried out in large volumes. These characteristics mean that two of the most important phenomena in urban transportation are traffic congestion and mass transit.

Traffic congestion imposes large costs, primarily in terms of lost time. (Economists measure the value of this time by examining situations in which people can trade time for money, such as by choosing different means of travel.) Researchers at the Texas Transportation Institute regularly estimate the costs of urban congestion; their estimate of annual congestion costs per capita in 2001 for seventy-five large U.S. metropolitan areas was 520, representing twenty-six hours of delay and forty-two gallons of fuel. This totals nearly 70 billion.1

But is the cost of congestion too high? Density dictates that we cannot expect to provide unencumbered road space for every person who might like it at 5:00 p.m. on a weekday—any more than one would expect to build a dormitory with a shower for every resident who wants to use one in the morning. Just as an architect might decide how many showers to provide for the dormitory, economists, by knowing how much people value their time and how much it costs to save time by increasing road capacity, can estimate the optimal amount of roadway capacity and the resulting level of congestion.

Virtually all economists agree that congestion in cities around the world is greater than this optimum. They also agree on the reason: driving in the rush hour is priced far below its real social cost. The social cost is the driver’s cost to himself plus the congestion imposed on other drivers. People often drive, therefore, even when the social cost is more than the trip is worth to them because they do not bear the cost of the congestion they cause. Whereas this social cost varies by time of day and location, the individual’s trip price (consisting of operating costs, fuel taxes, and the occasional toll) is more uniform. Even if the price covers the costs of providing road infrastructure, which it probably does not in U.S. cities, it is not serving the purpose of allocating road capacity at peak hours to those who value it most.

These observations lead directly to the frequent recommendation for “congestion pricing”: a system of prices that vary by time and location, designed to reduce congestion by encouraging people to shift their travel to less socially costly means, places, or times of day. Singapore has had congestion pricing since 1975. London adopted an ambitious pricing system in 2003, initially requiring five pounds (about eight U.S. dollars) to drive in its central area during weekdays. Singapore’s tolls are now collected electronically, and London’s through various off-site means, in both cases with enforcement by video recordings of license plates. In its first year, the London scheme appeared to have increased speeds to and in the central area by 15–20 percent and to have eliminated or diverted 67,500 weekday automobile trips there, with half of these shifting to public transit and another quarter diverting to less congested routes.2

A partial form of congestion pricing has recently been adopted in several U.S. locations. Known as “value pricing,” it applies only to a set of “express lanes” that are adjacent to an unpriced roadway. This scheme has the advantage that paying the price is voluntary, but also the disadvantage that congestion is eliminated for only a fraction of travelers and is even greater for the others than would be the case if the express lanes were opened to everyone. Value pricing has been in place on State Route 91 in the Los Angeles region since late 1995 and on Interstate 15 near San Diego since late 1996.3 Proposals have emerged for a nationwide network of such express lanes to replace the present system of intermittent carpool lanes.4

Since examples of congestion pricing are so few, the consequences of underpricing congested highways are far-reaching. People and businesses have rearranged themselves and their activities in time and place to lessen the!---- impacts of congestion, probably leading to more spread-out land-use patterns (although the land-use impact cannot be precisely predicted from theory). Furthermore, public authorities have responded by building more roadway capacity, including very expensive, wide expressways designed to allow high speeds, even though peak-period users cannot maintain those speeds. The result is a more spread-out urban area with bigger roads than would evolve if congestion pricing were in place.

The effectiveness of building capacity to relieve urban congestion is limited not only by its high cost, but also by the phenomenon of “latent demand” or “induced demand.” Because many potential peak-hour trips are already deterred by the congestion itself, any success in reducing that congestion is partially undone by an influx of these previously latent trips from other routes, hours of the day, or travel modes. As a consequence, adding capacity may still provide considerable benefits by allowing more people to travel when and where they want to, but it will not necessarily reduce congestion. The same problem afflicts other anticongestion policies, such as employer carpooling incentives, mass transit improvements, and land-use controls; moreover, these policies usually provide only weak incentives to change travel behavior.

Now consider mass transit, where economies of scale are critical. Researchers who have compared the costs of serving passenger trips in a given travel corridor via various modes consistently find that automobiles are most economical at low passenger densities, bus transit at medium densities, and rail transit at very high densities. (There is some disagreement about exactly where these thresholds occur, but not about their existence.) As passenger density increases, it becomes worthwhile at some point to pay one driver to serve many passengers by carrying them in a single vehicle, and eventually to incur the high capital cost of building a rail line. However, many rail transit systems recently constructed in the United States are uneconomical because the passenger volumes they carry are too low.5 An attractive alternative in such cases is “bus rapid transit,” in which local bus transit is configured to offer rail-like service quality at costs between those typical of bus and rail. Bus rapid transit was pioneered in Brazil and also operates on selected corridors in Ottawa, Los Angeles, Seattle, Boston, and other cities.6

In addition to the transit agency’s costs, scale economies have another dimension—costs incurred by its users. People using mass transit first have to access a station or bus stop and wait for the vehicle to arrive. Even if they know the schedule, they have to adjust their plans to match it, which is a cost to them. The more transit lines there are in a given area and the more frequent the service, the lower is each user’s cost to reach the station and wait for a vehicle to arrive. Empirical evidence reveals that people care even more about avoiding time spent walking or waiting than about time spent inside a vehicle. So these access costs are quite significant, as are the scale economies that result when increased passenger density leads to greater route coverage and/or frequency of service.

Scale economies are behind proposals to use land-use regulation to bolster transit demand by creating areas of high-density residential, commercial, or industrial development. However, many analysts are skeptical about how effective a given measure would be and whether such “transit-oriented developments” can overcome the preferences for low-density living that accompany rising income levels.

Scale economies create a prima facie case for transit subsidies because the social cost of handling a passenger is lowered by the favorable effects on the average cost for everyone. Another argument for transit subsidies is to overcome the inefficiently low price on peak-hour highway travel, if congestion pricing is deemed infeasible. Countering these arguments is the well-documented tendency of transit subsidies to be partly absorbed in higher wages to transit workers, less efficient use of employees, and excessive capital expenditures. This problem could be alleviated by giving the subsidies in the form of fare discounts rather than as grants to transit agencies. If subsidies are justified because of economies of scale in transit, however, then they would be justified for the many other industries with scale economies: it is infeasible and probably unwise to subsidize them all.

Because of scale economies in mass transit, it makes sense to focus service on those few markets with potentially high passenger density, especially suburb-to-downtown commutes and local travel in densely populated low-income areas. Unfortunately, this dictum collides with the political balance typically achieved in metropolitan-wide transit systems, where every participating jurisdiction is eager to receive some service in return for its financial contribution.

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Scale economies might make a case for highway subsidies as well, but it is even less clear-cut. Scale economies exist in construction of a given highway, but somewhat less so in an entire network because the cost of intersections rises more than proportionally to their capacity. Furthermore, because highways occupy a significant fraction of scarce urban land, expanding them drives up land prices and/or requires expensive mitigation measures, offsetting any scale economies in constructing them. On balance, there is probably not a strong case for subsidizing urban highway travel.

Today, government provides most urban transportation services and facilities, but this is not necessary, nor was it historically always the norm. Privately built and financed canals, and later “turnpikes,” were important in the industrialization of Britain in the eighteenth century and of the United States in the nineteenth century. And today, innovative private transit providers supply highly valued jitney service or specialized taxi service—sometimes illegally—in many cities around the globe, especially—but not exclusively—in the Third World. Ubiquitous private taxi fleets also play an important role in urban travel, and deregulating entry would bring down taxi fares substantially.

Private enterprise is making something of a comeback in infrastructure provision. A private company is completing Paris’s A86 ring road via tunnels under Versailles, financed by tolls. A similar proposal may break a thirty-year impasse over completing the final link in the Long Beach Freeway near Los Angeles. London is undertaking a controversial privatization of its subway system. In 2004, Texas solicited proposals for private construction and operation of new toll roads, and in 2005 Chicago privatized operation of its Skyway, an important segment of Interstate 90 bringing traffic into the city from the east.7

Evidence suggests that the private sector can carry out transportation activities more cheaply than the public sector can. Many experiments with the private sector have been motivated by huge subsidy increases or evident inefficiency of public sector operations. During the 1980s, all of Britain’s urban bus services outside London were privatized and the markets opened to free entry, resulting in cost savings but also some competitive problems. In most instances, some sort of regulation is needed to offset the market power that can accompany privatization. Success depends on the specifics of the situation and the details of any accompanying regulatory or franchising arrangements.

Urban transportation has historically had a dramatic influence on land-use patterns. Upon the invention of horse-drawn and then electric streetcars, “streetcar suburbs” quickly arose along newly laid tracks. Following World War II, widespread construction of express highways had a similar but even stronger effect, especially in the United States, causing development to spread more ubiquitously because automobiles relaxed the need for proximity to a transit line. These developments provided many desired amenities to residents, but also created problems. Whatever one’s judgment about the wisdom of those past decisions, the longevity of buildings makes such trends virtually impossible to reverse. In particular, a dispersed land-use pattern undermines the market potential of mass transit, making it ineffective as a means to counter the automobile’s dominance, even if promoting mass transit might have been a better policy in the first place.

Urban transportation is a vital part of economic activity and responds to well-designed economic policies. Much can be accomplished to improve urban life by using our basic knowledge of economic incentives.

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About the Author

Kenneth A. Small, research professor and professor emeritus of economics at the University of California at Irvine, specializes in urban, transportation, and environmental economics—especially highway congestion, air pollution from motor vehicles, and travel demand. Professor Small was a coeditor of the international journal Urban Studies for five years and is now associate editor of Transportation Research B. He received the Distinguished Member Award of the Transportation and Public Utilities Group of the American Economic Association in 1999 and is a Fellow of the Regional Science Association International.

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Further Reading

Introductory

Altshuler, Alan, and David Luberoff. Mega-Projects: The Changing Politics of Urban Public Investment. Washington, D.C.: Brookings Institution Press, 2003. Insightful description and analysis of the political changes behind the extraordinary increase in costs of the large U.S. urban infrastructure projects that started around 1970.

Arnott, Richard, and Kenneth Small. “The Economics of Traffic Congestion.” American Scientist 82 (1994): 446–455. Explanation of traffic paradoxes including induced demand, for a scientifically but not economically literate audience.

Downs, Anthony. Still Stuck in Traffic: Coping with Peak-Hour Traffic Congestion. Washington D.C.: Brookings Institution, 2004. A comprehensive look at numerous anticongestion!---- policies and their effectiveness, concluding largely that the only ones that are effective are politically infeasible.

Klein, Daniel B., Adrian T. Moore, and Binyam Reja. Curb Rights: A Foundation for Free Enterprise in Urban Transit. Washington, D.C.: Brookings Institution Press, 1997. Policy-oriented analysis of how the public sector can establish property rights to encourage successful private transit.

Meyer, John R., and José A. Gómez-Ibáñez. Autos, Transit, and Cities. Cambridge: Harvard University Press, 1981. A thorough analysis of urban transportation policy for an educated lay audience.

National Research Council. Curbing Gridlock: Peak-Period Fees to Relieve Traffic Congestion. Washington D.C.: National Academy Press, 1994. Full report by a study panel on congestion pricing. Volume 1 is the report, aimed at a general audience; volume 2 is a collection of commissioned papers.

Pickrell, Don H. “Rising Deficits and the Uses of Transit Subsidies in the United States.” Journal of Transport Economics and Policy 19 (1985): 281–298. Decomposes the dramatic increase in U.S. transit deficits into its sources, finding that about three-fourths of new subsidies were absorbed in higher costs.

White, Peter. “Deregulation of Local Bus Service in Great Britain: An Introductory Review.” Transport Reviews 15 (1995): 185–209. Reviews results of British bus deregulation of 1980s.

Winston, Clifford. “Government Failure in Urban Transportaion.” Fiscal Studies 21 (2000): 403–425. A nontechnical summary of inefficiencies in U.S. urban transportation policy drawing on the UK privatization experiment for perspective.

Advanced

Gómez-Ibáñez, José A., William B. Tye, and Clifford Winston, eds. Essays in Transportation Economics and Policy: A Handbook in Honor of John R. Meyer. Washington, D.C.: Brookings Institution Press, 1999. Collection of essays, some technical, on analytical and issue-oriented topics. Can serve as introductory textbook.

Santos, Georgina, ed. Road Pricing: Theory and Evidence. Elsevier: Oxford, 2004. Collection of scholarly articles about congestion pricing and related topics.

Small, Kenneth A. Urban Transportation Economics. Reading, Pa.: Harwood Academic, 1992, 2d ed. 2005. Advanced textbook and reference book.

Small, Kenneth A., and José A. Gómez-Ibáñez. “Urban Transportation.” In Paul Cheshire and Edwin S. Mills, eds., Handbook of Regional and Urban Economics. Vol. 3. New York: North-Holland, 1999. Survey of selected topics, aimed at professional economists.

Winston, Clifford, and Chad Shirley. Alternate Route: Toward Efficient Urban Transportation. Washington, D.C.: Brookings Institution Press, 1998. Analysis of mass transit policy in the United States, with emphasis on quantifying the inefficiencies of transit and highway investment and pricing.

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Footnotes

See David Schrank and Tim Lomax, 2003 Urban Mobility Report, available online at: http://mobility.tamu.edu/ums/.

See the Singapore Land Transport Authority Web site on electronic road pricing at: http://www.lta.gov.sg/motoring_matters/index_motoring_erp; and the Transport for London Web site on congestion charging at: http://www.tfl.gov.uk/tfl/cclondon/cc_intro. For other examples around the world, see the University of Minnesota’s Value Pricing Homepage at: http://www.hhh.umn.edu/centers/slp/projects/conpric/.

See the operators’ Web sites at http://www.91expresslanes.com/ and http://sandag.cog.ca.us/index.asp?classrd29fuseactionhome.classhome.

Robert W. Poole Jr. and C. Kenneth Orski, “HOT Networks: A New Plan for Congestion Relief and Better Transit,” Reason Public Policy Institute, Policy Study 305, February 2003, available online at: http://www.rppi.org/ps305.pdf.

See “The Public Purpose” Web site (http://www.publicpurpose.com/) for unabashedly critical and informative evaluations of many rail projects and other topics.

See the Bus Rapid Transit Policy Center Web site at: http://www.gobrt.org/; also Aaron Golub, “Brazil’s Buses: Simply Successful,” Access (University of California Transportation Center, Berkeley) 24 (2004), available online at: http://www.uctc.net/access/access.asp.

On privatization initiatives, see the periodicals Public Works Financing, and the Reason Foundation’s Privatization Watch (http://www.reason.org/pw.shtml), especially “Urban Toll Tunnels Solve Tough Problems” by Robert W. Poole Jr. (http://www.rppi.org/urbantolltunnels.html).

