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Recent Posts

Here are the 10 latest posts from EconLog.

EconLog February 20, 2019

Wilbur Hamilton Ross, by David Henderson

 

Payday for Public Choice.

Because it’s [the tariffs on Chinese goods] spread over thousands and thousands of products, nobody’s going to actually notice it at the end of the day.

This quote is from an interview of Commerce Secretary Wilbur Ross on CNBC’s Squawk Box last September.

And now here’s Alexander Hamilton in April 1782:

No mode [other than tariffs] can be so convenient as a source of revenue to the United States. It is agreed that imposts on trade, when not immoderate, or improperly laid, is one of the most eligible species of taxation. They fall in a great measure upon articles not of absolute necessity, and being partly transferred to the price of the commodity, are so far imperceptibly paid by the consumer.

What’s interesting, beyond their assertion that consumers won’t notice the slightly higher prices, is that both Hamilton and Ross use this an an argument for tariffs. We economists who apply Public Choice to understand government policy often point out that one reason tariffs are so popular is that they benefit a concentrated group (domestic producers) at the expense of a dispersed group (consumers.) It’s striking to see how upfront both Hamilton and Ross are at admitting that that is one of their arguments for tariffs.

(0 COMMENTS)

EconLog February 20, 2019

Another big success for libertarianism, by Scott Sumner

Pot legalization is an issue that has been largely ignored by Democrats and Republicans, but championed by libertarians. And now it’s sweeping the country, as more and more states jump onboard.

I often get newsletters from various libertarian groups, and I’ve noticed that asset forfeiture laws are another big concern. Police who pull someone over on the highway can simply take the driver’s money, on suspicion that the funds were used in some sort of crime.  No crime need be proved.  It’s highway robbery by police.

In other cases, a minor conviction results in the forfeiture of a valuable piece of property, worth far more than the maximum fine imposed for the crime. For instance, an Indiana man had his 42,000 SUV seized by the government after being arrested for a minor drug offense with a maximum penalty of 10,000. Asset forfeiture process is a completely lawless system, which relies on the discretion of law enforcement officials. They do not have to prove anything in order to seize one’s property.

While Democrats and Republicans ignored this issue, libertarians fought hard to eliminate the practice.  Now the Supreme Court has struck a blow against unrestrained asset forfeiture:

WASHINGTON — Siding with a small time drug offender in Indiana whose 42,000 Land Rover was seized by law enforcement officials, the Supreme Court on Wednesday ruled that the Constitution places limits on civil forfeiture laws that allow states and localities to take and keep private property used to commit crimes.

Civil forfeiture is a popular way to raise revenue, and its use has been the subject of widespread criticism across the political spectrum.

The revenue aspect of asset forfeiture is particularly corrupt.  Police seize assets to gains revenue for their own use, to help fund more lavish police budgets.  This is something you expect in third world countries, not advanced democracies.

Occupational licensing, organ transplant markets, and zoning reform are other areas that are ignored by the two big parties.  Let’s see if we can begin to make progress on more parts of the libertarian agenda.

PS.  It was a unanimous 9-0 decision, which is one reason why I’m skeptical of arguments that focus on “liberal” and “conservative” justices. All that matters is whether they are good judges or bad judges.

(0 COMMENTS)

EconLog February 20, 2019

Technological Unemployment and Work, by Bryan Caplan

The state of technology and the unemployment rate look nothing like each other.  What about the state of technology and the labor force participation rate (LFP)?

Well, LFP doesn’t have massive spikes like the unemployment rate.  Since the state of technology doesn’t have massive spikes either, that eliminates one big discrepancy.

Otherwise, however, LFP and technology have almost nothing in common.  Technological progress is nonstop, but LFP rose for five decades, then started falling.

Disaggregating a bit:

  1. LFP was roughly flat from 1948-1965, a period of legendary technological progress.

  2. LFP rose non-stop from 1965-1999, a period of noted technological progress.

  3. LFP fell almost non-stop from 2000-2015, another period of noted technological progress.

  4. LFP has been flat ever since, as progress from earlier in the 21st-century continues unabated.

If technology doesn’t explain these ups, downs, and lulls, what does?  I see every reason to accept the orthodox view that demographics are the most important factor, by far.  The main reason for the rise: Far more women now want to work outside the home than in 1948, so far more do.  The main reason for the fall: aging.  Why the hump?  There’s an upper bound on female LFP, because there’s a solid core of women who want to stay home and take care of their kids.  We hit that bound a couple decades ago, so the effects of aging finally became obvious.

Yes, there’s also been a decline in prime-age male participation.  You could blame technology, but it makes a lot more sense to blame the mating market.  As female income rises, women understandably place less weight on men’s financial success.  As a result, attractive men no longer need a job to date, and unattractive men need more than a low-status job to date.  Culture amplifies these effect: The fewer men work, the lower the shame of idleness – and the lower the shame of dating an idle man.

Is the mating market story speculative?  Perhaps.  But unlike the technological story, at least it doesn’t directly contradict the facts.

(0 COMMENTS)

EconLog February 19, 2019

Van Doren on Payday Loans, by David Henderson

The Consumer Financial Protection Bureau (CFPB) recently proposed the elimination of new payday lending rules created under the Obama Administration and imposed in 2017. Payday lenders are frequently vilified—a recent New York Times editorial declared that the CFPB “betrayed financially vulnerable Americans last week by proposing to gut rules…that shield borrowers from predatory loans”—but recent evidence indicates that the predatory costs of payday loans may be nonexistent and the benefits are real and measurable. Thus, the original regulatory restrictions were unnecessary.

Most Americans take access to credit for granted, but many lower-income Americans have difficulty meeting the requirements to get a credit card or take out collateralized loans. With minimal approval requirements that are easier to meet—often just a bank account statement, a pay stub, and a photo ID—payday lenders offer short-term, uncollateralized loans. These loans are advances against a future paycheck, typically about 100-500 per loan, and customers usually owe a fee of around 15 per 100 borrowed for two weeks.

These are the opening two paragraphs from Peter Van Doren’s excellent post today, “The CFPB and Payday Lending Regulations,” at the Cato Institute’s Cato at Liberty site. The whole thing, which is not long, is worth reading. (Disclosure: Van Doren is the editor of Regulation, which I write for regularly)

EconLog February 19, 2019

Deadlock and Partisan Bitterness, by Bryan Caplan

Why does American politics seem so deadlocked?  The media mostly focuses on issues where Democrats and Republicans refuse to compromise because they strongly disagree: immigration, guns, health care.  But American politics often seems deadlocked even when both parties agree.  For example, supermajorities of both parties want to protect DREAMers, but they’ve never reached an agreement to do so.  How is this possible?

  1. Transactions costs.  Hammering out a deal is hard work, so many mutually beneficial deals don’t happen.

Critique: Economists routinely appeal to these alleged costs, but how high can they possibly be?  Seriously, why should it take more than a single day for the DREAM Act to become a law?  Vote, vote, sign, done.

2. The hold-out problem.  Suppose we agree that X is good, but you want X a lot more than I do.  In this situation, it makes sense for me to demand some “compensation” from you even though we basically agree.