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Welfare

The U.S. welfare system would be an unlikely model for anyone designing a welfare system from scratch. The dozens of programs that make up the “system” have different (sometimes competing) goals, inconsistent rules, and over-lapping groups of beneficiaries. Responsibility for administering the various programs is spread throughout the executive branch of the federal government and across many committees of the U.S. Congress. Responsibilities are also shared with state, county, and city governments, which actually deliver the services and contribute to funding.

The six programs most commonly associated with the “social safety net” include: (1) Temporary Assistance for Needy Families (TANF), (2) the Food Stamp Program (FSP), (3) Supplemental Security Income (SSI), (4) Medicaid, (5) housing assistance, and (6) the Earned Income Tax Credit (EITC). The federal government is the primary funder of all six, although TANF and Medicaid each require a 25–50 percent state funding match. The first five programs are administered locally (by the states, counties, or local federal agencies), whereas EITC operates as part of the regular federal tax system. Outside the six major programs are many smaller government-assistance programs (e.g., Special Supplemental Food Program for Women, Infants and Children [WIC]; general assistance [GA]; school-based food programs; and Low-Income Home Energy Assistance Program [LIHEAP]), which have extensive numbers of participants but pay quite modest benefits.

Welfare reform, brought about through the passage of the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996, significantly altered the rules for delivering income support, but it was narrowly focused on one program. The 1996 law replaced Aid to Families with Dependent Children (AFDC) with TANF. SSI and food stamps were also affected, but to a much lesser extent.

Key Programs

The accompanying figures summarize trends in the coverage and expenses of the six major federal safety-net programs over the past three decades. Figure 1 shows the percentage of the American population receiving benefits from each program, and Figure 2 presents the share of!---- federal expenditures spent on each program. The bars in Figure 1 also plot the percentage of Americans classified as being in poverty. In addition to highlighting the evolution of these U.S. welfare programs, the following discussion briefly describes the forms of benefits paid out by programs, along with eligibility criteria.

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Figure 1  Percentage of Population Receiving Program Benefits

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Temporary Assistance for Needy Families pays cash assistance to single-parent or unemployed two-parent families for a limited term. The program also significantly funds job training and child care as a means to discourage welfare dependency and encourage work.

The origins of TANF are in the Social Security Act of 1935, which established the Aid to Dependent Children (ADP) program. ADP enabled state governments to help single mothers who were widowed or abandoned by their husbands. It was originally designed to allow mothers to stay at home and take care of their children, providing cash benefits for the basic requirements of food, shelter, and clothing. The program was expanded in the 1950s and 1960s to provide cash assistance to needy children and families regardless of the reason for parental absence. This expansion coincided with renaming the program Aid to Families with Dependent Children. While AFDC was principally a federal program managed by the Department of Health and Human Services, it was administered through state-run welfare offices. Indeed, states were responsible for organizing the program, determining benefits, establishing income and resource limits, and setting actual benefit payments. With relatively little flexibility, an AFDC program in New York City looked a lot like its counterpart in Reno, Nevada, apart from differences in the maximum amount each state paid to a family for assistance. Funding for AFDC was shared between the federal and state governments, with the feds covering a higher portion of AFDC benefit costs in states with lower-than-average per capita income. As with many other welfare programs, AFDC’s costs were not capped because the program was an “entitlement”—meaning that qualified families could not be refused cash assistance.

By the early 1990s, many policymakers were seeking alternatives to AFDC. Although the average monthly benefit in 1995 was only 376.70 per family and 132.64 per recipient, 40 percent of applicants remained on welfare for two years or longer. In response to this dependency, in 1996, Congress passed and President Bill Clinton signed the Personal Responsibility and Work Opportunity Reconciliation!---- Act, which replaced AFDC with TANF. Under the new program, the federal government eliminated the entitlement to cash welfare, placed limits on the length of time families could collect benefits, and introduced work requirements. By law, a family cannot receive TANF benefits for more than a lifetime limit of five years, cumulative across welfare spells. Regarding work requirements, TANF mandated that at least 50 percent of recipients participate in “work” activities by 2002, with activities including employment, on-the-job training, vocational education, job search, and community service. Together, these activities must account for thirty hours per week for a single parent. Recipients who refuse to participate in work activities must be sanctioned, resulting in a loss of cash benefits. Enforcement of sanctions could include immediately suspending all cash payments, stopping support only after multiple episodes of noncompliance, or only partially reducing grants to families who fail to cooperate. States could, and in fact did, introduce more stringent requirements for families to work or participate in educational activities to qualify for cash payments. TANF cemented the primary emphasis on getting welfare recipients into jobs.

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Figure 2  Program Spending as a Percentage of Federal Outlays

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Figures 1 and 2 reveal that growth in neither costs nor enrollments motivated the passage of welfare reform in 1996. Program expenditures have accounted for less than 3 percent of the federal budget since 1975. The caseload remained relatively stable until the mid-1990s. After welfare reform, however, the welfare caseload and welfare spending as a percentage of government spending dropped sharply.

The Food Stamp Program, authorized as a permanent program in 1964, provides benefits to low-income households to buy nutritional, low-cost food. After 1974, Congress required all states to offer the program. Recipients use coupons and electronic benefits transfer (EBT) cards to purchase food at authorized retail stores. There are limitations on what items can be purchased with food stamps (e.g., they cannot be used to purchase cigarettes or alcohol). Recipients pay no tax on items purchased with food stamps. The federal government is entirely responsible for the rules and the complete funding of FSP benefits under the auspices of the Department of Agriculture’s Food and Nutrition Service (FNS). State governments, through local welfare offices, have primary responsibility for administering!---- the Food Stamp Program. They determine eligibility, calculate benefits, and issue food stamp allotments.

Welfare reform imposed work requirements on recipients and allowed states to streamline administrative procedures for determining eligibility and benefits. Childless recipients between the ages of eighteen and fifty became ineligible for food stamps if they received benefits for more than three months while not working. According to Figure 1, the FSP caseload has included between 6 and 10 percent of the U.S. population, following a cyclical pattern before welfare reform: during recessions, the caseload percentage was higher. Welfare reform caused a decline in the FSP caseload percentage.

Supplemental Security Income, authorized by the Social Security Act in 1974, pays monthly cash benefits to needy individuals whose ability to work is restricted by blindness or disability. Families can also receive payments to support disabled children. Survivor’s benefits for children are authorized under Title II of the Social Security Act, not Title XVI, and are, therefore, not part of the SSI program. Although one cannot receive SSI payments and TANF payments concurrently, one can receive SSI and Social Security simultaneously. (In 2003, 35 percent of all SSI recipients also received Social Security benefits, and 57 percent of aged SSI recipients were Social Security beneficiaries.) The average SSI recipient received almost 5,000 in annual payments in 2003, with the average monthly federal payment being 417, and many state governments supplemented the basic SSI benefits with their own funds.

Welfare reforms and related immigration legislation in 1996–1997 sought to address three areas of perceived abuse in the SSI program. First, the legislation set up procedures to help ensure that SSI payments are not made to prison inmates. Second, the legislation eliminated benefits to less-disabled children, particularly children with behavioral problems rather than physical disorders. Finally, new immigrants were deemed ineligible for benefits prior to becoming citizens.

Medicaid became law in 1965, under the Social Security Act, to assist state governments in providing medical care to eligible needy persons. Medicaid provides health-care services to more than 49.7 million low-income individuals who are in one or more of the following categories: aged, blind, disabled, members of families with dependent children, or certain other children and pregnant women. Medicaid is the largest government program providing medical and health-related services to the nation’s poorest people and the largest single funding source for nursing homes and institutions for mentally retarded people.

Within federal guidelines, each state government is responsible for designing and administering its own program. Individual states determine persons covered, types and scope of benefits offered, and amounts of payments for services. Federal law requires that a single state agency be responsible for the administration of the Medicaid program; generally it is the state welfare or health agency. The federal government shares costs with states by means of an annually adjusted variable matching formula.

The Medicaid program has more participants than any other major welfare program. More than 17 percent of the population received Medicaid benefits in 2002, up from about 10 percent in the 1970s and 1980s. Spending on Medicaid has risen steadily as a fraction of the federal budget, increasing from approximately 2 percent in 1975 to 13 percent in 2002. Total outlays for the Medicaid program in 2002 (federal and state) were 259 billion, and per capita expenditures on Medicaid beneficiaries averaged 4,291.

Housing assistance covers a broad range of efforts by federal and state governments to improve housing quality and to reduce housing costs for lower-income households. The Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) administer most federal housing programs. Under current programs, each resident pays approximately 30 percent of his or her income for rent.

In terms of welfare policy, there are two principal types of housing assistance for low-income families: subsidized rent and public housing. The federal government has provided rental subsidies since the mid-1930s and today funds the HUD Section 8 voucher program. Local governments commonly provide for subsidized housing through their building authority in that they require a portion of new construction to be made available to low-income families at below-market rents. Public housing (the actual provision of dwellings) is almost exclusively a federal program administered by local public housing agencies (PHAs), not private owner-managers. In contrast to the mid-1960s, public housing now accounts for a small fraction of overall housing assistance.

Earned Income Tax Credit, enacted in 1975, pays a refundable tax credit for working Americans with low earnings. The tax credit increases family income by supplementing earnings up to a fixed level. The program was initially designed to offset the impact of Social Security taxes on low-income individuals and to encourage individuals to seek employment rather than rely on welfare benefits. Because EITC is part of the regular federal income tax system, receiving benefits is private, unremarkable, and without stigma. In 2004, the EITC paid out 33.1 billion to approximately 18.6 million claimants—several billion dollars more than the amounts projected to be spent on other primary programs such as TANF and food stamps.!---- EITC is one of the few programs that effectively reach the eligible population. Analysis of EITC claims in 1999 shows that 86 percent of eligible families with children received the credit. (In contrast, only 66 percent of eligible households with children received food stamp benefits in 1999.) Although the EITC is generally paid all at once as an annual refund, it can also be included with an employee’s weekly, biweekly, or monthly paycheck.

caption div style"background-color:#FFFFFF" hr span class"title"br bTable 1/b Benefits, Taxes, and Disposable Income for a Family of Four/span /div /caption

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Program Payments Tax Costs Disposable Income Earnings() TANF Food Stamps SSI Sec. 8Housing Federal EITC Health Care Federal Payroll Taxes Federal Income Tax Taxes, EITC Taxes, EITC, TANF, FSP Taxes, EITC, TANF, FSP,Sec. 8 0 8,148 5,988 9,660 10,800 0 MNP 0 0 0 12,663 20,611 4,000 7,498 5,510 8,170 9,400 1,600 MNP 306 0 5,294 16,503 23,279 8,000 5,498 4,550 6,170 8,000 3,200 MNP 612 0 10,588 19,317 25,393 12,000 3,498 3,590 4,170 6,600 4,300 MNP 918 0 15,382 21,631 27,007 16,000 0 2,630 2,170 5,200 4,101 Child 6–19 1,224 0 18,877 21,507 26,707 20,000 0 1,670 170 3,800 3,261 Child 1–6 1,530 0 21,731 23,401 27,201 24,000 0 710 0 2,400 2,421 Child 1–6 1,836 190 24,395 25,105 27,505

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Level of Benefits and Impacts on Work Incentives

How much do the above safety-net programs pay in benefits? Table 1 presents the benefit levels provided to a qualifying family whose annual earnings equal the amounts listed in the first column of the table. Calculations in this table assume that the family includes a father, a mother, and two children below the age of eighteen, and that this family lives in California.1 According to the row in the table for a family that earns 8,000 a year, this family would be eligible to receive 5,498 from TANF, 4,550 from food stamps, 6,170 from SSI, 8,000 in housing benefits from the Section 8 program, and 3,200 from EITC, for a total of 27,418 in government assistance. Moreover, this family would qualify for Medicaid’s Medically Needy Program (MNP), wherein all family members would receive zero-price health care. On reaching 16,000 in earnings, the family would qualify for Medicaid’s Children Ages 6 to 19 Program (Child 6–19), which provides zero-price health care to all children in the family; and at 20,000 in earnings, the family would qualify for Medicaid’s Children Ages 1 to 6 Program (Child 1–6), which offers zero-price health care to all children ages six and below.

To determine the disposable income available to a family, one needs to add the family’s earnings and the payments it receives in program benefits and then subtract the amounts paid in taxes. Any family faces three categories of taxes: Social Security payroll taxes, federal income tax, and state income tax. The eighth and ninth columns of the table show the amounts a family of four must pay in payroll and federal income taxes for the various levels of earnings—the negative values in these columns indicate payments that subtract from income rather than add to income. The table does not include a column for state taxes because none are paid for any of the income values considered in the table. The last three columns of the table report a family’s disposable income for each level of earnings, assuming participation in the programs listed in the associated column. The family that earns 8,000 receives 10,588 in disposable income for the year when it chooses not to participate in any welfare program and obtains benefits only from EITC. This family’s disposable income grows to 19,317 if it decides to take TANF and food stamps and to 25,393 if it also chooses to obtain assistance for rent.2

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Note, by looking at the “Taxes, EITC, TANF, FSP” column, that a family participating in these programs increases its disposable income by 5,294 when it raises its earnings from zero to 4,000. That means that, in this range of earnings, work is rewarded; the family actually increases its disposable income by more than 4,000. But if a family raises its earnings from 12,000 to 16,000, its government benefits fall so much that its disposable income literally declines by 124. This happens because program benefits fall as earnings rise. Families facing these latter circumstances (earning 12,000) clearly have no incentive to increase their work effort since they will see no enhancement of their spending power. If one alters the family’s situation and also has it participate in housing programs, then the last column shows that raising earning from 12,000 to 24,000 yields merely 498 more in disposable income. Such features of our welfare system sharply reduce the returns of work, and in doing so discourage families from increasing their work activities. The U.S. welfare system enhances work incentives at low levels of earnings, but discourages work thereafter. To counterbalance such work disincentives, welfare reform in the mid-1990s introduced work requirements that required families to work above specific thresholds in order to qualify for benefits.

Future Directions

Welfare reform was enacted to promote self-sufficiency and to improve flexibility in the design of income-maintenance programs. To a large extent, these goals have been achieved. TANF has brought about substantial increases in the work activities of low-income families and enhanced states’ flexibility to create welfare systems unique to their constituencies. States are using the monies they are allocated in a more efficient manner—focusing on job readiness, child care, education, and work placement.

What other policy trends characterize the evolution of welfare system in the United State today? Briefly, two key forces are changing the basic relationship between the government and welfare recipients in all programs.

First, welfare programs at all levels are being geared toward more work-related activities. Nearly every program gives priority to parents who show a willingness and commitment to work. At the same time, able-bodied adults who refuse to work now find themselves disqualified from many programs. The emphasis on work has gained strength only since 1996. Proposals for the reauthorization of welfare!---- reform all generally push for stricter work requirements and a longer work week.