Critique: This might make sense for a year or two.  But if we’ve failed to reach an agreement after many years of negotiation, you’d expect both sides to moderate their demands to cut their losses.  Yes, they could conceivably be investing in their reputations for intransigence to secure favorable terms in the future, but does anyone seriously expect to see the day when one party finally submits to the other?

EconLog February 18, 2019

High-powered money (100 years of stability), by Scott Sumner

When I studied economics, the term ‘high-powered money’ was often used synonymously with the monetary base, which consists of currency plus bank deposits at the Fed. This asset was called “high-powered” for three reasons:

  1. It is determined exogenously by the monetary authority.
  2. It is non-interest-bearing.
  3. It is the medium of account.

As a result of these three factors, high-powered money is a sort of “hot potato”. When the Fed injects new high-powered money into the economy for reasons other than responding to an increased demand for liquidity, the public tries to get rid of excess cash balances by spending them. Prices and NGDP rise until the public is again content to hold the newly enlarged supply of high-powered money.

Today, bank deposits at the Fed earn interest, and thus are no longer high-powered money. Only currency remains high-powered.

100 bills comprise about 80% of US high-powered money

The stock of high-powered money has risen by roughly 265 times over the past 100 years, from about 6.45 billion in early 1919 to just over 1.7 trillion today. NGDP has risen by almost the same proportion, leaving the high-powered money to NGDP ratio at roughly 8.2%, even after 100 years! People seem to want to hold about the same fraction of income in the form of high-powered money as they did 100 years a go. As a result, you might say that the Fed caused NGDP to grow 265-fold by increasing the stock of high-powered money 265-fold.

EconLog February 18, 2019

Including the Renegade, by Bryan Caplan

In the last six months, I’ve found myself stuck in two separate Sermons on Inclusion.  These were public events.  Neither was branded as left-wing.  Both, however, gave the floor to speakers who explained the supreme value of making everyone feel included in the community.

In each case, my mid-sermon reaction was the same: “I don’t think I’ve ever before felt so excluded in all my life.”

Why would I react so negatively?  It’s not because I disagree with the one-sentence summary of the sermons.  Sure, be friendly to people.  Make them feel welcome.  It’s common decency.  So what’s the problem?

I’m tempted to blame the glaring hypocrisy.  It was obvious that the speakers had zero interest in making Republicans, conservatives, macho males, traditional Christians, veterans, or economists feel included.  In fact, the Sermons on Inclusion were full of thinly-veiled accusations against members of these groups.

Yet on reflection, glaring hypocrisy is too ubiquitous in life to explain why I personally felt so excluded by the Sermons on Inclusion.

The real reason I felt so excluded was that the preachers of both Sermons on Inclusion spoke as if human beings naturally value their cultural heritage.  Frankly, I usually don’t.  I don’t value my religious heritage.  My mother was Catholic, and I was raised Catholic.  But I deem the religion false and don’t care about it.  I don’t value my ethnic heritage.  My mother was Irish, my father was Jewish, but neither identity matters to me.  I don’t support Ireland or Israel… or any other country for that matter.  My parents raised me to be an American nationalist; my schools taught me about the wonders of democracy.  But in all honesty, the only institution I really believe in is business.

So what am I?  A renegade.  And I’m not alone.  Lots of people turn their backs on the religion of their birth.  Lots of people never feel – or lose interest in – their ethnic heritage.  Lots of people dissent from “their” political culture.  Cultural loyalists may call them traitors, sell-outs, self-haters, or gusanos.  Yet despite our cosmic diversity, we renegades have one thing in common: We refuse to be ruled by the circumstances of our birth.  And any sincere Sermon on Inclusion ought to acknowledge our existence and outlook.

Unfortunately, this omission is hard to correct, because one of the main goals of Sermons on Inclusion is to foster group pride… and the existence of renegades is an affront to group pride.  You can’t favorably discuss the assimilated Irish without tacitly snubbing people who cherish their Irish identity.  You can’t praise people who leave Orthodox Judaism without tacitly snubbing Orthodox Jews.  Et cetera.

But don’t Sermons on Inclusion lionize some renegades, like anti-war veterans or the transgendered?  Sure.  But since the the Sermons barely acknowledge the existence of these renegades’ groups of origin, there’s little tension.  It’s easy to welcome renegades from group X if your default is to exclude typical members of group X.

Are efforts to promote inclusion therefore self-defeating?  Not if you’re careful, because actions speak louder than words.  As I’ve argued before, the best way to make people feel included is just to be friendly and welcoming.  Sermons divide us.  Common decency brings us together.

(8 COMMENTS)

EconLog February 18, 2019

Fantastic Neoliberal Policies and Where to Find Them, by Alberto Mingardi

Perhaps the use of the word “neoliberalism” should be taxed, so that its use may become more parsimonious and more thoughtful. In a 2009 paper, Taylor C. Boas and Jordan Gans-Mors highlighted that the word (which now basically an “anti-liberal slogan”) is very frequently used and yet very rarely defined. Historians of ideas may use it to refer to the German Ordo-liberals and some of their contemporaries (like Walter Lippman), who endeavoured to adapt the classical liberal message for the 20th century, in years when the growth of government power seemed an inevitable destiny. But that use is rare.

Typically, the neoliberal story goes like this: Thatcher and Reagan got elected, they rolled government back, the rest of the world followed their lead and here we are, today, paying the price of under-government.

If only!

Read this column by Paola Subacchi for Project Syndicate. The piece aims to be an assessment of the legacy of Margaret Thatcher. It is indeed a good summary of the commonplace uses of this much-misunderstood word.

According to Subacchi:

Her [Thatcher’s] government inaugurated a new age of economic policymaking guided by the principle of laissez-faire.

In short order, a similar approach was adopted by Ronald Reagan’s incoming administration in the United States. Like Thatcherism, Reaganism was based on the idea that markets always know best.

Notice the caricature. “Markets always know best” sounds conceited and seems to imply some sort of faith in absolute, mythological creatures:  “markets”. Yet markets aren’t actors with their own preferences and will: markets do not act, neither they do “know”. A market is a metaphor, which refers to a set of institutions that allow people to freely exchange good and service. Therefore, the “idea” upon which free-marketers found their policy suggestions, is that people do know better what they care for, than whatever bureaucracy that swears to act on their behalf.

Writes Subacchi that:

… Despite several mutations over the years, neoliberalism’s main tenets – privatization, deregulation of product and labor markets, low taxes, free trade, and capital-market liberalization – remain the same. And, not by coincidence, the decades of its reign have been marked by financial instability, widening inequality, and, ultimately, political discontent.

… The so-called Washington Consensus exported both Thatcher’s austerity and Reagan’s tax cuts to the rest of the world, foisting free-market policies onto developing countries struggling with balance-of-payment woes.

One would expect some data on, well, government spending as percentage of GDP. You would search for them in vain, in the article. Subacchi reminds us that the top income tax rate was slashed, but she doesn’t tell us if, as a result of that, “the rich” contribute more or less to fiscal revenues. On the other hand, she seems to assume that highly different political environments can all be pigeonholed into the same neoliberal box – whatever their nuances when it comes to political culture and institutions.