Second, there has been a movement from pure in-kind provision to voucher-based systems. In-kind provision represents government efforts to both fund and directly serve the poor. Voucher systems are being emphasized not only for shelter but also for provision of food, health care, job training, and child care, among others. A cash-equivalent voucher is provided directly to the person served, who then redeems the voucher at any qualified/authorized service provider. This approach brings some of the advantages of market-based economics to the provision of welfare. The recipient spends dollars on the things he or she wants most. A classic example is public housing. HUD provides the funding for most public housing, and local government housing authorities use it to buy or build publicly owned residential units. This inefficient use of funds segregates low-income families into common facilities that typically duplicate housing resources that are widely available in the private market. Over the past decade, HUD and other government providers have been opting to fund more voucher-based, Section 8-type housing to meet the needs of the poor, thus allowing recipients greater choice in where they live.

Although welfare reform has achieved success in a short amount of time, more reform is needed. Of the many government assistance programs, only one, TANF, has seen any significant reform. The remaining programs (food stamps, SSI, housing assistance, Medicaid, and EITC) are about as inflexible as ever and generally ignore what is going on in the rest of the system. Future policy initiatives are likely to alter these programs toward the direction set for TANF in the 1990s welfare reform, with the two above trends continuing to influence new reforms.

Does Welfare Help the Poor?

David Henderson

Economists believe that people tend to make decisions that benefit themselves, so the answer to the above question seems obvious. If welfare did not help the poor, then why would so many of them go on welfare? This self-interest among the poor could also explain a phenomenon noted by those who study welfare, namely that only about one-half to two-thirds of those who qualify for welfare programs are enrolled in them. Presumably, the others have decided that it is in their self-interest to refuse the money and keep the government from meddling in their lives.

So, while it seems clear that welfare helps the poor who accept welfare, that does not mean that welfare helps the poor generally. Two groups of poor people, not counted in the welfare statistics, are hurt by welfare. The first group consists of the future poor. Economists know that welfare is a disincentive to work, and, therefore, that its existence reduces an economy’s output. If even some of this output would have been used for research and development, and if this forgone R&D would have increased growth, then welfare hurts growth by reducing R&D. If the annual growth rate of GDP in the United States had been just one percentage point lower between 1885 and 2005, then the United States today would be no richer than Mexico. The main thing that helps all poor people in the long run is economic growth. Even though the 1920s are thought of as a decade of prosperity, by today’s standards almost all Americans in the 1920s were poor. Economic growth made almost all Americans richer than their counterparts of the 1920s. A reduction in economic growth, even a slight one, if compounded, causes more future poverty than would otherwise have been the case.

The second group hurt by U.S. welfare is poor foreigners. The welfare state acts as a magnet for poor immigrants to the United States. Because of this, there are various domestic pressures to limit immigration. Without the welfare state, the number of immigrants would likely rise substantially, meaning that many previously poor foreigners would become much richer. The welfare state limits this improvement.

Based on Tyler Cowen, “Does the Welfare State Help the Poor?” Social Philosophy and Policy 19, no.1 (2002) pp. 36–54.

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About the Authors

Thomas MaCurdy is the Dean Witter Senior Fellow at the Hoover Institution and a professor of economics at Stanford University. He is a member of standing committees that advise the Congressional Budget Office, the U.S. Bureau of Labor Statistics, and the U.S. Census. Jeffrey M. Jones is a research fellow at the Hoover Institution. He was previously executive director of Promised Land Employment Service.

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Further Reading

DeParle, Jason. American Dream: Three Women, Ten Kids, and a Nation’s Drive to End Welfare. New York: Viking Books, 2004.

Jones, Jeffrey, and Thomas MaCurdy. “How Not to Mess Up a Good Thing.” Hoover Digest, no. 2. Stanford, Calif.: Hoover Institution Press, 2003. Pp. 99–108. Online at: http://www.hooverdigest.org/032/jones.html.

MaCurdy, Thomas, and Frank McIntyre. Helping Working-Poor Families: Advantages of Wage-Based Tax Credits over the EITC and Minimum Wages. Washington, D.C.: Employment Policies Institute, 2004. Online at: http://www.epionline.org/studies/macurdy_04-2004.pdf.

Malanga, Steven. “The Myth of the Working Poor.” City Journal (Autumn 2004). New York: Manhattan Institute, 2004. Online at: http://www.city-journal.org/html/14_4_working_poor.html.

Murray, Charles. Losing Ground: American Social Policy 1950–1980. New York: Basic Books, 1984.

O’Neill, June, and M. Anne Hill. “Gaining Ground, Moving Up: The Change in the Economic Status of Single Mothers Under Welfare Reform.” Civic Report, no. 35 (March 2003). New York: Manhattan Institute, 2003. Online at: http://www.manhattan-institute.org/html/cr_35.htm.

Rector, Robert, and Patrick F. Fagan. “The Continuing Good News About Welfare Reform.” Backgrounder no. 1620. Washington, D.C.: Heritage Foundation, 2003. Online at: http://www.heritage.org/Research/Welfare/BG1620.cfm.

Tanner, Michael. The Poverty of Welfare: Fighting Poverty in Civil Society. Washington, D.C.: Cato Institute, 2003.

2004 Green Book. Washington, D.C.: Committee on Ways and Means, U.S. House of Representatives, 2004. Online at: http://waysandmeans.house.gov/Documents.asp?section813.

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Footnotes

To qualify for low-income assistance, the family must have less than two thousand dollars in financial and housing assets. For the calculation of housing benefits, Table 1 assumes that the family pays nine hundred dollars in rent per month. In some circumstances, eligible benefit levels may be affected by dual-enrollment restrictions (e.g., cannot receive TANF and SSI concurrently).

In the calculation of food stamps and housing benefits, payments from TANF count as income: this lowers payments below the amounts listed in the table for the program. The program benefits listed in the first set of columns assume that the family participates only in that particular program.

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Supply

The most basic laws in economics are the law of supply and the law of demand. Indeed, almost every economic event or phenomenon is the product of the interaction of these two laws. The law of supply states that the quantity of a good supplied (i.e., the amount owners or producers offer for sale) rises as the market price rises, and falls as the price falls. Conversely, the law of demand (see demand) says that the quantity of a good demanded falls as the price rises, and vice versa. (Economists do not really!---- have a “law” of supply, though they talk and write as though they do.)

One function of markets is to find “equilibrium” prices that balance the supplies of and demands for goods and services. An equilibrium price (also known as a “market-clearing” price) is one at which each producer can sell all he wants to produce and each consumer can buy all he demands. Naturally, producers always would like to charge higher prices. But even if they have no competitors, they are limited by the law of demand: if producers insist on a higher price, consumers will buy fewer units. The law of supply puts a similar limit on consumers. They always would prefer to pay a lower price than the current one. But if they successfully insist on paying less (say, through price controls), suppliers will produce less and some demand will go unsatisfied.

Economists often talk of “demand curves” and “supply curves.” A demand curve traces the quantity of a good that consumers will buy at various prices. As the price rises, the number of units demanded declines. That is because everyone’s resources are finite; as the price of one good rises, consumers buy less of that and, sometimes, more of other goods that now are relatively cheaper. Similarly, a supply curve traces the quantity of a good that sellers will produce at various prices. As the price falls, so does the number of units supplied. Equilibrium is the point at which the demand and supply curves intersect—the single price at which the quantity demanded and the quantity supplied are the same.

Markets in which prices can move freely are always in equilibrium or moving toward it. For example, if the market for a good is already in equilibrium and producers raise prices, consumers will buy fewer units than they did in equilibrium, and fewer units than producers have available for sale. In that case producers have two choices. They can reduce price until supply and demand return to the old equilibrium, or they can cut production until the quantity supplied falls to the lower number of units demanded at the higher price. But they cannot keep the price high and sell as many units as they did before.

Why does the quantity supplied rise as the price rises and fall as the price falls? The reasons really are quite logical. First, consider the case of a company that makes a consumer product. Acting rationally, the company will buy the cheapest materials (not the lowest quality, but the lowest cost for any given level of quality). As production (supply) increases, the company has to buy progressively more expensive (i.e., less efficient) materials or labor, and its costs increase. It charges a higher price to offset its rising unit costs.

Are there any examples of supply curves for which a higher price does not lead to a higher quantity supplied? Economists believe that there is one main possible example, the so-called backward-bending supply curve of labor. Imagine a graph in which the wage rate is on the vertical axis and the quantity of labor supplied is on the horizontal axis. It makes sense that the higher the wage rate, the higher the quantity of labor supplied, because it makes sense that people will be willing to work more when they are paid more. But workers might reach a point at which a higher wage rate causes them to work less because the higher wage makes them wealthier and they use some of that wealth to “buy” more leisure—that is, to work less. Recent evidence suggests that even for labor, a higher wage leads to more hours worked.1

Or consider the case of a good whose supply is fixed, such as apartments in a condominium. If prospective buyers suddenly begin offering higher prices for apartments, more owners will be willing to sell and the supply of “available” apartments will rise. But if buyers offer lower prices, some owners will take their apartments off the market and the number of available units will drop.

History has witnessed considerable controversy over the prices of goods whose supply is fixed in the short run. Critics of market prices have argued that rising prices for these types of goods serve no economic purpose because they cannot bring forth additional supply, and thus serve merely to enrich the owners of the goods at the expense of the rest of society. This has been the main argument for fixing prices, as the United States did with the price of domestic oil in the 1970s and as New York City has done with apartment rents since World War II (see rent control).

Economists call the portion of a price that does not influence the amount of a good in existence in the short run an “economic quasi-rent.” The vast majority of economists believe that economic rents do serve a useful purpose. Most important, they allocate goods to their highest-valued use. If price is not used to allocate goods among competing claimants, some other device becomes necessary, such as the rationing cards that the U.S. government used to allocate gasoline and other goods during World War II. Economists generally believe that fixing prices will actually reduce both the quantity and the quality of the good in question. In addition, economic rents serve as a signal to bring forth additional supplies in the future and as an incentive for other producers to devise substitutes for the good in question.

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About the Author

Al Ehrbar is a principal in EVA Advisers LLC, an investment advisory firm. He formerly was editor of Corporate Finance magazine and a senior editor of Fortune magazine.

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Further Reading

Alchian, Armen. “Costs and Outputs.” In Choice and Costs under Uncertainty. Vol. 2 of The Collected Works of Armen A. Alchian. Indianapolis: Liberty Fund, 2006. Pp. 161–179.

Robinson, Joan. “Rising Supply Price.” Economica 8 (1941): 1–8.

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Footnotes

Finis Welch, “In Defense of Inequality,” American Economic Review 89, no. 2 (1999): 1–17.

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Politics, Economics, and Evolution

• Some see the social world as just too complex to be successfully explained in terms of simple and general principles. Others, in a more radical way, state that human meanings or beliefs belong to a special domain of cultural things, which is forever closed to scientific explanation… the best way to counter these conceptions is simply to demonstrate that there are indeed scientific explanations for particular social phenomena.
• —Pascal Boyer, Minds Make Societies

In Minds Make Societies,1 Pascal Boyer makes the case that our individual habits and cultural practices rest on a cognitive foundation that evolved during the hundreds of thousands of years when we struggled to survive in small bands. That period I will refer to as the formative era. Those cognitive instincts shape our inclinations in economics, politics, and sociology. But because the modern environment differs from that of the formative era, we must sometimes make the effort to correct our intuition.

Although Boyer does not discuss diet, I believe that diet can help to illustrate his thesis. Our taste for high-calorie foods evolved in response to an environment in which there was at best a slim margin between the calories that we consumed and the calories that we expended in obtaining food. Under such circumstances, it was an advantage to recognize and ingest high-calorie foods. The survivors were humans who developed a taste for such foods. But in the calorie-abundant world in which we find ourselves today, we need to tame our appetites.

One of Boyer’s examples is the spreading of rumors, or “fake news” in the current lexicon. In the formative era we were faced with imminent threats, particularly from predatory animals. This gave a survival advantage to people who could recognize and communicate about threats. Our individual and social threat-detection systems became very powerful.

As individuals, we are “faster and better at identifying a spider among flowers than a flower among spiders.” Socially, “people find the authors of descriptive texts, for example, about a computer program or a hiking trip, more competent and knowledgeable if the texts include threat-related information.”

This reminds me of a classic fairy tale in which Henny-Penny says that “the sky is falling,” spreading a false rumor. This is consistent with the thesis that we have evolved to attend to threats. Had she made a more benign pronouncement, such as “I see a rainbow with polka-dots,” Henny-Penny would have encountered at best indifference, and at worst heavy skepticism.

“Although the story of Henny-Penny and the story of ‘The Boy Who Cried Wolf’ warn us away from those who issue false threats, we still attend to people who make dire forecasts, even when their track records are poor.”

Although the story of Henny-Penny and the story of “The Boy Who Cried Wolf” warn us away from those who issue false threats, we still attend to people who make dire forecasts, even when their track records are poor.2 There continues to be a large audience for stock market ultra-bears and environmental catastrophists.

Our evolved tendency to focus on threats may explain why news outlets focus on stories that disturb and frighten their audience. Politicians also find that articulating threats can help attract followers.

Another feature of social communication is what Boyer calls moralizing. Effective coalitions involve coordination. Boyer says that the need for coordination gives an advantage to would-be organizers who describe problems in simplistic moral terms:

• A moralized description of a situation is likely to result in coordinated opinion, more so than other possible understandings of what is going on. People tend to condemn the party they see as the transgressor and side with the victim, partly because that is also the choice they expect others to make.

If I say that the financial crisis of 2008 was caused in part by regulations that lowered bank capital requirements for mortgage-backed securities, it is difficult for you to predict how many people are likely to agree with my explanation. It is much easier to coordinate around an explanation that blames “greedy bankers.” As Boyer puts it, “stating that someone’s behavior is morally repugnant creates consensus more easily than claiming that the behavior results from incompetence.”

Boyer includes a chapter on our ideas of social and economic justice. He points out that humans are better than other species at cooperative behavior.

• The unique feature of human cooperation is that it extends so easily to individuals beyond one’s kin, and in large groups, even to individuals one does not really know at all.

He goes on to say that

• … people who cooperate… are following social norms that include an aversion to inequality and a preference for prosocial behavior in oneself and in others… prosocial behavior could be stabilized, in human groups, by punishment… punishment could ensure the transmission and stability of any kind of behavior.

In game-theoretic terms, we build stable social norms by rewarding cooperators and punishing defectors. But rewarding cooperators and punishing defectors is costly. In fact, Boyer points out that in a modern society,

• You do not pursue thieves and muggers yourself but trust the police and the justice system to mete out appropriate sanctions… these institutions appeared very recently in an evolutionary timeline. And they only appeared when the size of the communities lowered the cost of third-party enforcement. Paying your taxes to support law enforcement is much cheaper than hiring your own police force.

That last sentence suggests that anarcho-capitalism might be expensive relative to state-provided law enforcement. Of course, one must be careful, because in principle competition always seems wasteful relative to monopoly, but in practice competition is better at holding down costs.

Boyer argues that in the formative era, we knew the people with whom we were dealing, we had repeated interactions with them, and we communicated with others in our group about our experiences. As a result, people who maintained reputations for honesty and trustworthiness would benefit from more trade with others. Personal reputation in a context where interaction is repeated and norm violations are reported plays a key role in our instinctive system of cooperation.

Boyer argues that our understanding of fairness, inequality, and ownership are natural and intuitive. They are based on people’s perceptions of luck versus effort in economic activity.3

Boyer points out that because our intuition about trade comes from a formative era of repeated interactions, this affects our view about what is a “fair” price. He writes,

• The person who usually trades arrowheads for your honey will not try to jack up his price if he knows you have run out of arrowheads, because he wants to keep you as a partner in the future.

No matter how firmly economists believe that charging a higher price for supplies during an emergency is efficient, from the repeated-interaction point of view the seller is engaged in “price-gouging” and should be punished. Our instinct is that the seller should no longer be considered a desirable partner with whom to exchange in the future.

The formative era did not equip us to understand that market prices are determined by market forces in general and competition in particular. Instead, Boyer writes that our most natural

• … assumption is that prices are determined only by bargaining power… The notion is that prices favor the “stronger” or “bigger” partner at the expense of the other. For instance, when we are told that such-and-such company “controls” a very high share of a market, many people conclude that the business in question can impose whatever products or prices it chooses on the consumer. Economists would point to the fact that apparently powerful corporations are, in fact, perpetually threatened by consumer choice… But the power of consumers only exists in the aggregate, which makes it invisible to individual customers.

Boyer says that in small-scale societies, we learned to judge people by their apparent concern for our relationship:

• Before mass markets it was highly efficient to infer outcomes from intentions. That is, the terms of exchange were much more likely to be beneficial to us in the long run, if the partner appeared to be motivated mostly by the desire to establish durable, mutually advantageous interaction with us. By contrast, if the only information available was that the partner was trying to maximize his own benefits, that would signal the kind of interaction we should avoid.

Even today, as consumers we are loyal to particular manufacturers and retailers, in part because we treat them as caring about an ongoing relationship. But judging intentions rather than outcomes can be hazardous in the modern world.

Concerning economic inequality, Boyer writes,

• … the economy or society as a whole is construed as a gigantic collective action, to which everyone contributes in one way or other, and from which they may receive rewards.
• … humans do not generally believe that any individual’s contribution could possibly be hundreds or thousands of times greater than anyone else’s.

This reinforces the instinct that economic inequality must be derived from power rather than from merit.

In a modern economy, we do not observe many of the processes involved in providing us with the goods and services that we consume. Our intuition is to take these processes for granted. Boyer writes,

• If a great deal of production is just given—to be more precise if some of our cognitive systems take it as given—then it is bound to activate the intuitive systems concerned with communal sharing. That is because a good part of the available goods and services are mentally processed as a windfall, as something that is clearly there, but whose origin is simply not represented.

For more on these topics, see the Econlib articles “The Science of Liberty,” by Arnold Kling, Feb. 1, 2016; “Can Evolutionary Psychology Explain Your Political Beliefs?” by Arnold Kling, Feb. 3, 2014; and “Price Gouging Is Fine but Humans Are Better,” by Michael Davis, Nov. 6, 2017. See also the EconTalk episode Sebastion Junger on Tribe.

Recall my critique of G.A. Cohen’s “camping trip” model of socialism.4

There is much more to Boyer’s book, including chapters on religion and on the family. But I found the chapter on economics and our ideas of social justice to be particularly convincing. It turns out that, although his name does not appear in the index, research over the past 50 years or so has confirmed Friedrich Hayek’s belief that human intuition was formed to deal with a more primitive environment.

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Footnotes

[1] Pascal Boyer, Minds Make Societies: How Cognition Explains the World Humans Create. Yale University Press, 2018.

[2] See Scott Sumner’s 2014 criticism of stock market bear Robert Shiller (2001: A Market Odyssey (Shiller out of sample)) and note that the S&P 500 has gone up nearly 50 percent further since then. On environmental catastrophists, see Mark Perry’s 2017 critique (18 spectacularly wrong predictions made around the time of first Earth Day in 1970, expect more this year ).

[3] See my essay, “Capitalism and Inequality,”. Library of Economics and Liberty, November 7, 2016.

[4] “Camping-Trip Economics vs. Woolen-Coat Economics”. Library of Economics and Liberty, February 2, 2015.

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*Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is the author of several books, including Crisis of Abundance: Rethinking How We Pay for Health Care; Invisible Wealth: The Hidden Story of How Markets Work; Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy; and Specialization and Trade: A Re-introduction to Economics. He contributed to EconLog from January 2003 through August 2012.

Read more of what Arnold Kling’s been reading. For more book reviews and articles by Arnold Kling, see the Archive.

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Vera Smith: The Contrarian View

In 1936, seven years into the Great Depression, John Maynard Keynes’ General Theory of Employment, Interest, and Money was published. The culmination of Keynes’ theorizing in support of policies of manipulation of money and credit by the state in order to achieve macroeconomic equilibrium came with that book. A central bank, in that context, became the main instrument enabling governments to execute such policies.

With all that going on, what does London School of Economics student Vera Smith do? She writes a doctoral dissertation bringing irrefutable historical evidence contrary to the idea that the manipulation of money and credit is a “new” thing necessary to produce macroeconomic stability. That dissertation became the basis of The Rationale of Central Banking and the Free Banking Alternative,1 her book, also published in 1936.

Costs, Cancer, and Making Better Choices

You might think economists are obsessed with the idea of “cost.” It is nearly impossible to talk to or read economists without our invoking cost for some reason or another. This is, however, not some irrational obsession on our part. The concept of cost is at the very heart of economics. It comes into play in almost every type of analysis or topic of discussion in which economists engage.

Applying the economist’s concept of cost can also be incredibly useful for much of our everyday thinking. A sound understanding of the interrelated ideas of opportunity cost, marginal cost, and sunk costs can provide important guidance in navigating almost any situation of choice. Even those that we don’t think of as economic.

In this article, I want to explore economists’ conception of cost; I will emphasize three points. First, the fact that we live in a world of scarcity means that every choice we make has a cost. Second, cost is ultimately about our expectations and therefore resides in the realm of the subjective. Putting these first two observations together leads to my third, and perhaps most important, point: cost is always forward-looking. Past events that we cannot change are not relevant costs when we make a choice.

The idea of sunk costs is particularly important in our everyday decision making. I want to explore it by talking about the role that anger and other emotions can play by interfering with the choices we make, and how understanding sunk costs and the forward-looking nature of choice can make it a little bit easier to overcome them.

Scarcity

Almost every introductory economics course begins with the fact that we live in a world of omnipresent scarcity. For economists, scarcity is not a physical concept—it is not the same as “rarity.”

We can illustrate by borrowing an example from the textbook The Economic Way of Thinking. To the best of my recollection there are, at most, two Steve Horwitz autographed baseballs in existence. This makes them exceedingly rare. The number of Derek Jeter autographed baseballs is significantly larger. It’s tempting to think that the Jeter baseballs are less scarce than the Horwitz ones. Unfortunately for me, many people think a Jeter autograph is very desirable, but not even my dad would want a Horwitz autographed ball. That means it’s the Jeter baseballs that are scarce in the sense that economists use the word.

For economists, scarcity means that people can imagine more possible ways in which they can put a good to use than there are goods that can be used. The greater that gap, the more scarce something is. Thus, the Jeter baseballs are scarcer than the Horwitz ones.

Because we have neither the time nor resources to satisfy all of our wants, we must choose which ones to satisfy. Therefore, every choice we make means giving up something else. I can spend the next hour at the gym or grading papers. I can spend next Thanksgiving at my family’s house or my wife’s. I cannot do both—I have to choose. Scarcity is omnipresent.

Opportunity cost

The cost of any choice can be understood as what we have to give up when we choose which want to satisfy. The “opportunity” in opportunity cost refers to the opportunity we forgo when we choose one thing over another. In the examples above, the opportunity cost of going to the gym is grading papers. The opportunity cost of Thanksgiving with my family is Thanksgiving with my wife’s family. And vice versa. But this is not quite precise enough. Really understanding opportunity cost requires a bit of a digression.

Another early topic in introductory courses is the idea that economic value is subjective. We mean this in a couple of ways, but the most important insight is that value is “created by the subject.” What gives goods value is not something inherent to the good, but that people believe that it can satisfy their wants. People are willing to sacrifice money for a Big Mac because they believe that it will satisfy their hunger, not because Big Macs are uniquely valuable. It is the belief that they will give us something we want that leads us to give goods value and therefore makes us willing to sacrifice for them. We, as subjects, give value to the objects of our action.

The subjectivity of value also means that the same physical object will have different value to different people—different subjects. If you’re a vegetarian, we will value the same plate of chicken wings very differently. When we talk about value subjectivism, differences across people and the fact that it’s difficult to compare our value assessments is what’s often emphasized. While it is certainly important, it’s only a consequence of the more fundamental subjectivist insight—the fact that goods have any value at all is a result of the fact that we, as actors, create it.

So what does the fact that actors create value have to do with developing a more subtle understanding of opportunity cost? Remember that value is based on the belief that a particular good will satisfy a particular want. When we make a choice, we are choosing into an unknowable, but not an unimaginable future. Economic choice is about choosing between various expectations.

In the moment that we make a choice, we compare our evaluations of different future states of the world: the one in which I choose one option and one in which I have chosen another. My evaluation of those possible futures is based on my expectations about how well either option will satisfy the relevant unfulfilled ends.

Think about yourself at a restaurant. When you decide between a steak dish and a pasta dish, you’re deciding between your expectations of how well each dish will satisfy your hunger. Looking at the menu is like being at a fork in the road. You have to make your best guess as to what each path forward will look like. Choosing one entrée over the other means having to persuade yourself of the accuracy of your own expectations about each dish.

Choice is as much about “getting over” something as it is about giving it up. What we really do when we choose steak over pasta is as much “getting over” our expectation of the deliciousness of the pasta as it is giving up what the pasta tastes like. Human choice is a process of getting over the mental hurdle of having to decide that is forced on us by scarcity. It is the act of persuading ourselves about the superiority of one of our alternative visions of the future.

Once we recognize that it’s all about expectations, we understand more completely that choice, including opportunity cost, is forward-looking. And because it’s forward-looking in this way, we never really know what our opportunity cost was. Put differently, how can we know exactly what it is we gave up when we have given it up? When I decide between steak and pasta for dinner and choose steak, I never know for sure what my opportunity cost was because I gave up the pasta (assuming I do not have a dining companion who orders it and gives me a taste). When I go to class instead of sleeping in, I don’t know for sure what I gave up because I didn’t sleep in. I might have had great dreams or terrible nightmares. I might have slept soundly or been awoken by a fire truck.

So to be more precise about opportunity cost, we might define it as the foregone expected subjective utility of our next best option. As Deirdre McCloskey likes to say, economics is what happens between your ears. The fundamentals of cost and choice are an excellent example of that aphorism.

Marginal cost

For more on these topics, see the Library of Economics and Liberty articles “The Relentless Subjectivity of Value”, by Max Borders, May 3, 2010; and “Think on the Margin,” by David R. Henderson, Jan. 4, 2016. See also Marginalism, by Steven E. Rhoads; Opportunity Cost, by David R. Henderson; and Benefit-Cost Analysis by Paul R. Portney in the Concise Encyclopedia of Economics.

Understanding the forward-looking nature of cost also helps us think about the idea of marginal costs. For economists, “marginal” means something like “the next thing.” So the “marginal cost” of something is the cost associated with obtaining the next unit of it. In a “buy one, get one at half price” sale, the marginal cost of buying a second 50 pair of shoes is 25. The total cost of two pairs of shoes is 75. Notice the difference between “a second” and “two” in comparing marginal and total costs. Marginal cost is the cost associated with moving forward (“a second”), while total cost looks backward at all that we (will) have spent (“two”).

From this perspective, opportunity costs and marginal costs are two different ways of looking at the same phenomenon. The marginal cost of the second pair of shoes is the 25 they would cost, and that’s ultimately understood in opportunity cost terms as the expected subjective utility of the next best use of that 25. Marginal cost looks at this in terms of a change we might make to our current situation, while opportunity cost looks at what we imagine we were giving up as we make that change. But both describe the same act of choice.

As Heyne, Boettke, and Prychitko put it in The Economic Way of Thinking: “All opportunity costs are marginal costs and all marginal costs are opportunity costs” (page 79, 13th edition).

Sunk costs

Because choice, and therefore cost, is forward-looking, past choices that cannot be altered should be irrelevant to our current decision-making process. To take another example from The Economic Way of Thinking, imagine we place a 5,000 non-refundable deposit on a venue for our wedding. Now suppose we are considering canceling the wedding. What would be the cost of canceling?

The cost, from an economic perspective, is what we give up going forward with the decision to cancel. That does not include the cost of the venue rental, because no matter whether we get married or not we’re out the 5,000. That choice has already been made and is irreversible. It has become what we call a sunk cost. Because sunk costs cannot be changed going forward, they are not relevant to the next decision.

For another example, consider car repairs. Suppose I spend 400 fixing my car only to discover a month later that I need an additional 700 in repairs. In deciding whether to spend this 700 on repairs, the 400 I’ve already spent is irrelevant. I spent that already, and I can’t get it back. The question I’m facing is whether it’s worth spending the 700 on this repair. Economic thinking tells us that thinking “well, I’ve already put 400 into it…” is a mistake. The prior 400 might be informative in deciding not to purchase that model of car again, but it’s not relevant to the question of the next repair.

For the bride and groom in the wedding example it will be hard to ignore the 5,000 already spent, but it’s the economically correct way of considering the decision. They should consider the imagined subjective importance of loss of the gifts, the disappointment of their friends, or anything else that is part of the expectation of what will unfold in each of the alternative scenarios in front of them. They might even learn a lesson about the perils of non-refundable deposits. But what cannot be changed now cannot be a cost of moving forward. Choice is about what we will do next.

Don’t get angry. Think like an economist.

This rich concept of cost, which so captures economists, can make it much easier to deal with a whole variety of decision-making situations. It helps explain why poker players say, “Don’t throw good money after bad.” It explains why if you oversleep into an important meeting or a class you shouldn’t say, “Well I missed half of it, so I might as well go back to bed.” Sunk costs are sunk. You can’t get that half of class back, so considering that should be irrelevant to your decision moving forward. But you can make the second half. The question is always forward-looking and marginal: “is it worth it for me to go to the rest of class, compared to what else I could do with that time?”

The forward-looking model of decision making that helps us understand cost can help us in other circumstances, too. Thinking on the margin and recognizing the irrelevance of things we can’t change for future decisions can also help make better decisions in heavily emotional contexts. Folk wisdom understands this: “It’s no use crying over spilt milk.” Note that this saying is phrased in terms of “use.” Getting upset over what cannot be changed isn’t useful. An emotional reaction to what we can’t change might be cathartic or feel good in other ways, but it can’t change the past and is probably not helpful for changing the future.

I have struggled with this in the last few months. Just after getting married and starting a wonderful new job, I received a cancer diagnosis. I want to be so angry. There’s a cosmic injustice here that I just want to scream at. But every time I feel myself getting angry, I remind myself that all the anger in the world doesn’t turn back time or stop cancer cells from dividing and growing. The fact that I have multiple myeloma, for decision-making purposes, is importantly like a sunk cost.