Subacchi mentions revenues from privatising business but notices that “instead of investing these funds in education and the country’s development, Thatcher used them to finance more tax cuts.” Indeed, when people have more money in their pockets, you don’t know ex ante what they will do with it. But are you so sure that, whatever it is, it doesn’t bear any relationship with “the country’s development”?

Subacchi believes that what Thatcher started, Major, Blair, Cameron and other leaders -including Schroeder and Merkel – simply kept on doing. What’s the evidence? What are the major reforms that were accomplished after Mrs T left office? How did they resemble Thatcherism? To what extent did government shrank?

Though the United Kingdom enjoys a lighter touch with regulation than other European countries, it is hardly a “deregulated” country. Synthetic (and, admittedly, highly imperfect) measures like the Index of Economic Freedom would suggest that not much changed in England in recent years.

Social spending is pretty much in line with the OECD average, which has increased from 16% of GDP in 1980 to 20.6% in 2016. David Cameron’s coalition “embraced fiscal austerity” (and yet, this shouldn’t be forgotten, Cameron cashed in a substantial and unforecasted victory in 2015 – were only the “haves” voting?) but public spending is still 40% of GDP. While the dynamics of public spending as a percentage of GDP in the UK is less linear than in other developed countries (it did not always go up!), the trend hardly shows a tendency to “rolling government back”.  Subacchi discusses “financial deregulation” as the stronghold/pillar? of Thatcherism – and yet scholars like Philip Booth would argue that Thatcher did not deregulate the City, but rather substituted formal regulations for long-term, freely adopted codes of conduct. In a sense, then, Thatcher regulated the City far more than it was.

Generally speaking,  reading only Subacchi’s article you’d believe that average government spending in OECD countries was 6, perhaps 10 per cent of GDP. It is not.  Redistributing money is what governments relentlessly did, at least for the last fifty years. Can you really pretend to explain what you do not like about income distribution, assuming that the welfare state isn’t there?

It is nice that Subacchi credites the Institute of Economic Affairs in London for forging “a new-conservative economic policy”.

Sure, ideas for an alternative path might have come from the IEA and the works of Friedrich von Hayek and Milton Friedman. However, critics of Mrs Thatcher tend to forget that it was the electorate who voted for her. Why did they do so? Perhaps because, after a generation of ambitious industrial policy, top marginal tax rates of 98% and accelerating inflation, there was a real fear that Britain would go the way followed a few decades later by Venezuela under Hugo Chávez. Thatcher’s message was timely and met popular approval, far beyond the boundaries of the rich and powerful.

This, however, doesn’t mean that she successfully smashed, once and for all, British interventionism.

The “power of ideas”, Thatcher’s included, should be put in context.  I love the IEA deeply and I cherish its triumphs. Yet this view that one day a few libertarian economists won some conservative politician to their cause and the world subsequently changed, for good or bad, is hopelessly naive. Ideas have consequences? Yes, they have. But whatever policy paper (and the IEA always focused more on the big picture, than on the details of specific reforms) is not translated into law with some touch of magic. Politics, conservative or socialist, is always a complex bargaining process, in which special interest groups blossom and bureaucracy thrive to keep if not increase her own power. This may explain why “rolling back the state” is more talked about than actually accomplished. Thatcher was an amazingly determined woman, which may contribute to explain why she did more than most. Yet the British civil service was hardly under her spell.

The assumption that ideas have consequences can easily be turned into a story that bears little resemblance to reality. Sure an op-ed is by definition painted with a wide brush. But my impression is that the rather prolific industry of blaming X (substitute x for whatever social evil) on neoliberalism needs exactly such a naivety. Good stories, after all, always need a foe.

(2 COMMENTS)

EconLog February 17, 2019

Cowen Interview with Jordan Peterson, by David Henderson

Economist Tyler Cowen recently interviewed Canadian psychologist Jordan Peterson. The audio and transcript are here.

My three favorite highlights follow. After that, I’ll say what I wish Tyler had asked about.

On modern universities:

They [universities] do absolutely everything wrong from a psychological perspective because the fundamental rule — if you’re a psychologist who’s interested in increasing resilience — is that you help people identify what they’re afraid of and what they would like to avoid that’s standing in the way of their movement forward. Then you design techniques to help them voluntarily confront that and learn how to withstand it or to cope with it.

That’s standard exposure therapy. It’s the bedrock of virtually every therapeutic system — that and getting your story straight, let’s say. Well, that’s it. Those are the two most important elements of any psychotherapeutic process.

So when you insist that the right way to view the world is victim versus victimizer, and then you coddle people into exaggeration of their own negative, emotion-centered pathology, you’re going to ensure that the political structure becomes more and more neurotic. If you’re aiming at something and you’re moving rapidly towards it, you’re likely to hit it. And that’s exactly what’s happening on the campuses.

On what modern corporate managers don’t get:

COWEN: If we turn to senior management of large American companies, as a class of people — and I know it’s hard to generalize — but what do you see them as just not getting?

PETERSON: I would caution them not to underestimate the danger of their human resources departments.

 

And, on the same issue:

PETERSON: Yeah, well, all of a sudden now, they’ve [the HR departments] become ethics departments. And people who take to themselves the right to determine the propriety of ethical conduct end up with a lot more power — especially if you cede it to them — than you think. And that’s happening at a very rapid rate.

The doctrines that are driving hiring decisions, for example — any emphasis, for example, on equity, or equality of outcome — it’s unbelievably dangerous. You don’t just pull that in and signal to society that you’re now acting virtuously without bringing in the whole pathological ideology.

And look out when you do, because it’s like, there are elements of it that are extraordinarily old, and that would be the resentful element in terms of patterns of thinking. But the collectivist ethos is very, very attractive to people, so you have to be very careful of it.

On gender discrimination:

COWEN: Let’s say one is of the view that men and women are intrinsically different on average, but one still recognizes there’s a great deal of unjust discrimination against women.

PETERSON: Yeah, I don’t recognize that. I don’t think there is a great deal of unjust discrimination against women in comparison to the degree of unjust discrimination against men. I think that hasn’t really been true for probably, well, at least 10 years. And I know that’s not very long. But then, I also don’t buy the argument that throughout history, men have, what would you say? Singularly oppressed women? I think that’s absolute bloody nonsense.

Peterson is also good on immigration.

Now to what I wish Tyler had asked about. Here’s a guy, Peterson, who grew up in rural Alberta. His parents were almost certainly modest income. I always find stories of such people fascinating. Admittedly one of my reasons is that my upbringing was similar: in a modest-income family in rural Manitoba. I have 12 years on him and so with the all the economic growth in those 12 years, his family’s income was likely higher than my family’s. I think a lot of people are interested in those stories. He read Ayn Rand at an early age, as did I. What was he thinking? How did his views develop? Did his modest rural upbringing contribute, as I think mine did, to his being a fighter who won’t take crap from people? Inquiring minds would like to know.