“To be consumed by anger at my disease would be to fall for the fallacy that sunk costs matter.”

To be consumed by anger at my disease would be to fall for the fallacy that sunk costs matter. Wasting my time and energy being angry about it does nothing. The question is, as always for economists, how do I move forward given the place I find myself? Anger is backward-looking. Figuring out what I can do to beat cancer is forward-looking. What matters is taking every pill, making every appointment, and learning more about how to treat my disease. That is what has kept me healthy, not being angry at the universe.

It doesn’t have to be economic costs and it doesn’t have to be cancer for this advice to be useful. We can apply this to any experience that prompts us to react emotionally about and invest our time and resources in things we can’t change. If the concern is moving forward in the best possible way, those emotions are too often the equivalent of complaining about sunk costs or crying over spilt milk. They can get in the way of good decision making.

There’s more to life than economics. But this lesson from economics, that in deciding what we should do next, the past is irrelevant because we can’t change it, applies to all human choice. Taking it seriously can help us not only make better decisions, but also recognize that however good it feels, reacting with anger or frustration to unfortunate events doesn’t affect the one thing we can change—the future. Time’s arrow runs in only one direction. Thinking carefully about costs can help us live a better and happier life.

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*Steven Horwitz is the John H. Schnatter Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University in Muncie, IN. He is also an Affiliated Senior Scholar at the Mercatus Center in Arlington, VA, and a Senior Fellow at the Fraser Institute of Canada. He is the author of three books, including most recently Hayek’s Modern Family: Classical Liberalism and the Evolution of Social Institutions. He has written extensively on Hayek and Austrian economics, monetary theory and history, and American economic history, and is a frequent guest on radio and cable TV programs.

For more articles by Steven Horwitz, see the Archive.

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Markets without Friction

“If you want to know why at present we own rather than share, the answer is transaction costs. And that is all going to change.” —Michael C. Munger, Tomorrow 3.0: Transaction Costs and the Sharing Economy

In his most recent book, Mike Munger sees Airbnb and Uber as portents of a future in which reduced transaction costs will allow us to make more efficient use of durable goods. In the process, Munger offers other important lessons in economics. His thesis also leads one to worry about the implications for liberty in a society where individuals own less and share more.

A Century of Risk, Uncertainty, and Profit

In 1917, Frank Knight submitted an essay entitled “Cost, Value, and Profit” to Hart, Schaffner, and Marx as part of an essay contest whose aim was “to draw the attention of American youth to the study of economic and commercial subjects.”1 Knight’s essay ended up winning second place. First place went to E. E. Lincoln, for his study of The Results of Municipal Electrical Lighting in Massachusetts, a very good example of institutional economists’ interest in the intersection of industrial studies and public administration which received several nice reviews. Both first and second place manuscripts were entitled by the terms of the essay prize to be published. Lincoln’s book was published immediately after the contest, appearing in 1918. Knight, on the other hand, heavily revised his manuscript at least once more while he taught during 1917-1919 at the University of Chicago and then again between 1919 and 1921 at the University of Iowa. When Risk, Uncertainty and Profit was published in 1921, it received only two reviews. However, while Lincoln’s study was quickly forgotten, Knight’s ended up changing the course of economic theory and teaching in the twentieth century.

How so, you might ask? What can a single book do?

Culture Matters

Libertarian intellectuals and activists know that culture matters. If I had a hundred bucks for every time I’d heard someone chalk up poverty to a black box called “culture” or demand that we “change the culture” or complain that Hollywood or the universities or the media or women in general are culturally biased against markets I could buy a vacation home. And not a cheap one, either.

That culture matters isn’t controversial. The real issue is that most libertarians simply aren’t terribly curious about how culture works. They treat it as an instrument—a tool for promoting or hampering the advancement of their political ideas—rather than a phenomenon worthy of its own careful observation and analysis.

Libertarians and classical liberals know and care about government. They know and care economics. They don’t know or care about culture.

“When faced with cultural outcomes they dislike, people who surely know better fall back on explanations that sound eerily reminiscent of how leftists and populists describe markets.”

One result is that, when faced with cultural outcomes they dislike, people who surely know better fall back on explanations that sound eerily reminiscent of how leftists and populists describe markets. Either a small group of powerful people determine the public’s attitudes and behaviors or somewhere there’s a magic lever and if we could find it and pull it everybody would agree with us. We just need a good documentary film and more celebrities!

But culture is not a tool. It is not a machine. It is an emergent order, as complex, dynamic, and intellectually interesting as the economy—and thoroughly entangled with it.

Here are a couple of useful definitions of culture :

“a way of life of a group of people—the behaviors, beliefs, values, and symbols that they accept, generally without thinking about them, and that are passed along by communication and imitation from one generation to the next.” “the cumulative deposit of knowledge, experience, beliefs, values, attitudes, meanings, hierarchies, religion, notions of time, roles, spatial relations, concepts of the universe, and material objects and possessions acquired by a group of people in the course of generations through individual and group striving.”

Culture includes the topics newspapers put in their “culture” sections—arts and entertainment—and the rest of the newspaper as well. It encompasses how we think and behave. It determines who we trust or fear or censure. Culture shapes who we want to be and who believe we are. It is too important to be treated as an afterthought.

In a liberal order, however imperfect, the competition, criticism, innovation, and open-ended pursuit of better ways of doing things that characterize economic dynamism also give rise to cultural dynamism. Free individuals exercise voice and exit. They use what I’ve called “criticism by expression” and “criticism by example”—otherwise known as complaining and entrepreneurship—to shape new norms and institutions. And since the culture and the economy are not, in fact, separate spheres, the two forms of dynamism affect one another.

I’d like to suggest a few big questions through which classical liberals might make contributions to a better understanding of culture. These questions in no way exhaust the range of possibilities, but they give us somewhere to start.

How do cultural norms shift and why?

The mid-20th century period in which the modern libertarian movement arose is now looked upon with great nostalgia, especially in the United States. As my friend Brink Lindsey puts it, the right wants to live there and the left wants to work there.

When Donald Trump says “Make America Great Again,” the again refers to the world in which he grew up. The war was over, standards of living were rising, and new technologies from vaccines to synthetic fibers promised a better future.

Social critics of the day deplored mass production, mass consumption, and mass media, but the general public enjoyed their fruits. The burgeoning middle class happily replaced tenements with “little boxes made of ticky-tacky.” Snobs might look down on the suburbs, but families were delighted to settle in them. Faith in government was high, and other institutions—universities, churches, corporations, unions, and civic groups—enjoyed widespread respect.

It looked like a satisfactory equilibrium. But it wasn’t. The 1950s, after all, produced the 1960s.

Consider a series of best-selling books: The Lonely Crowd, by David Riesman, published in 1950; Atlas Shrugged by Ayn Rand and The Organization Man by William Whyte, both published in 1957; and The Feminine Mystique by Betty Friedan, published in 1963. All of these books, and undoubtedly others I’ve overlooked, took up the same essential theme: the frustration of the person of talent and integrity in a society demanding conformity and what Riesman called “other-directedness.”

These books succeeded in the economic marketplace, as well as the marketplace of ideas, because they tapped a growing sense of discontent with the prevailing social and business ethos. Their audience might have been a minority of the population, but it was a large, gifted, and ultimately influential one. Despite the era’s prosperity—or perhaps because of it—many people had come to resent social norms that demanded that they keep their heads down, do what was expected of them, and be content to be treated as homogeneous threads in the social fabric. The ensuing cultural upheaval, which peaked in the late 1970s, took many different forms, with unanticipated results.

One of the most paradoxical examples I’ve run across comes from Dana Thomas’s 2015 book Gods and Kings,1 on the fashion designers Alexander McQueen and John Galliano. It’s about Galliano, who was born in Gibraltar and grew up in South London as the son of a plumber. His career, Thomas comments in passing, was made possible by two cultural phenomena: Thatcherism and punk.

How could that be? After all, Thatcherism and punk are usually seen as antagonistic. I asked Thomas about it in an interview. “Both were breaking down British social rules and constraints,” she said. Punk brought together kids of all classes, while Thatcher’s economic reforms encouraged entrepreneurship.

If you had an idea and you had the backing then you could make it happen, no matter what your dad did in life or your mother did in life or where you came from or what your background was, or where you grew up or what your accent sounded like. These were all barriers before. So it double-whammied for Galliano. It was great. Because it allowed him to get out of South London, get into a good art school and be seen as a bona fide talent on his own standing, as opposed to where he came from. And he was also able to get the backing to start his company, because there was more money out there. It gave him more freedom. Before punk and before Thatcherism, chances were the son of a plumber was not going to wind up being the head of a couture house.

If you care about the open society, how could you not be interested in a phenomenon like that? How exactly do such transformations take place, and what are their unexpected ripple effects? What processes of experimentation and feedback are at work? Could a young designer do the same thing today and, if not, why not? Are these moments of cultural and economic opportunity inherently fleeting?

What is the relation between merit and value?

Today’s cultural values and assumptions are as different from those of the mid-20th century as a modern container port is from the harbor in On the Waterfront or a contemporary coffeehouse is from a midcentury diner.

Classical liberals whose intellectual roots are in the mid-20th century often refer to themselves as individualists because, in the middle of the 20th century, their focus on the value, freedom, and agency of the individual made them distinctive.

By the last quarter of the 20th century, that distinctiveness had disappeared. Individualism was no longer a dissenting view. It was the cultural norm, expressed in phrases like “do your own thing” and “follow your bliss.” Social critics began fretting about “expressive individualism” and “bowling alone.”

In both markets and culture, the blue-collar values of loyalty, solidarity, security, and physical production, have largely given way to the creative-class values of creativity, self-expression, risk-taking, and brains. It’s the revenge of the nerds. The winners are symbolic analysts. The losers are guys good with their hands. For those who adhere to the old values, the shift can be infuriating. Many people suddenly feel not merely economically insecure but culturally disrespected.

In The Constitution of Liberty, Friedrich Hayek made the important point that we should not confuse what the market values at a given point in time with what is meritorious. Market value is strictly a matter of relative scarcity—of supply and demand, of the technologies and production functions of the moment. Commanding a higher salary doesn’t demonstrate your intrinsic superiority. Your economic value is historically contingent and separate from your merit.

Naturally people who think their merit should command higher pay don’t appreciate such cold analysis. And economically successful people absolutely hate the idea. I once interviewed a Harvard professor about his experience teaching Hayek.2 Of all Hayek’s ideas, he told me, the merit-value distinction was the one his students found least congenial. “Hard-working, successful, achievement-oriented Harvard students don’t like that idea,” he said. “They’re troubled with the idea that there’s a lot of luck.” So are many libertarians.

As a moral and intellectual point, the merit-value argument is tremendously important. For starters, it is empirically correct. The circumstances of your time and place do determine the potential rewards of your efforts and native gifts. But in treating merit and value as separate phenomena, Hayek’s distinction may be missing how culture (merit) and the economy (value) actually interact. Where do our ideas of merit come from anyway, and how do they relate to economic conditions?

In her account of the Great Enrichment, Deirdre McCloskey argues that a shift in cultural norms about merit led to a vast increase in wealth.3 If she’s right, how did that change come about? The merit ascribed to bourgeois commercial venturing has had its ups and downs over the centuries. Do they track at all with economic value?

Might merit, like value, flow to what is productive but scarce? My husband Steven Postrel argues that “merit tracks value with a lag.” In this formulation, when the economy rewards certain qualities, over time people come to praise those attributes and honor those who exhibit them. I’m not sure Steve’s right, but you can certainly find examples to support his theory.

In 1956, defying the era’s powerful norms of corporate loyalty, a group of engineers dubbed “The Traitorous Eight” left Shockley Semiconductor to start their own company, Fairchild Semiconductor. That startup gave rise to a second generation of companies, including Intel, which gave rise to still others, and on and on. As Silicon Valley grew, employee behavior once deemed traitorous became the new, much-admired norm of high-tech entrepreneurship. Would we admire that behavior if it didn’t produce wealth?

When does value shape ideas of merit or vice versa? Are there any patterns, or these cultural and economic qualities as separate as Hayek suggested?

How does the concept of creative destruction apply to culture?

For more on these topics, see the EconTalk episodes Peter Boettke on Elinor Ostrom, Vincent Ostrom, and the Bloomington School and Deirdre McCloskey on Capitalism and the Bourgeois Virtues. See also Postrel on Progress, by David Henderson, EconLog, December 18, 2012; and Creative Destruction, by Richard Alm and W. Michael Cox in the Concise Encyclopedia of Economics.

Economic dynamism’s trial-and-error learning can look pretty ugly when you’re in the middle of it. Startups fail. Long-standing companies go out of business. People lose their jobs. Cities, regions, or countries decline even as others rise. Investors lose money. Skills developed over a lifetime suddenly become worthless. In the short term, the costs and benefits fall unevenly. In the long run the world is better off—dramatically so, as McCloskey’s work demonstrates.

Is the same thing true of culture? The transitions to new norms can certainly be ugly. We need only look at the emotionally charged hearings on U.S. Supreme Court nominee Brett Kavanaugh’s alleged sexual misconduct as a teenager. Pull back from the specifics of this case and you see cultural dynamism at work. Norms are shifting.

Looking back at the coming-of-age movies popular in the early and mid-1980s, the Scottish journalist Alex Massie observes4:

• At precisely the time when Brett Kavanaugh was a senior at Georgetown Prep and an undergraduate at Yale, movies such as Revenge of the Nerds, Fast Times at Ridgemont High, and Sixteen Candles routinely treated date rape and statutory rape as vehicles for laughs. The kind of boorish, frat-boy behaviour Kavanaugh is accused of was entirely typical of the time and the culture…. None of this means Kavanaugh is guilty. Nor, of course, does it absolve him. But what was more or less mainstream then—particularly in the elite milieu in which he moved—is not considered acceptable now.

The culture is groping toward new standards of behavior. People are trying to find a way to combine sexual liberation and gender equality with gentlemanly propriety and skepticism about drunkenness. It’s the 1970s meets the 1870s, with unpredictable results.

The risk of moral panic and false charges is high. As someone who worries about such things, I’m not entirely comfortable with viewing this process as a cultural dynamic driven by criticism, competition, and feedback. But that’s what’s happening. We’re in the middle of a trial-and-error process, and mistakes are inevitable. The previous equilibrium was unstable and unjust. Finding an alternative is hard.

If classical liberals better understood—or simply were more interested in—how culture evolves, we might have more constructive insights to contribute to the process. What can a liberal analysis tell us about cultural change? Do institutions of experimentation and feedback work to correct errors in cultural systems as they do in economics? Are there significant differences that might affect outcomes? Are the time scales similar or different? Are there institutions that might limit the collateral damage—a worthwhile question in the case of economic dynamism as well?

Each of these three big questions could supply a lifetime’s research agenda for many different people—and they are only a few of the myriad cultural topics that deserve the attention of thinkers who care about the open society. My own work on culture, in fact, largely deals with other topics.

Cultural analysis is psychologically more challenging than economic analysis. We live inside our cultures. Whether we accept or reject prevailing norms, they influence how we think. We have rooting interests. It’s hard to be objective. But it’s worth trying, if only because cultural reality has a way of carrying the day.

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Footnotes

[1] Gods and Kings: The Rise and Fall of Alexander McQueen and John Galliano, by Dana Thomas.

[2] “Friedrich the Great”, by Virginia Postrel. Boston Globe, January 11, 2004.

[3] See, for example, “A conversation with Deirdre McCloskey”. James Pethokoukis interviews Deirdre McCloskey about her work and the Great Enrichment. AEI.org, October 20, 2017.

[4] See, for example, “The Kavanaugh hearings mark a low point in a low era of American politics”, by Alex Massie. CapX.co, September 28, 2018.

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*Virginia Postrel is an author, columnist, and speaker whose work spans a broad range of topics, from social science to fashion, concentrating on the intersection of culture, commerce, and technology. Postrel is the author most recently of The Power of Glamour: Longing and the Art of Visual Persuasion, published by Simon & Schuster. Her previous books are The Substance of Style (2003) and The Future and Its Enemies (1998). She is a regular columnist for Bloomberg View and writes a bimonthly column on history and material culture for Reason Magazine, of which Postrel was the editor from July 1989 to January 2000. Under her leadership, Reason was a finalist for the National Magazine Awards, the industry’s highest honor, for essays in 1993 and public interest journalism in 1996 and in 1998, when Reason had two finalist articles. She founded Reason.com in 1995, establishing Reason as an online pioneer.

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Democracy and Its Discontents

Democracy today receives the general assent of humanity, yet it also suffers from infirmities that make others doubt its very survival. Is democracy mainly the political expression of the principle of individual sovereignty? Or is it rather characterised by the levelling of the rights and condition of the citizens? Or must it be understood as the expression of communal and national feelings?

As regards the procedural side of political arrangements, constitutions are increasingly seen as expressions of class struggle to be set aside as soon as a new popular coalition attains power. Representative democracy, whereby citizens delegate political decisions to deputies, senators, or presidents, is considered elitist. Referenda, which should help the people make their voice heard on questions of great import, often turn into plebiscites and become instruments of confrontation or even oppression. The separation of powers, devised as a barrier to stop precipitous decisions to satisfy short term opinion, is continually side-stepped by demagogues greedy for power.

If we look at the material rather than the formal content of politics, the picture is also dismal. The welfare state, adopted by so many nations after World War II, is a dream that can easily turn into a nightmare. The belief that the state should protect individuals ‘from cradle to grave’, if taken seriously, results in infringements of individual liberty. Art and science must be protected and financed by the state. Education should be principally delivered by the public administration. Health services should be universal and free at the point of service. The ‘precautionary principle’, especially as applied in the European Union, justifies growing regulation. In sum, democracies must try to foster the happiness and well-being of the population by any means at hand or at whatever cost.

My thesis is that the only way to save democracy from the contradictions that cause so much discontent is to take individual liberty as the basic principle and re-interpret the other two elements as subordinate to the principle of individuality.

The individual and democracy

Logically speaking, democracy is a corollary of individual sovereignty. Individualists who see individual freedom as the basis of a well-ordered society will be naturally led to defend the participation of citizens in public affairs. They will want their voice to be heard and their vote to count in communal questions that affect them.

However, classical liberals face two kinds of problems in the practice of democracy. One is that political decisions always have an element of imposition that can lead to the oppression of minorities. The other is that the complexity of political mechanisms allows small groups to exploit the democratic system to their own benefit.

The step from individual private action to collective democratic decision is not an easy one. How different it is to take decisions in the private sphere from decisions in the public field was well expressed by Milton and Rose Friedman in their book Free to Choose (1980)

The ballot box produces conformity without unanimity; the marketplace, unanimity without conformity. That is why it is so desirable to use the vote in as far as possible only for decisions where conformity is essential.

For more on these topics, “Ronald Coase, the Unexpected Economist”, by Pedro Schwartz, Library of Economics and Liberty, Oct. 7, 2013 and Externalities, by Bryan Caplan in the Concise Encyclopedia of Economics. See also “Lessons and Challenges in The Limits of Liberty“, by Pierre Lemieux, Library of Economics and Liberty, Nov. 5, 2018.

Market choices and private contracts are fundamentally different from authoritative decisions and communal agreements. In family life, in personal friendships, and in the marketplace a special kind of unanimity reigns, unanimity ‘nemine discrepante‘, when two agree and the rest abstain. This is to say, in the private field, when two persons or two firms reach a free agreement to their mutual benefit, the rest of society abstains.1 Economists since John Stuart Mill and Arthur Pigou have over-insisted on the idea that all private agreements have ‘externalities’ that must be corrected. One should follow Ronald Coase instead in saying that so-called ‘market defects’ are optimal adaptations by individuals to defects of politics and institutions. As James Buchanan has remarked, the concept of externalities assumes that some authority outside those implied in an agreement can define what the optimal outcome should be. Rather, if those implied find defects in the result they will question the institutional framework in which they function.2

“The essence of politics is that the majority imposes its will on the minority in pursuance of a social objective.”

The essence of politics is that the majority imposes its will on the minority in pursuance of a social objective. Classical liberal constitutions must therefore agree to entrench the respect of human rights, the defence of private property, and the performance of contracts. However, there is always a remnant of questions that demand to be agreed upon by a majority, at least in matters of justice and defence and the taxation needed to finance them. Here is the origin of the defects of public action and of the danger that majority decisions result in the oppression or exploitation of minorities, and even in a populist tyranny.

Saving democracy from itself

What is to be done? We could try to change our electoral laws. Senators and Representatives in the U.S. Congress, for example, could be subject to term limits. Frequent referenda could be tried, along Swiss lines. And while we are at it, we could also decentralise power radically as among the cantons of Switzerland. Or rewrite our constitutions to move them away from the catalogues of rights without duties they have become. And reinforce the checks and balances on executive power that used to be their essence.

I am afraid I must express scepticism regarding these reforms. All electoral laws in their diversity are imperfect and changes satisfy few people. Referenda have been a force for good in Switzerland, a bearable process in Canada, and rather unsuccessful in California. Devolution is positive when not transformed into metaphysical nationalism. Even a Constitution like that of the United States, which appears as an immoveable bulwark of liberty, has changed, sometimes for good, sometimes for ill, by the Supreme Court following the moods of public opinion. Thus, I find Buchanan’s belief in constitutional reform and constitutional limitations perhaps a little naïve.

Three forces for freedom

Democracy plods on thanks to three powerful antitoxins. First, there seem to be automatic political stabilisers at work in the system. I find it striking that the size of the state in even the most interventionist countries is pulled back to an average of 40 or 50 percent of GDP when voters find that going beyond that seriously endangers growth. While still a large proportion of our yearly production, we must be thankful for small mercies: in the long run, competition between democracies with regard to personal freedom, economic progress, and scientific prowess strikes a chord with many voters. When it becomes evident that ‘liberal’ or ‘social democratic’ policies have become an obstacle to prosperity, there frequently arise movements in favour of free market policies. Such reactions against the drift towards the ‘dormant society’ of socialism took place in Britain with Margaret Thatcher, in the United States with Ronald Reagan, in New Zealand with economics ministers Roger Douglas and Ruth Richardson, in Poland thanks to Leszek Balcerowicz, and in Sweden under Carl Bildt. But for a person of democratic convictions and free market beliefs there are another two more powerful reasons for hope: international trade and technological discoveries.

See “The Bother with Brexit”, by Pedro Schwartz, Library of Economics and Liberty, Aug. 6, 2018.

The first is free trade. In a large country such as the United States or a sizeable area such as the European Union, international trade and migration will, despite the regulators, always be a force for competition. This is even truer of small countries whose size forces them necessarily to be open to the world. In both cases, international trade will be a potent antitoxin against coalitions of rent seekers. It is only in middle sized economies with a national market large enough for established firms to prosper that interest groups with political clout will be able to hold their ground against international competition. Anti-trust will be used as a fig leaf to cover their privy parts against prying eyes. In the same way, these protectionist countries will use international aid to cover up the harm caused to developing countries by their import restrictions. This is one of the reasons why people who defend a ‘hard Brexit’ would like to see Britain leave the European Union with no more ado and open its commercial borders unilaterally to all comers.

The second reason for hope is the immense development of the digital world. The new communication technologies, big data in the cloud, the growing abundance of open information, internet manufacturing, 3D printing, and so on, seem unstoppable. The balance of Joseph Schumpeter’s creative destruction will be positive, despite the efforts of state authorities to control the internet and the people who use it.

Democracy can be learnt

I do not want to sound too pessimistic because it is an observable fact that democracy at higher stages of civilisation is less imperfect than in countries that are just beginning to learn the strange ceremonies of free speech, independent courts, private property, and respect for the dignity of individuals. I unashamedly hold it that it is better, as Karl Popper used to say, to be able to change your government without bloodshed: it is quite an advance in political mores to send your adversaries to the opposition benches rather than to shoot them at dawn, or condemn them to life imprisonment after a spate of torture. Voting is in itself a curious procedure that we have agreed to put in place of the more natural ideology expressed by the dictum that power comes out of the mouth of a gun.

For all its faults, democracy is better than other political arrangements. I would rather live in one of those rickety western commonwealths than in China or Russia, let alone Cuba. It takes a long time and much forbearance to acquire the habits of tolerance and of distaste for oppression, even of one’s political enemies. But these habits can be learnt. Experience and criticism can help countries avoid the worst blemishes of popular governance.

A precondition for the three forces I mentioned to succeed in purging democracy of its worst habits is never to cease in the effort of discovering of new ideas for progress and new arguments for liberty.

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Footnotes

[1] A business deal such as the sale of a house results in the mutual benefit of the parties concerned, which in principle does not affect the rest of society. This is not to deny that such a contract has consequences for third parties, in so far as it (even if minimally) influences real estate prices. But it is a rule to be abided to, that the pecuniary effect of transactions should not be interfered with, because the information gathered in prices is necessary for the correct and rational behaviour of individuals.

[2] See James Buchanan (1984): “Rights, Efficiency, and Exchange: The Irrelevance of Transaction Cost.”

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*This is a revised version of the paper I presented at the September/October Mont Pelerin Society General Meeting at Las Palmas de Gran Canaria.

Pedro Schwartz is “Rafael del Pino” Research Professor of economics at Universidad Camilo José in Madrid. A member of the Royal Academy of Moral and Political Sciences in Madrid, he is a frequent contributor to the European media on the current financial and social scene. He was a past President of the Mont Pelerin Society.

For more articles by Pedro Schwartz, see the Archive.

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William Nordhaus versus the United Nations on Climate Change Economics

William Nordhaus was a co-recipient of this year’s Nobel Prize in economics for his pioneering work on the economics of climate change. On the day of the Nobel announcement, the United Nations’ Intergovernmental Panel on Climate Change (UN IPCC) released a special report1 advising the governments of the world on various steps necessary to limit cumulative global warming to 1.5 degrees Celsius. The major media coverage treated the two events as complementary.2 In fact, they are incompatible. Although Nordhaus favors a carbon tax to slow climate change, his own model shows that the UN’s target would make humanity poorer than doing nothing at all about climate change.

Indeed, we can use Nordhaus’s and other standard models to show that the now-championed 1.5C target is ludicrously expensive, far more costly than the public has been led to believe. This is presumably why the new IPCC special report does not even attempt to justify its policy goals in a cost/benefit framework. Rather, it takes the 1.5C target as a politically “given” constraint and then discusses the pros and cons of various mechanisms to achieve it.

It is ironic that in the context of accusations that opponents of government intervention are “science deniers,” the latest UN report largely ignores the peer-reviewed publications in climate-change economics, including those of the man who just won the Nobel Prize in the field.3

Nordhaus’s “DICE” Model

Nordhaus is arguably the inventor of the modern economics of climate change, with contributions going back at least to his 1979 book.4 Then, in the 1990s, he, along with others, developed the Dynamic Integrated Model of Climate and the Economy (DICE). Nordhaus and co-author Joseph Boyer, in a 2000 book, outlined the DICE model as well as a regional version called RICE and in 2008, Nordhaus published a book summarizing the model as of 2007. He updated his model in 2016 and published technical papers in 2017 based on its latest findings.

Nordhaus subscribes to the standard view that greenhouse gas emissions from human activities constitute a negative externality and, therefore, recommends that the governments of the world implement a carbon tax. One of his major purposes in developing and refining his DICE model is to estimate the “social cost of carbon.” The social cost of carbon is the present value of the net future harms from an additional ton of emissions in a particular year. A related purpose of Nordhaus’s DICE model is to estimate the trajectory of the optimal carbon tax over time. (Note that the “social cost of carbon” trajectory depends on government policy. In the presence of an optimal carbon tax, the volume of future emissions will be lower than otherwise. Thus, on the margin, an additional ton of carbon dioxide emitted in, say, 2050 will be less damaging than it would have been in the laissez-faire baseline.)

I endorse neither Nordhaus’s diagnosis of “market failure” nor his prescription for a carbon tax. Indeed, I have critiqued Nordhaus’s model elsewhere,5 and I have co-authored a study with climate scientists in which we make the case against a generic U.S. carbon tax.6

For the purposes of the present article, however, I stipulate Nordhaus’s work as representative of the state of the art when it comes to the mainstream economics of climate change. That is all we need to show that the UN’s special report on climate change is utterly at odds with the literature.

Nordhaus’s 2007 Results Showed Current UN Target Much Worse Than “Doing Nothing”

As I explain in greater detail in my 2009 journal article, the exposition Nordhaus gave for his 2007 model runs was useful in showing the consequences of various climate policy goals. Below, I reproduce a table from my article, which I adapted from a table in Nordhaus’s 2008 book.

Table 1. Relative Benefits and Costs of Various Climate Policies According to DICE-2007 (Trillions of 2005 US)

figure id"table_1"a href"https://www.econlib.org/wp-content/uploads/2018/11/MurphyNordhausT1.png"img src"https://www.econlib.org/wp-content/uploads/2018/11/MurphyNordhausT1.png" width"100%"/a/figure

Source: Table 4 from Murphy (2009), p. 211.

The first row of the table shows what the DICE model—as of its 2007 calibration—estimated would happen if the governments of the world took no major action to arrest greenhouse gas emissions. There would be significant future environmental damages, which would have a present-discounted value of 22.55 trillion.

In contrast, the second row shows what would happen if the governments implemented an optimal carbon tax. Because emissions would drop, future environmental damages would fall as well; that’s why the PDV of such damage would be only 17.31 trillion. However, even though the gross benefits of the optimal carbon tax would be some 5 trillion as a result (because of the reduction in environmental harms), these gross benefits would have to be offset by the drag on conventional economic growth, or what is called “abatement costs.” Those come in at a hefty 2.20 trillion (in PDV terms), so that the net benefits of even the optimal carbon tax would be “only” 3.07 trillion.