My impression, from admittedly a quick reading of many transcripts of Tyler’s conversations, is that he’s a lot in the present: what do you think now? what are your views now? That probably is more important. It’s just that I find the early life stories fascinating and would like to see more on that.

A year ago on EconTalk, Russ Roberts interviewed Peterson on his book 12 Rules for Life.

(7 COMMENTS)

EconLog February 17, 2019

Lessons from the Golden State, by Scott Sumner

In many ways, California is the ideal place to build a high-speed rail line. The state has two giant metro areas, separated by 380 miles, which is the “sweet spot” for high-speed rail. A high-speed rail line could (theoretically) cover that distance in less than 2 hours, which makes it competitive with air travel.  (The actual proposal was much slower.)

California has many other advantages as well. Governor Jerry Brown was an enthusiastic advocate. The state is completely dominated by the Democratic Party, with the environmental wing of the party being especially powerful. California is home to the world’s wealthiest industry (tech) and is able to impose very high income taxes on the rich without suffering a mass migration to cheaper states, due to its enviable climate and lifestyle.  They’ve got enough money.

California is an almost perfect place to build high-speed rail.

And yet it will probably never happen. The new governor has put most of the project on hold, and most experts seem to think this is just a polite way of pulling the plug on the project.

“Right now, there simply isn’t a path to get from Sacramento to San Diego, let alone from San Francisco to L.A. I wish there were. However, we do have the capacity to complete a high-speed rail link between Merced and Bakersfield.”

There are important lessons here for progressives, who have been pushing for exactly this sort of infrastructure project. In short, progressives have not faced up to a number of difficult choices:

1.  The choice between strict environmental regulations for major construction projects, and the goal of building environmentally friendly infrastructure.

2.  The choice between pro-union labor policies and building affordable infrastructure.

3.  The choice between high levels of spending on human services and building infrastructure.

4.  The choice between wildly excessive safety regulations, and efficient transport services that are “safe enough”.  For instance, it took decades for our transportation regulators to approve lightweight rail cars that had been used in Europe for many years. Penn Station’s Amtrak station has long lines due to utterly useless passenger checks in the terminal, even as “terrorists” could freely board the same train without any ID checks a few miles down the road in Connecticut.)

A society often makes a choice by not making choices.  The progressives have chosen to keep intact some wildly excessive regulatory burdens on getting environmental approval for new projects, instead of limiting the environmental review to no more than 6 months.  They have chosen to use expensive American union labor and inefficient US builders rather than more efficient foreign builders using labor from China and Bangladesh.  They have chosen to spend lots of money on human services, leaving little money for building infrastructure.  By making these choices, progressives have implicitly revealed that infrastructure is not a high priority to them.  We are not Singapore.

And it’s not just progressives.  The long environmental review process caused conservative Orange County to abandon a much needed airport project that had previously been approved by the voters.

In previous posts, I’ve argued that it would be foolish for the federal government to spend lots of money on infrastructure, partly because America no longer knows how to build infrastructure.  After the recent California high-speed rail fiasco (which used federal funds), perhaps my critics will better understand my argument.

PS.  Matt Yglesias has an excellent account of what went wrong, written from the perspective of a sensible progressive.  I think the problems are even deeper, but his critique is quite well informed and full of good observations.

PPS.  I reluctantly signed the carbon tax petition today.  I say reluctantly, because I oppose the provision that would rebate the revenue to taxpayers.  Instead, I’d prefer to use the funds to service our ballooning national debt, i.e. reduce the budget deficit.

(10 COMMENTS)

Here are the 10 latest posts from EconTalk.

EconTalk February 18, 2019

Catherine Semcer on Poaching, Preserves, and African Wildlife

African-lion-300x215.jpg Catherine Semcer of the Property and Environment Research Center (PERC) talks with EconTalk host Russ Roberts about the role of incentives in preserving wildlife in Africa. The conversation discusses how allowing limited hunting of big game such as elephants and using revenue from hunting licenses to reward local communities for habitat stewardship has improved both habitat and wildlife populations while reducing poaching. Semcer draws on her experience as former Chief Operating Officer of Humanitarian Operations Protecting Elephants and also discusses recent efforts to re-locate lions in Mozambique.

EconTalk February 11, 2019

Jessica Riskin on Life, Machinery, and the Restless Clock

Restless-Clock-199x300.jpg Historian Jessica Riskin of Stanford University talks about her book The Restless Clock with EconTalk host Russ Roberts. What is the difference between human beings and machines? How has science thought about this distinction? When do we have agency and when are we constrained? Riskin discusses these issues and the implications for how we think about ourselves and the growth of artificial intelligence.

This week's guest:

This week's focus:

Additional ideas and people mentioned in this podcast episode:

A few more readings and background resources:

A few more EconTalk podcast episodes:

Time Podcast Episode Highlights


0:33

Intro. [Recording date: January 14, 2019.]

Russ Roberts: Before introducing today's guest, I want to thank everyone who voted in our Survey for your favorite episode of last year. It takes a while to compile those, but we will at some point communicate those via Twitter and via an episode later in this year; and we do have a category in our archives called Favorites where you can see what people voted for in the past--what were some of the favorite episodes in years past. And, one of the things I learned from the Survey is that many of you do not realize that we have Highlights for every episode, which is almost a full transcript; we have links to things related to this episode, including other EconTalk episodes and the writings of the author or the guest. And, so, I encourage everyone to check those out if they interest you at all.

1:22

Russ Roberts: And now, for today's guest. She is historian and author Jessica Riskin.... Her latest book and the subject of today's conversation is The Restless Clock: A History of the Centuries-Long Argument over What Makes Living Things Tick which was published in 2016.... Your book is a history of the science of how we've thought about life and nature itself, and science, also. And at the heart of the book is a tension between what you call brute mechanics and agency. Explain those two different issues and how they've played out in the History of Science, without giving us the entire book--which of course is what the book is about. Just give us a brief intro to the idea behind those two concepts.

Jessica Riskin: Sure. Yeah. Well, I think that there has been a kind of a struggle throughout the history of the modern life sciences between two models of living things. And, according to both models, living things are a kind of machinery in the sense that they are made out of material parts interacting with one another. But, one of the two models considers them to be machines, clock-like machines, that are essentially passive: they've been designed to function in a certain manner, and they function in exactly the way they were designed, like a clock--tick, tick, tick. And so they are essentially passive. According to the competing model, living things are active machines: they are self-making, continually self-transforming. They have a kind of internal agency. And so those, I think those two models of living things emerged around the 17th century and have been in a kind of an interesting struggle with one another since then. And even today, I think you see elements of each in current science. So, in The Restless Clock, I was interested in tracking that struggle.

Russ Roberts: Yeah, and on the surface it seems kind of obvious, say, that a car is a machine and I'm not. And yet, there are many car-like, machine-like things in me: my blood pressure, my sweat when it's hot out. There are a lot of things that are clearly not in any sense agency on my part. They happen without agency. They happen passively, without any intention. And so there is a deep, obviously philosophical question as to whether I can have any intention at all--or is it all just the parts? All just the chemistry of the adrenalin, etc., that makes me tick; and I'm under the illusion that I have agency?