Consider, now, the scenario “Limit temp. to 1.5C.” Recall that this is the IPCC’s current policy goal and that various environmental analysts and pundits also embrace it. Because Nordhaus just won the Nobel Prize for his work on climate change, one might suppose that his model would provide support for the UN’s goal. It doesn’t.

As Table 1 indicates, Nordhaus’s model—at least as of its 2007 calibration—estimated that such a policy goal would make humanity 14 trillion poorer compared to doing nothing at all about climate change. Moreover, the 14 trillion magnitude of the net damages from the wrong policy—including what is now the UN’s goal—dwarfs the 3.07 trillion size of the net benefits from even the best theoretically possible policy.

Notice, also, that two of the other impoverishing policies considered by Nordhaus were not the product of his fanciful imagination but, instead, were proposals that either other economists (Nicholas Stern) or famous political figures (Al Gore) offered. The difference in the two Kyoto scenarios also showcases the sensitivity of the calculations to the participation of the world’s major emitters; the 3.07 trillion net benefits from a carbon tax accrue only if all of the governments enact the textbook carbon tax profile for more than a century.

In light of Nordhaus’s calculations shown above, the apparently urgent need for “climate action” is not so urgent. It now looks more analogous to economists discovering the theoretical possibility of an “optimal tariff” but still understanding that free trade is the safest rule of thumb.

Nordhaus’s 2016 Results Recommend a Ceiling of 3.5C

Over the years, Nordhaus has updated his model, and he now believes, due to developments in the physical sciences, that the potential harms from climate change are worse than he believed back in 2007. In 2009, for example, Nordhaus estimated the social cost of carbon in the year 2025 at 16 per ton of COsub2/sub (measured in 2010 U.S.). In contrast, according to his 2016 projections, Nordhaus puts the 2025 social cost of carbon at 44 per ton (in 2010 )—which means the estimate has almost tripled in less than a decade.

Before proceeding, it’s worth noting that this outcome shows just how fluid the “economics of climate change” literature really is. Imagine physicists inflating their estimates of the charge on an electron, or the mass of the moon, by such a large amount in such a short time span. Rather than justifying aggressive new government policies that would carry a huge price tag, such shifting “consensus science” might understandably make us pause because even the scientists in the area clearly don’t understand the field very well.

But let’s put aside these concerns and take Nordhaus’s 2016 version of his model at face value. Despite the huge increase in the estimated harms of future climate change, Nordhaus still recommends a relatively modest deviation from the laissez-faire baseline, as the following diagram indicates.

Figure 1. Cumulative Global Warming Under Various Policy Options, According to DICE-2016.7

figure id"figure1"a href"https://www.econlib.org/wp-content/uploads/2018/11/MurphyNordhausFig12018.11.png"img src"https://www.econlib.org/wp-content/uploads/2018/11/MurphyNordhausFig1_2018.11.png" width"100%"/a/figure

Source: Figure 4 from Nordhaus (2017).

As Figure 1 indicates, as of 2016, Nordhaus’s model (using the median settings on various parameters) projected that unabated global warming would reach a little above 4C by 2100. In contrast, if the governments of the world implemented an optimal carbon tax, warming would be constrained to 3.5C.

To get a sense of the significance of this temperature gap, consider: Nordhaus calculates that to justify a 2.5C ceiling, the implied social cost (or what is often, though misleadingly, referred to as the “shadow price”) of carbon in 2025 would be 284 per ton, which is more than six times Nordhaus’s own estimate of a social cost of carbon that year of 44 per ton.8 (A carbon tax of 284 per ton of COsub2/sub works out to a gasoline tax of about 2.50 per gallon.) And remember that this chasm in the implied harm of carbon dioxide emissions relates to the difference between a ceiling of 3.5C and one of 2.5C. The gap would be much bigger still for a ceiling of 1.5C. In the next section, we spell out how large the negative externality from carbon dioxide would have to be to justify a 1.5C ceiling.

Estimates of the Social Cost of Carbon versus the UN’s Implied “Shadow Price”

In the previous section, we saw that the latest version of Nordhaus’s model suggests that the “optimal” amount of global warming is far higher than what the UN and many in the media are now recommending as necessary in order to avert catastrophe. In this section, we can use a different approach to illustrate the enormous gulf between the UN’s 1.5C goal and the findings of the literature on the economics of climate change.

In its earlier mentioned special report, the UN stated:

Cross-Chapter Box 5: Economics of 1.5C Pathways and the Social Cost of Carbon

… In CEA [cost-effectiveness analysis], the marginal abatement cost of carbon is determined by the climate goal under consideration. It equals the shadow price of carbon associated with the goal which in turn can be interpreted as the willingness to pay for imposing the goal as a political constraint. Emissions prices are usually expressed in carbon (equivalent) prices…. Since policy goals like the goals of limiting warming to 1.5C or well below 2C do not directly result from a money metric trade-off between mitigation and damages, associated shadow prices can differ from the SCC [social cost of carbon] in a CBA [cost-benefit analysis]. In CEA, value judgments are to a large extent concentrated in the choice of climate goal and related implications, while more explicit assumptions about social values are required to perform CBA. [UN IPCC Special Report, pp. 2-76 and 2-77, citations removed, bold added.]

In other words, the UN’s special report explains that it will not try to quantify the costs and benefits of emissions and then recommend an appropriate carbon tax (or other mitigation policies) in order to equate marginal benefits with marginal costs. Rather, the UN is taking as given that the goal is to limit global warming to 1.5C and, based on that assumption, will consider the costs of various possible means of achieving that goal.

If one wants to relate the UN’s analysis to the published literature on cost-benefit analysis, we can back out the implied “shadow price” of, or implicit tax on, carbon from the various measures. But the text warns the reader that these implied “carbon prices” will not necessarily line up with the published estimates of the social cost of carbon, which, as noted earlier, quantifies the negative externality of emissions.

So just how big is this discrepancy between the optimal tax and the “carbon price” implied by the UN’s desired goal? Consider the following comment from a Resources for the Future (RFF) essay, which is very sympathetic to the UN special report:

By design, the IPCC report is not policy-prescriptive. However, it does present a range of carbon prices necessary to keep emissions on track to meet the 1.5ºC target. The level and significant range of prices— from 135 to 5,500 per ton of carbon dioxide emissions in 2030 —have caught our attention…. [RFF, bold added.]9

To translate this into plain English, the RFF writers are explaining that the measures considered in the latest UN report are going to reduce particular units of emissions at a cost to the conventional economy of up to 5,500 per ton in 2030. (A carbon tax of 5,500 per ton works out to a gasoline tax of 48 per gallon.) In a standard cost-benefit approach, this would be economically efficient only if the estimated social cost of carbon were also in this range.

What does the economics of climate change literature have to say about the social cost of carbon? The Obama Administration established an Interagency Working Group on the Social Cost of Carbon (SCC), in which it used leading models—including Nordhaus’s DICE, along with two others—to estimate the SCC through the middle of the 21st century. According to its last update, published in early 2017, the Obama EPA reported that the SCC in 2030, using the standard 3% discount rate, would be 50 per ton. Thus, the UN’s target of 1.5C is implicitly treating the marginal units of greenhouse gas emissions as being anywhere from 1.6 to 100 times more damaging than the Obama Administration’s team estimated.

Conclusion

Both fans and critics of William Nordhaus’s computer model of the global economy and climate acknowledge that it is a crude approach that omits many crucial real-world considerations. Even so, it is surely significant that the work that won Nordhaus the Nobel Prize says quite plainly that the UN’s special report on climate change is full of proposals that are ludicrously expensive. In an interview after Nordhaus accepted his prize, he diplomatically handled the situation by saying that the 1.5C target is impossible to achieve at this point.10 Yet we can go further. Nordhaus’s work shows that such an aggressive goal would make humanity much worse off than if we simply adapted to climate change with no government measures.

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Footnotes

[1] United Nations Special Report, “Global Warming of 1.5C,” Intergovernmental Panel on Climate Change (IPCC).

[2] See for example Binyamin Appelbaum, “2018 Nobel in Economics Is Awarded to William Nordhaus and Paul Romer,” New York Times, October 8, 2018.

[3] In this article, I focus on the published model results of Nobel laureate William Nordhaus, which are consistent with other models of the global economy and climate. However, the reader should be aware that climate change economists such as Martin Weitzman have developed frameworks that place greater weight on unlikely but catastrophic outcomes. In these approaches, it is efficient to engage in more aggressive government action against climate change than in the more conventional cost/benefit framework used by Nordhaus and others. See for example Martin Weitzman, “Fat-Tailed Uncertainty in the Economics of Catastrophic Climate Change,”.

[4] William Nordhaus. (1979) The Efficient Use of Energy Resources. New Haven, Conn: Yale University Press.

[5] Robert P. Murphy. (2009) “Rolling the DICE: William Nordhaus’ Dubious Case for a Carbon Tax,” The Independent Review, vol. 14, no. 2, Fall 2009, pp. 197-217.

[6] Robert P. Murphy, Patrick J. Michaels, and Paul Knappenberger. (2016) “The Case Against a U.S. Carbon Tax,” Cato Institute Policy Analysis No. 801, October 17, 2016.

[7] The diagram in Figure 1 comes from William Nordhaus, “Projections and Uncertainties About Climate Change in an Era of Minimal Climate Policies,” NBER Working Paper 22933, Revised September 2017.

[8] See Table 1 from William Nordhaus, “Revisiting the social cost of carbon,” Proceedings of the National Academy of Sciences (PNAS), January 30, 2017.

[9] Kevin Rennert and Marc Hafstead, “Latest IPCC Report Sounds New Alarm on Global Climate Policy,” Resources for the Future (RFF) Online Magazine, Issue 199, Fall 2018.

[10] Coral Davenport, “After Nobel in Economics, William Nordhaus Talks About Who’s Getting His Pollution-Tax Ideas Right,” The New York Times, October 13, 2018.

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*Robert P. Murphy is Research Assistant Professor with the Free Market Institute at Texas Tech University. He is the author of Choice: Cooperation, Enterprise, and Human Action (Independent Institute, 2015).

For more articles by Robert P. Murphy, see the Archive.

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Re-Imagining the Economist’s Role in Policy

… if it is to be a contractarian recommendation, it must be addressed to the individuals whom it will affect. —Robert Sugden, The Community of Advantage

In his new book,1 economist Robert Sugden challenges the philosophical underpinnings of conventional economic policy analysis. He takes particular aim at the use of behavioral economics to justify paternalistic intervention, as advocated by Cass Sunstein and Richard Thaler (co-authors of Nudge2), among others.

When writing an article for a professional journal, an economist often will include a section on “policy implications.” This falls within a tradition in neoclassical economics of trying to find policies that improve social welfare. Paul Samuelson and Abram Bergson went so far as to propose that economists think in terms of maximizing a social welfare function, meaning that we would aggregate the utility of all citizens and solve for the optimum. Although the project of calculating aggregate utility was found to be problematic, “welfare economics” still operates as if a social welfare function exists.3

Sugden points out that this neoclassical approach has the economist address his or her recommendations to a hypothetical benevolent autocrat. In effect, the economist plays the game that Kenneth Minogue called “fantasy despot.”4

As an alternative framework, Sugden proposes what he calls contractarianism, which he credits to James M. Buchanan. Instead of thinking in terms of social decisions made by benevolent autocrats, Sugden’s contractarian treats decisions as made by individuals acting voluntarily and in concert. The job of the welfare economist is to act as a mediator, making individuals aware of opportunities for mutually agreeable bargains as suggested by the economist’s research.

See Ronald Coase, biography in the Concise Encyclopedia of Economics. See also Ronald Coase on Externalities, the Firm, and the State of Economics, an interview with Ronald Coase, EconTalk, May 2012.

For example, consider the social problem of reducing carbon emissions. Using the standard neoclassical approach, many economists suggest that the benevolent despot should impose a carbon tax. Using the contractarian approach, we would instead suggest bargains to which everyone might agree. This might mean a bargain in which everyone agrees to pay a carbon tax, but some of the money raised goes to compensate those who are adversely affected, such as workers in the coal industry. The economist’s calculations would assist people in undertaking the Coasian bargaining required to get everyone to agree to a carbon-emission reduction plan.

“Whatever the philosophical shortcomings of the benevolent-autocrat model, it seems much simpler to implement public policy by fiat rather than through multi-person bargaining.”

It is fair to ask whether this contractarian approach is really feasible in practice. Whatever the philosophical shortcomings of the benevolent-autocrat model, it seems much simpler to implement public policy by fiat rather than through multi-person bargaining.

As a behavioral economist, Sugden is concerned with less complex bargaining situations. An example that he frequently discusses is Sunstein and Thaler’s cafeteria manager, who they argue should influence patrons’ food choices by placing healthy foods at the front of the line. That way, patrons may fill their trays with salads and fruits before they get to fattening desserts. Patrons are then presumably more likely to pass on the unhealthy foods; whereas if they arrive at the cake section with room on their trays, then they are likely to take the food that is bad for them.

See Richard Thaler on Libertarian Paternalism, EconTalk, November 2006.

Sugden argues that this paternalistic approach assumes that the cafeteria manager knows something about the “true” preferences of the patrons that the patrons themselves do not know. The patron does not “really” want a rich dessert. Knowing this, Thaler and Sunstein’s cafeteria manager sets up the food in order to minimize temptation.

Sugden says that this concept of “true” or “rational” preferences is embedded in most of behavioral economics. The intervention is justified on the basis that a rational individual would prefer the outcome that is influenced by the “nudge” to the outcome that would result otherwise from the individual’s choice.

But Sugden points out that the idea of “nudging” based on the assumption that you know others’ true preferences is problematic.

If the scenario is one in which Robert Sugden is in a roadside restaurant and a morbidly obese stranger is sitting at another table ordering a huge all-day breakfast as a mid-afternoon snack, the answer is that I would do nothing. I would think that it is not my business as a diner in a restaurant to make gratuitous interventions into other diners’ decisions about what to eat. (page 50)

A different scenario would be one in which someone says that they really would prefer to avoid eating unhealthy foods, and they ask for help based on the insights of behavioral economics. In that case, we have been given permission to do the nudging. We should not tie Odysseus to the mast without his permission, but it is fine if he asks us to tie him to the mast so that he can hear the sirens while resisting their temptation.

Sugden’s book exposes standard welfare economics as based on the assumption that a benevolent autocrat knows, when informed by the economist, what is best for the autocrat’s subjects. But instead it is possible for economists to convey their insights to individuals while still leaving them to make their own choices and bargains. In theory, if the outcomes suggested by behavioral economics and welfare economics are truly desirable, then people can arrive at those outcomes without being commanded, or even nudged, by a benevolent autocrat.

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Footnotes

[1]RobertSugden, The Community of Advantage: A Behavioural Economist’s Defence of the Market, p. 47. Oxford University Press, 2018.

[2]Cass Sunstein and Richard Thaler, Nudge: Improving Decisions About Health, Wealth, and Happiness. Yale University Press, 2008.

[3]See Pedro Schwartz, “The Poverty of Social Choice.” Library of Economics and Liberty, Nov. 2, 2015.