Jessica Riskin: Well, also the other thing about--I should sort of specify that when I use the word 'agency' in the book, I use it sort of at many, many different levels. So, maybe the highest level agency would be conscious acts of will. But, you can sort of go all the way down to very, very rudimentary forms of agency by which living organisms respond to their environment, at least according to certain theories, that are not acts of will--say, phototropism of a plant or something like that. And, Lamarck, the French naturalist Jean-Baptiste Lamarck, who was really the first person, at the end of the 18th century, beginning of the 19th century, to develop a theory of what we would now call evolution--he didn't use that word--but transformation of living forms. Lamarck was the first to develop a theory of that. And he identified kind of a spectrum of forms of agency going all the way down to very, very rudimentary sensitivity and reactiveness to the environment, and all the way up: he said that at the level of birds and mammals, that was the level of complexity at which organisms could respond by acts of will to their environments and shape themselves through actual acts of will by forming habits in response to their environment. So, you know, there certainly is a spectrum of forms of living agency in the History of Biology.

Russ Roberts: Lamarck is having a bit of a come-back. We will get to that later. I think that's incredibly fascinating.

Jessica Riskin: It is. That's very interesting.

Russ Roberts: Yeah. But, I want to go back to--you mentioned phototropism. And I assume that means that, if you put a plant on a table it will turn toward the sun, and start growing toward the sun. Which is--we would often, in science, we certainly do this in economics--we would say, 'The plant as if it seeks the sun.' We don't think the plant is conscious, but we find it useful to use a metaphor of intention and agency to describe that activity, that action, that result. And, what's fascinating to me about much of what you write about is: I think most scientists would say, 'Well, we don't really mean the plant wants to get to the sun. It's just a metaphor.' And yet, we struggle to keep those metaphors separate from the reality.

Jessica Riskin: Right. Yeah. I mention in the introduction to the book--it's funny, actually: this is one of the passages that people have responded to the most--I mention the conversation I had with a good friend of mine, actually one of my college roommates who is a biologist now. And, I was talking with her about this--you know, she was saying that biologists, in conversation, in casual settings, all the time speak as though the organisms they study had agency--were, you know, seeking things and striving for things, and so forth. And she said, 'But we would never publish in those terms. We would never'--you know, this is only okay for casual conversation. And I think that's sort of an interesting thing. If you find a community of researchers who speak in one way and publish in another way, it's sort of an interesting phenomenon. Why is that? I'm interested--so, one way to describe what I was interested in, in the book, is the history of that situation: Why do biologists speak in this way casually, but they would never publish in those terms?

7:50

Russ Roberts: You and I have a colleague at Stanford in the Business School, Paul Pfleiderer. I don't know if you know Paul. But he wrote a very provocative piece, and we talked about it on EconTalk, and we'll link to it, where he talked about the 'as if' assumption in economics--'People act as if'--or the idea that we model things by stripping away a lot of reality, and we all assume that firms, say--we actually call them 'agents' in economics. It's a pretentious term to mean people who decide things, and live. But, we'll talk about 'agents's having a certain utility function,' or maximand. And, when pressed, most economists would say, 'Well, we don't literally mean that, that's exactly what they are doing. But, they act as if they are doing that, and it's useful.' The problem is, is that we then want to make welfare statements--statements about wellbeing--that are predicated on those models' actually describing reality. Not just trying to use a model to predict what's going to happen. And those are two very different things. And what Pfleiderer points out is we typically confuse those because of our habits of talking about them as if they are the same. And they are not at all. And it's really dangerous.

Jessica Riskin: Right. Yeah, I mean, of course any model--this is sort of a basic point in the Philosophy of Science, that any model is going to reduce and simplify. If it didn't do that, it would be worthless. Then you might as well look at the world itself rather than at your model of the world, if the model doesn't reduce or simplify in any way. But, as you say, for one thing it's important to keep in mind the dimensions in which you are reducing and simplifying. And also, I think, it's a question of what people are trying to achieve with this particular form of reduction or simplification. So, to come back to, to give an example from the book: I think the classical, passive mechanist model or brute mechanist model of considering living things to be like clocks, or other sorts of machines that have been designed in a certain way and function in that way for all of eternity--the purpose of that model, that model came out of--it's one of the things I'm most interested in, in the book--that model came out of a theological tradition, the argument from design, in which people beginning around the middle of the 17th century began to--especially Englishmen like, for example, Robert Boyle--it's a fundamentally Protestant theological tradition, the argument from design. People began to look for lots of evidence of rational design in nature as evidence of a rational designer, of a rational God. And so, people got very, very interested in studying physiological fitness: the perfect suitability of, you know, the eye of a bird to the task it has to perform, versus the eye of a fish, which needs to do a different task in a different environment. Those questions of physiological fitness first got attention in the context of the argument from design. And of course, the argument from design assumes that agency is external, is outsourced to the designer, and not internal to the designed creature.

Russ Roberts: 11:04 And that's a fascinating--it's a paradox, of sorts, or at least a confusion, even, I think, for some people. Because, on the surface, the movement toward seeing nature as mechanical--as a--and I think of that--you didn't talk about this much, but I think of it as a series of causes and effects. A series of a chain of responses to stimuli. That's the essence of science. It's that you're not going to use or invoke a divine mover. And similarly for human beings: you are not going to invoke a soul to describe what gives human beings life. That's the essence of science, is to rule out those theological arguments. And yet--I want you to say it again--your argument that in the beginnings of science, at least, the more mechanical people viewed nature, the more they were essentially invoking a divine origin.

Jessica Riskin: Right. That's right. I think there's a kind of supreme irony, actually, in this. I mean, the founding of the modern sciences around the 16th, 17th century--one of the kind of main features of that moment in the history of natural science was the ruling out of what these new philosophers--people like Newton and Boyle--took to be mystical, you know, 'No longer will we appeal to mystical tendencies and souls and things like that'--

Russ Roberts: Miracles, magic--

Jessica Riskin: Exactly. From now on--so, final causes, in Aristotelian terms, are to be ruled out. Its purposes, tendencies, inclinations, and so forth--from now on we're simply going to talk about matter in motion. Material causes. And, so, you know, the origin of this kind of passive clockwork model of the cosmos really takes place in the 17th moment in which people are trying to rule out these kind of inexplicable tendencies and proclivities that they saw as having been everywhere in scholastic medieval science. But, there is an irony to this, which is that they sort of outsourced all of that agency to an external designer. So, in a sense you have this purely material artifact world--this very beautiful, very complex, very perfect and rationally-designed artifact world that's all made out of just moving parts. And so, the advantage of that is it's intelligible. Descartes is another example of someone who--he was one of the first to describe this beautiful, rational, artifact world and to extend it even to living things. To say, 'Everything is just machines and we can understand therefore what's wonderful about that is we can understand it all.' It's all intelligible to reason. If we apply human reason to this world, we will understand it entirely. But, then there's this ironic, sort of accompanying feature which is that agency and the original cause of all of this, is external. Is super-natural. It's out there in the hands of the super-natural God. So, there's a kind of supernaturalism that goes along with it.

14:36

Russ Roberts: And yet, in today's world, I think many scientists who do not believe in God, would argue you don't need a first mover. It just kind of--it just happens. And it just so happens that that world that happens has cause and effect, laws, things that we can inquire about and uncover. And we do. And that's nothing to do with intention or design on the part of a divine origin. It's just the way it is.

Jessica Riskin: Yeah. I mean, here's another: We've come to another kind of basic principle in the Philosophy of Science, which is that any explanation has to start somewhere. You have to start somewhere. You have to have some primitives, some beginning point. And so, for somebody like Descartes that beginning point was matter and motion: you know, you assume the existence of matter and motion; and then explain everything in those terms. And I suppose human reason--somebody like the German philosopher Leibniz--he really objected to the kind of major theories that he saw emerging around him, to the Cartesians [i.e., followers of/thinkers about Descartes--Econlib Ed.] and to Newtonians. He said, basically, 'Matter and motion explain nothing without force, without energy. Modes of action.' What puts all of this in motion? You need to have some source of movement and energy and force. And so, he made that his primitive. So, I guess it's a question of what you are willing to assume, and what you really want to be able to explain to explain, in terms of those things that you've decided you are willing to assume.

Russ Roberts: Well, I think--I think for modern scientists--they are very Leibnizian. I don't know if that's a word. Is that a word?

Jessica Riskin: That is a word, I think. Or at least I think, because I use it.

Russ Roberts: So, they are very Leibnizian. And that first cause is the Big Bang. And, once that is set into motion--we don't have a theory as to how that happened or why it happened. Or, if you are a religious believer you'd say it could have come from God. But if you are not a religious believer, you just say, 'Well, they don't'--I think increasingly scientists don't say, 'We just don't know.' They say, actually, 'I don't even need to have that first cause any more.' But I think most people, most human beings are very uncomfortable with that. And they like the idea, even if it's a mystery as to the source of it, they like the idea of a first cause.

Jessica Riskin: Yeah. Well and also I think you need a lot of first causes in scientific explanations. For, the Big Bang, for example, is a useful first cause maybe in cosmology, astronomy. But there are plenty of areas of science where it probably doesn't get you very much explanatory power, and you need other first causes there. So, yeah. I think it's sort of an interesting philosophical problem throughout the sciences for any given area or field: Which are the things that I'm willing to assume? And which are the things that I need to be able to explain? But, those explanations are always going to go only as far as the level of assumptions, right? Again, you have to start--it's interesting, my daughter is a junior in high school, and she's taking AP [Advanced Placement] Biology this year. And, one of the things she found hardest when she started the AP bio curriculum was that it seemed to her that some of the questions she was asking in class, she was told, the teacher would say, you know, 'You just have to assume that.' 'If you go to grad school in biology maybe you'll be able to learn about that, but for now let's just assume it.' And other things, the teacher would give her a very worked-out explanation that she would need to understand and learn. And so she was saying to me, and she said to her teacher, 'I don't understand what's the difference between those questions that I have to just assume and those where I really need to be able to explain it thoroughly.' And I think that's a problem not just for high school juniors in AP bio, but throughout the sciences.

Russ Roberts: Oh, I think it's a big part of life. It goes way beyond AP bio, for sure. When I used to be in the classroom teaching economics, I loved to ask students questions that didn't have clean answers. That were puzzles. And, to answer those puzzles, to make any progress, you have to make some assumptions. And my students, at first, they want to know: Well, what are the right assumptions? And, that's the hardest part: knowing what to ignore and what to focus on is a huge part of the scientific enterprise. And even the social scientific enterprise. And it's not really science. It's a craft. It's an art. At least in economics.

Jessica Riskin: Yeah.

18:20

Russ Roberts:

Russ Roberts: I want you to talk about the metaphor of the restless clock, because it haunts me after reading your book. And I want you to contrast it with the brute machine--you mentioned it briefly but I want you to go into it in a little more depth, the origin of that phrase and its contrast with the brute machinery. And, the brute machinery, the brute mechanism model--you know, I'm basically at the mercy of my chemistry, forces beyond the control of the living organism itself. How does that restless clock work?

Jessica Riskin: Okay. So, thank you for asking that. Actually, the Restless Clock--I struggled to come up with a title for the book. And when I arrived at this, I thought that would really encapsulate the argument. Um, it actually, the phrase, 'The Restless Clock,' comes from a passage by Leibniz, who I was just mentioning a few moments ago, in which he says, um--he's writing in his new essays, which were written in French, actually, even though he was German--he was writing in French. So, he says, in German, the name for the balance arm for a clock is [?unhula?], which he translates as, in French, as [?aquiez?] or restless. And he says, 'I like that name for the balance arm of a clock.' Because, if you think about, clocks are always having to respond and adjust to their environment. They are always having to make up to a little variations and things taking place around them. And, it's the same way--I'm certainly paraphrasing here--but, 'It's the same way, he says, in living bodies. We are constantly having to respond and adjust to our surroundings. We can never just be calm and quiet. We have to be always in a constant state of restless responsiveness.' And what struck me about that passage is that this was a period in which pretty much everybody, everybody, everybody was making that analogy between living organisms or different natural phenomena--but, including living organisms on the one hand and clockwork on the other hand. But, they meant very different things by it. So, another--you know, someone else--I'm going forward in time a bit, but someone like William Paley who made that same analogy, meant that living things are passive, mechanical devices that have been designed, by some external designer. Leibniz meant that they are dynamic, responsive, self-adjusting, self-moving. So he meant something very different by it. And so, that's why I chose it as my title, because I wanted to point out this kind of less, I think less visible but equally important tradition in the history of the life sciences, which is the restless clockwork model as opposed to the passive clockwork model.

21:44

Russ Roberts: Yeah; I want to stay with that for a minute, but I first want to digress for a second about economics. In economics, we have the model of a market in equilibrium. We teach it to our students. When I teach economics it's at the heart of what I teach often as a way of analyzing the impact of, say, a policy intervention or change in something that's affecting the market participants or any of the supply or demand side. So, it might be looking at a change in tastes or taxes or subsidies or price controls, or so on--changes in the so-called rules of the game. And, we then, in economics, we perturb the system and we watch it come back into equilibrium. But, when pressed, certainly a good economists says, 'Well, of course, that's just a metaphor.' Markets--first of all, they are not real. There is no such thing. We are not talking about a farmer's market. We are talking about, say, the thing that determines the price of a shirt made out of 100% cotton that are, say, iron-free in the United States right now. That's what we mean by the market for shirts. And there isn't one. It's just a conceptual idea to help me wrap my brain around a really complicated kind of set of interactions between buyers and sellers. And, I don't really believe it's an equilibrium because the price of cotton is constantly changing, and there's all kinds of things affecting the labor market for workers in the cotton industry. And the fashion market is changing every second. And so, it's a metaphor. It's really a restless--it's a super-restless clock. Because it doesn't--it doesn't necessarily stay on time at all. And we wouldn't really expect it to. And a good economist admits that. But, we use that metaphor because it's helpful.