[4]See my essay, “Kenneth Minogue on the Servile Mind.” Library of Economics and Liberty, Nov. 4, 2013.

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*Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is the author of several books, including Crisis of Abundance: Rethinking How We Pay for Health Care; Invisible Wealth: The Hidden Story of How Markets Work; Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy; and Specialization and Trade: A Re-introduction to Economics. He contributed to EconLog from January 2003 through August 2012.

Read more of what Arnold Kling’s been reading. For more book reviews and articles by Arnold Kling, see the Archive.

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Lessons and Challenges in The Limits of Liberty

James Buchanan is not easy to categorize. Is he a libertarian? A classical liberal? A conservative? Or perhaps even a “liberal” in the modern American sense of “progressive” or “social democrat”? Is he an economist or a philosopher? It is paradoxical but not totally wrong to answer “all of the above,” so complex and rich is his contractarian theory of the state. His 1975 book, The Limits of Liberty: Between Anarchy and Leviathan,1 has become a classic exposition of individualist contractarianism.

Buchanan was awarded the 1986 Nobel prize in economics for “his development of the contractual and constitutional bases for the theory of economic and political decision-making.” The Royal Swedish Academy of Sciences cited The Limits of Liberty as one of the two books in which he presents his “visionary approach.”2

Buchanan repeatedly states he does not want to impose his own values, except for individualism as the starting point of his analysis. A “good society” cannot be “defined independently of the choices of its members, all members” (emphasis by Buchanan). “My approach,” he writes at the beginning of the book, “is profoundly individualistic, in an ontological-methodological sense” (emphasis in original); “[e]ach man counts for one, and that is that.” It follows that individual liberty is a value and that the social system should be based on unanimous consent. Any limit to liberty must thus be consented to by each and every individual.

The Constitutional Contract

In Buchanan’s view, anarchy, or the absence of organized political power, does not work, for the reasons explained by Thomas Hobbes and because public goods can only be produced (or financed) by government. Hobbes famously argued that anarchy is characterized by “a War of every man against every man” and that “the life of man [is] solitary, poore, nasty, brutish, and short.”3 In the terms of game theory, anarchy leads individuals in the worst case of a prisoners’ dilemma.

Given this, what would be an efficient state, that is, one that responds to individual preferences? Buchanan answers that it should be based on a unanimous “constitutional contract” or “social contract” (he uses both expressions) establishing the basic rules of life in society.

Start with the equilibrium that would obtain in an anarchic society. It would be an inefficient equilibrium as individuals waste resources (including life) in predation and defense. (As for an anarchy regulated by stifling tribal rules and superstitions, Buchanan reckons that it would be even more inefficient.) This starting point provides a “natural distribution,” that is, some assignment of rights and behavior boundaries, from which a “constitutional contract” may be negotiated.

Think of the social contract as a set of constraints that everybody accepts in order to obtain guaranteed rights and to avoid the violence and waste of anarchy. Only unanimous agreement is necessary; there is no need to invoke “natural law.”

A constitutional contract between self-interested individuals contains four elements: 1. A “disarmament contract,” whereby individuals unanimously commit to avoid predatory behavior. 2. A definition of rights. 3. The limits of a “protective state” established to enforce the social contract. 4. The rules of collective decision-making for the “productive state,” charged with producing the other public goods that individuals may want.

Contrary to other contractarian theorists, Buchanan does not assume that individuals come to the negotiating table as equals in terms of resources or capabilities. As in ordinary exchange, individuals are only equal—but really equal—with regard their status in the exchange: each one is equally free to say yes or no.

A corollary follows. The Rambos who are more efficient at predation than at production might have to be bought off before they consent. When I first read The Limits of Liberty circa 1984, I was certainly not the only libertarian to be disturbed by the justification this could provide for the welfare state. Meet the “liberal” Buchanan. (I put “liberal” in quotation marks when I want to emphasize the ambiguity of the label as it was adopted by American progressives.) Even if disturbing, the idea is certainly widely shared in the public (even in the United States) that helping the poor is a bargain for the taxpayer as it prevents theft and violence. The logic of Buchanan’s argument, within this theoretical framework, seems unassailable.

Postconstitutional Exchange

After this social or constitutional contract is agreed on, Buchanan conceives of a “second, or postconstitutional, stage of negotiation,” which involves trade in public goods (agreement on their production, financing, and consumption): such things as dams, roads, parks, perhaps schools (if a minimum of education is necessary in a free society), and so forth. Buchanan’s social contract thus involves two stages: the basic rules at the constitutional stage; and postconstitutional contracts on public goods.

Trades in private goods don’t require any general agreement once the constitutional contract has defined individual rights. But such a preliminary definition of rights—which economists before Buchanan just assumed to exist—is necessary.

Another intriguing idea is that “[t]he dividing line between private and public goods depends, in part, on how the property rights of persons are defined.” To illustrate Buchanan’s brief remark, the social contract may exclude some land from private appropriation, which transforms these public lands into a public good. Similarly, the social contract could define a restaurant owner’s property rights as including the ambient air, which would allow him to welcome smokers if he chooses to.

A requirement of unanimity in decisions related to specific public goods would give a veto to every citizen. Anyone would thus gain holdout power and an incentive to sell his consent for lower taxes or for some transfer. This free-rider problem, argues Buchanan, is much more pressing at the post-constitutional stage than at the constitutional stage: in the latter case, an individual cannot obtain the benefits of the social contract without consenting to the whole package, while he can always consume a pure public good once it is financed by others (by definition of a public good). Recognizing this, rational adherents to the social contract will establish some voting rule granting the right of decision to some majority (simple or qualified) at the postconstitutional stage.

In order to embody unanimous consent, that is, to be efficient, the exchange of public goods requires constitutional limits on the state. “The operation of an unconstrained collectivity,” Buchanan supposes, “could scarcely emerge from rational constitutional contracting among persons.”

But note that the contract also limits the liberty of individuals. Once these limits are unanimously accepted at the constitutional level, “it becomes inconsistent and self-contradictory for a person to claim that his ‘rights’ are violated in the mere working out of the collective decision rules that are constitutionally authorized.”

This contractual setup allows individuals “to attain maximum liberty within the constraints of acceptable order.”

Problems of Unanimity

Buchanan is of course aware of the objection that a social contract could at best bind only those who signed it, presumably generations ago.4 The social contract, he answers, is an implicit contract that is continually renegotiated: “The formation of constitutional contract is continuous.” This insures that the social contract remains consistent with everybody’s “renegotiation expectations”—the net benefits one could obtain if the contract were renegotiated now, starting from a new anarchic equilibrium—or, in other words, that it remains Pareto-superior.

The adjustments that become necessary when renegotiation expectations change are often proposed by overly advantaged individuals who realize that it is in their preventive interest to embrace reform. They implicitly offer a new bargain to those who intuitively realize that their position in anarchy would now be better than the status quo. To understand what Buchanan is saying, think about rich coastal “liberals” who are often at the forefront of “social justice” and redistribution movements.

Like all forms of imagined unanimous social contract, the Buchanan sort raises questions. Unanimity is a clear concept when applied to private arrangements, but what does a unanimous social contract mean? Can we hope for literal unanimity or is quasi-unanimity sufficient? Buchanan opens a Pandora’s box when he says without elaboration that adjustments to the social contract are to be “agreed on by all or substantially all of the members of the community.” How much is “substantially all”? How do we know that near-unanimity has been reached?

Problems of Government

The state issued from the social contract is a delicate institution. What Buchanan calls “the paradox of being governed” comes from the dual roles of the state, “protective” and “productive,” corresponding to the two stages of social contracting. On the one hand, rational parties to the constitutional contract want the protective state to enforce the rules agreed on, no more and no less. The protective state is neutral and as “external” as possible. The productive state, on the other hand, is “internal”: it is “us”; its decisions are subjective and participatory.

“The state is, at the same time, both us and non-us.”

The state is, at the same time, both us and non-us. This idea may seem to solve a conundrum of any liberal theory of the state, but perhaps it only emphasizes the problem. If the two corresponding roles are confused—if the protective state becomes us and the productive state changes the terms of the contract—people will become dissatisfied with the constitutional order, and the social contract will be threatened. Buchanan saw signs of this in the 1960s and 1970s.

It is easy to agree with Buchanan that the paradox of being governed, as many other problems, increases with the size of government. The larger the scope of the state, the more likely it will violate the individual rights that have been agreed on.

Buchanan was worried about the decline of private ethical norms. “Ordered anarchy,” he argued, is assisted by “privately imposed constraints on behavior, through adherence to basic norms of mutual tolerance and mutual respect for acknowledged rights.” As an example of this sort of informal law, he mentions respect for free speech on university campuses, which was starting to be undermined at the time he was writing. When these informal rules weaken, more state-imposed constraints are required.

Law (both formal and informal) is a public good and public capital. Depreciation of this capital carries a high cost in terms of the future returns of social stability. It will often be preferable to maintain existing legal capital than to scrap it and rebuild it anew, which lends support to “the basic mystique of orthodox conservatism.” The author of The Limits of Liberty also believes that ethical constraints include “obedience to and respect for formalized law.” Meet the more conservative Buchanan.

A chapter titled “The Punishment Dilemma” looks puzzling. It argues that punishments for transgression of the constitutional contract can be dangerously watered down over time, leading to an erosion of law. Ex ante, punishment is an essential deterrent. But ex post, its application gives disutility to officials and voters.

Buchanan admits that constitutionally-decided, deterrence-oriented punishments will not be watered down “if the average or representative person in the community should actually enjoy seeing others punished,” but he discounts this possibility. From our vantage point, he turned out to be wrong. Since he wrote The Limits of Liberty, punishments have become more and more severe in response (at least partly) to the inflation of laws. One indication is that 8% of American adults have a felony record, that is, are “convicted felons” for life, and their number has been growing rapidly since the mid-1980s.5 Another indication is that America is the country with the highest rate of incarceration in the world (even if it has been decreasing since 2008).6 The real problem appears to be the growth of the punishing state in America, not its undermining.

This being said, Buchanan correctly saw that when people are dissatisfied with the erosion of formal and informal constraints, their demands for “law and order” mean “increased rather than decreased collectivization of society.”

The Threat of Leviathan

Besides the necessary limits to liberty, the threat of Leviathan is the second broad thread in the book, and what perhaps makes it more libertarian. A non-limited democratic state gives free rein to the self-interest of politicians and bureaucrats in expanding government and overturning constitutional rights. A majoritarian government can also fail to maximize citizens’ benefits by expanding government too much. Its fiscal policies can benefit the majority at the expense of the minority, or the other way around. Majorities must be constrained by constitutional rules, just as an individual creates his own rules (setting an alarm clock, for example) to control his temptations.

In reply to people’s dissatisfaction, both “liberals” and libertarians propose top-down solutions, Buchanan argues. He sees the solution neither in pragmatic politics nor in a choice between the laissez-faire model (even if it was based on the principle of ordered anarchy) and the socialist model, but in a “constitutional revolution” based on consent. “[G]ood,” he repeats, “is that which emerges from agreement among free men, independent of intrinsic evaluation of the outcome itself.”

A constitutional revolution means that individual rights and claims will be redefined and new rights created, including those related to the environment or congestion, as Buchanan mentions, perhaps influenced by the environmental scares of the 1970s.7 A new redistribution will be negotiated, and new limits imposed on Leviathan. Here, we find a mix of both the “liberal” and the libertarian Buchanan. In other places, Buchanan explained how he favored “equality of opportunity” and opposed “inherited wealth.”8

In a Nutshell

The basic idea of Buchanan’s contractarianism is that, in order to live in society, individuals have to agree on their rights and on the limits of their liberty. They have to discuss and exchange until they agree. The alternative is violent Hobbesian anarchy, and nobody wants that if he can have better. Buchanan tries to prove that individuals can agree. He also argues that rational self-interest leads individuals at the constitutional stage to limit the state, a crucial idea. The whole exercise aims at having as much (ordered) anarchy as possible: “the ideal society is anarchy, “he writes, “in which no man or group of men coerces another.”

For more on these topics, see Is Leviathan Required for a Peaceful Order? by Anthony de Jasay, Library of Economics and Liberty, March 7, 2016. See also A Conversation with James M. Buchanan, Parts I and II, Econlib Videos, 2013.

But does the contractual state require too much loyalty and obedience to law, which can fuel the growth of Leviathan? How can a unanimous social contract between unequal individuals lead to anything other than laissez-faire? Is it actually possible to limit the state? As Anthony de Jasay suggests, isn’t any state a Leviathan-to-be?9 And is the state really necessary? Do the two conditions for its necessity—the nastiness of Hobbesian anarchy and the impossibility of efficient private production of public goods—obtain?

It is difficult to think about these fundamental questions without reading The Limits of Liberty.

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Footnotes

[1] James M. Buchanan, The Limits of Liberty: Between Anarchy and Leviathan (1975) (Indianapolis: Liberty Fund, 2000). Available online at https://www.econlib.org/library/Buchanan/buchCv7.html and in the Liberty Fund Book Catalog at https://libertyfund.org/books/the-limits-of-liberty.

[2] Royal Swedish Academy of Sciences, The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1986, at https://www.nobelprize.org/prizes/economic-sciences/1986/press-release/ (accessed September 12, 2018).

[3] Thomas Hobbes, Leviathan (1751) (Oxford: Clarendon Press, 1909), at http://oll.libertyfund.org/titles/hobbes-leviathan-1909-ed (accessed September 12, 2018).

[4] That was one of the objections of Lysander Spooner in his “The Constitution of No Authority,” No Treason 6 (1870), at http://www.gutenberg.org/ebooks/36145 (accessed September 15, 2018).

[5] Sarah K.S. Shannon et al., “The Growth, Scope, and Spatial Distribution of People with Felony Records in the United States, 1948-2010,” Demography 54 (2017).

[6] World Prison Brief, at http://www.prisonstudies.org (accessed September 13, 2018).

[7] A sense of the climate of the times can be gathered from my review “Running Out of Everything,” Liberty and Law, at https://www.lawliberty.org/book-review/running-out-of-everything/ (accessed September 16, 2018).

[8] For example, see James M. Buchanan, The Intellectual Portrait Series: A Conversation with James M. Buchanan (Part 2) (Indianapolis: Liberty Fund, 2011), at http://oll.libertyfund.org/titles/buchanan-the-intellectual-portrait-series-a-conversation-with-james-m-buchanan-part-2 (accessed September 24, 2018).

[9] See my review of de Jasay’s The State in “An Unavoidable Theory of the State?” Library of Economics and Liberty, June 4, 2018, at https://www.econlib.org/library/Columns/y2018/Lemieuxstate.html (accessed September 15, 2018).

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*Pierre Lemieux is an economist affiliated with the Department of Management Sciences of the Université du Québec en Outaouais. His latest book is What’s Wrong with Protectionism? Answering Common Objections to Free Trade (Rowman & Littlefield, 2018). He blogs on EconLog. He lives in Maine. E-mail: PL@pierrelemieux.com.

For more articles by Pierre Lemieux, see the Archive.

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