Jessica Riskin: Right. Right. Yeah, it's interesting, actually: I think, to sort of pursue the connection between living systems and economic systems, it seems to me that the modern theories of those have a common origin that is very much related to the subject of my book: that, you sort of, Darwin--Darwinian classical evolutionary theory and classical economic theory come from the same intellectual moment--

Russ Roberts: yeah--

Jessica Riskin: and indeed very much influenced one another. Certainly, you know, Darwin had in mind a kind of invisible hand struggle--

Russ Roberts: competition--

Jessica Riskin: competition, struggle for survival, when he was developing his idea of natural selection. And I think--but reciprocally, I think the authors of classical liberal economic theory had in mind--out of Smith, certainly--had in mind the late 17th and early 18th century natural sciences as a model for how social explanation should be. You know: social explanation should be as much as possible like natural scientific explanations. So, there's a real convergence in that moment.

Russ Roberts: And, Smith did not mean that you had to use calculus; but his modern offspring certainly think that that's the way to understand it. I don't agree; but it's a common thing to model economics as something like physics. I do think--I think I learned this from Vernon Smith, Nobel Laureate, in an EconTalk episode with Jim Otteson when we were talking about Adam Smith--that Smith was alive when Newton was alive--I think he was 3, or maybe 5 at the most. He didn't have any intellectual conversation. But, clearly, Newton was interested in the harmony of the heavens; and I think Smith was deeply interested in the harmony of our interactions with each other: how they worked together and interacted together. And, he wasn't looking for an equation for gravity, but he had something similar in the back of his mind.

Jessica Riskin: Oh, absolutely. That's right. And I think that the intellectual world that Smith was operating in was one that had been extremely shaped by Newtonian physics and the kind of natural science that got established at the end of the 17th century, with Newton's Principia and other contemporary works. And another thing that's interesting is it seems to me that both--just going back to Smith and Darwin--that both of them were much more sort of causal pluralists than their followers. So, Darwin was interested--so there's a kind of very reduced form of Darwinism that Darwin himself did not advance, that sort of reduces everything just to adaptation, natural selection and adaptation: every single trait is the result of natural selection directly and therefore is adaptive in some way. And the same thing, I think, with economic theory after Smith: the idea that competition is the only thing. And I think in each case--Darwin was interested in a kind of multiplicity of causes; and I think Smith was also interested in more of a multiplicity of forces at work in the economy. So, there's a kind of simplification that happens in the wake of those.

Russ Roberts: That's a great point. They are both incredibly rich thinkers that, if you haven't read them in the original, you've missed something. You may not learn a lot about Facebook and social media, say, reading Smith--although I wouldn't, as I've written: there is something to be learned from Smith about social media. But, just an example: Obviously, there are many things that are outdated in Smith; and similarly in Darwin. And yet, you get to see their minds at work in such a rich and non-reductionist way, that, as you say, led to some really reductionist theories down the road. But they were not reductionists themselves at all.

Jessica Riskin: Right. I think that's right. Yeah.

27:40

Russ Roberts: So, you write a beautiful thing about--going back to The Restless Clock for a sec--you say,

To say that a human being works like a machine, whether one accepts or rejects the idea, sounds like science. But it sounds less like science when one describes the machinery as restless, moved by its own inner agency.

And the reason I love that is, I do think--we've talked recently in the program about whether there is free will or not. Most of us behave as if there is. We find that to be a helpful--maybe an illusion, but certainly it is a helpful way to live. But, I think that idea of seeing ourselves as restless clocks--that there's a huge piece of our lives that we have no control over, a huge part of our being, but that somehow we have some agency and we do interact with our environment in complicated ways. And--I'm going to give you an example in a second, but first, just react to that.

Jessica Riskin: Yeah. I mean, one thing I'm interested in with this book is that what does or doesn't sound like science is a matter of history. Something sounds like science because the science has developed in a certain way. And so I guess I was sort of trying to suggest with that passage--I think it's toward the end of the book--that one could imagine this kind of parallel historical development in which the description of restless clockwork sounds perfectly scientific, and that there are--I think, a political history of science, almost. You know, as I've said, it had to do with the relations between, actually, science and theology. So, the idea that agency and purpose and meaning and those questions--those questions belong in the realm of theology; and science is meant to just address questions of sort of proximate mechanism: this piece pushing up against that piece. And to describe an essentially passive world to which the theologians will then supply the meaning, and the purpose, and the agency. And so, it's for that reason I think that, today, one of those sentences--the kind of passive clockwork, classical mechanist model sounds scientific; and the active mechanist model sounds less so. So, yeah. That's what I was getting at, with that. And in fact, William Paley--I had mentioned him earlier--he was the author of the watch on the heath--I think many probably many people have heard this kind of little story that Paley told. If you are walking across a heath, a field, and your foot struck against a stone, you could reasonably say to yourself, 'Well, maybe that stone just happened to be there. It's always been there.' But, if your foot struck against a watch, then you'd have to imagine that there must be a watchmaker somewhere. And so this is analogy: He wants you to then apply that to the natural world--'This is a watch' implies a watchmaker; the rational design of nature implies a rational God. And, Darwin recalled that he, as a student at Cambridge University had had to memorize a lot of Paley, a lot of Paley's writings. And he quite admired, actually, Paley. You can even hear the kind of resonance in Darwin's writing of some of Paley's rhythms and way of phrasing things. And Darwin basically said, 'I'm doing Paley, but I'm just taking out the God part.' And that's an interesting thing to think about. Can you, if you adopt that model of living things as sort of passive clockwork-like mechanisms, can you then just take out the God part? Or, isn't it implicit in that model; and don't you need a different model of living mechanism? So.

31:31

Russ Roberts: Yeah. So, why does that matter? I mean, why, for a modern scientist today who is not interested in God, or Paley for sure, who is usually mocked by most modernists, moderns: Why is that relevant? Why should I care about this old historical problem that you are talking about? This tension, this issue of, 'I'm just doing my science. Leave me alone. I don't have to worry about this.'

Jessica Riskin: Right. Good question. Well, I think because, I think practicing scientists, if they don't know so much of the history of their science, then they don't fully understand the stakes of their own convictions. So, if you have a conviction that ascribing agency to an evolving organism is unscientific, but you don't realize that that emerged from this older, theological division of labor, then I think you haven't fully understood the stakes of your own--what you take to be axiomatic. You know, today, in the 21st century--Darwin, I think Darwin himself was tremendously torn between the Paley model of clockwork--passive clockwork--and the Lamarck model of living things as self-making, self-transforming machines. That's how Lamarck saw things. Lamarck, of course, was in very bad odor in the 19th--well, has been, I think continues to be in many circles in very bad odor. But, initially at the end of the 18th and going into the 19th century, Lamarck was associated with the French Revolution, with materialism, with regicide, with Jacobinism, radical politics. And so, you know, Darwin sort of struggled to reconcile these two competing models, and with all of this politics surrounding them. And, if you don't know about that history, then you as a practicing biologist today in 2019, you don't fully understand why 'Lamarckian' sounds to you like bad science.

Russ Roberts: Yeah. And it would also discourage you to being open to the idea of epigenetics--the idea that some traits can be passed on. Which increasingly, in small areas, not important large ones necessarily. But that it is possible at all is absolutely stunning, given the way people were believing for the last few hundred years. And you'd miss that. You'd be biased against it.

Jessica Riskin: Exactly. And, in fact, I think you mentioned earlier that Lamarckism is having a sort of comeback today; and maybe I should specify I think that's right. And what I mean by Lamarckism is--

Russ Roberts: It isn't--I'm going to interrupt for a sec. It isn't that by stretching for the fruit that a giraffe gets a longer neck and passes it on to their children. Which is the sort of parody. That's what I was taught--

Jessica Riskin: That is the--well, he did say that.

Russ Roberts: That's what we were all taught. 'Well, that was a wrong idea.' Because that doesn't happen.

Jessica Riskin: Right. I remember learning that in high school biology as an example of total wrong-headedness. The giraffe stretching its neck. But, by Lamarck, Lamarckism, Lamarckian biology, what I mean is: First of all the idea that an organism can change in the course of its lifetime in ways that can be heritable. And, as you say, epigenetics is one area, one current, sort of very hot area of biological research in which people are finding that organisms can transform in ways that are not within the genome but, you know, outside the genes, there's a lot of things. There's the cell. There's the body. There's the environment. And so, an organism can transform in the course of its lifetime in heritable ways. And I think biologists are currently very interested in studying that. I've gotten, actually, sort of connected with a group of biologists through my colleague at Stanford, Marc Feldman, and his, I guess, collaborator, Kevin Laland who is at the University of St. Andrews. And they've invited me to a couple of conferences. It's been really fascinating. So, they are at work on something they call the extended evolutionary synthesis, which is trying to build back into evolutionary biology all those areas outside the genes that the kind of Neo-Darwinist tradition had left out. So, from the larger cell to the body to the environment--even, they are interested in the culture of animals and animal behavior. And that's been really fascinating for me, to be a part of those conversations.

36:11

Russ Roberts: So, I want to draw a different lesson from your book. I understand it's not--it's a long book; you've got a lot to talk about; there's a whole bunch of very in-depth intellectual history that you explore there and so you don't have, obviously, room or time for everything. But one of the things that struck me as I read it was the following. And it's an issue that's come up on the program before: That, you read these brilliant people--Descartes, Kant, Darwin, Lamarck--and a few dozen other of their colleagues that you write about in some detail. So, amazingly [?] that book, one thing that strikes you--at least it struck me, and I'd love your reaction--is that, 'Yeah. I just had no idea.' They were really smart; and they had, of course, limited knowledge--of all kinds of things, genetics being one obvious example for the listener that I just gave you. But, they had limited knowledge, and so their idea of, say, 'How are human beings different from animals?'--they had all kinds of wacky ideas that we look at now and laugh about. But it strikes me that we haven't made that much progress on a lot of these issues. And the second thing that strikes me--you and I talked about this before we came on the air--is that, a lot of times we latch onto a metaphor like a clock because it's the most advanced thing we can possibly think of. So, that was true in, say, 1750. And at that point--then later it became the steam engine. Or the combustion engine, became a better metaphor. And now it's the computer. So, we say, 'Well, eventually we'll understand that maybe the whole universe is a computer. It's all simulation.' And some really smart people believe this, or at least consider it, or speculate about it: that the entire universe is a computer simulation. It's like, 'Really?' If you read intellectual history, which is what your book is, you realize that we're just--we're really in the dark a lot of the time. Now, does that mean there won't be a moment where we're in the sunlight? Where we'll have finally figured this out? Whatever this is. But, it strikes me that humility is one of the lessons you might gather from some of these questions and our attempts to answer them.

Jessica Riskin: Yeah. It's interesting. I think--an example is in the history of Artificial Intelligence. Well, let me back up for a moment and say that I think both things are true. On the one hand, the sciences make tremendous, extraordinary progress. And, on the other hand, it seems like certain problems, core problems, don't get any closer to being solved--even while that tremendous, extraordinary progress is happening. And so, an example of this is, in the history of artificial intelligence, I think many artificial intelligence researchers have talked about this problem of a kind of moving of the goal posts. So, each time it becomes possible for a computer to do something that seemed like you could never do that, now there's a [?]. So, certainly, a computer could never play chess. Well, then there are computers that could play chess. And so, people said, 'Okay, well, that's not really the key thing. It's to be able to play Go.' Now there are computers that can play Go--

Russ Roberts: really well--

Jessica Riskin: Right. And so, each time there's--and it seems like, I do think that we don't--we have certainly not, through artificial intelligence gotten closer to the essence of what sentient cognition--even of animals--is like, let alone of human beings. Maybe people--that might be a controversial statement. I think people like maybe Steven Pinker would disagree with that. Would say, 'Well, we know that it's just a lot of subroutines and maybe we don't know quite the details.' But, to my mind, I don't--I am not persuaded by that kind of argument. It seems to me that--it's quite extraordinary the number of things that computers can do. And, at the same time, quite extraordinary how, it seems to me, that hasn't gotten us any closer to the essence of sentient cognition.

Russ Roberts: I agree.

40:20

Russ Roberts: One of the words I don't think I read in your book--it's probably in there, but I didn't notice it--is 'instinct'. So, I want to ask--I want to give you a, tell you a story. And then I'll let you react to it. So, I'm looking out my window, on a Tuesday morning, and I see my bird feeder. And there's a cardinal on my bird feeder. It's really a gorgeous, beautiful, dangerous thing to be a cardinal, because it's really visible. A male cardinal. It's bright, bright red. And it's really nervous at my feeder--at least, appears to be nervous: I can't have any way of knowing. It seems to give off the air of unease. Restless, actually, would be a good word. Very restless at the feeder. And, it can't stay there for long. It immediately flits to a nearby tree. And then it comes back. And it comes back to the feeder. And I'm thinking, 'Did it want to do that? Or is it just instinct?' And then I think about myself. It would be, like, procrastinating; and I get up, and I say, 'I'm just going to have one handful of peanuts out of that giant Kirkland/Costco brand Virginia peanuts that are really good. And I take the handful, and I go back and sit down, and I read what I'm reading or work on what I'm working on; and then, 'Oh, just one more.' Now, is there any difference between me and that bird? Is there will in that? Intention? Is the bird just responding to instinct? And, are we ever going to answer that question? I guess we could ask the same question about me.

Jessica Riskin: Yeah. I mean, I think there have been competing approaches to that kind of question. So, behaviorist psychology is about kind of describing animal and human behaviors from the outside and never ascribing any internal subjectivity to it. So, then the behaviorist answer to that question would be: 'You can just sort of describe what the bird does, and don't assume any subjectivity on the part of the bird, and attitude or feeling. Just describe what it does and assume that it does that because of its mechanism--how it's constructed. It's constructed to behave in those ways.' But it seems to me like those are questions of principle more than science. You know--do you adopt--or cybernetics is another example. I think that cybernetic movement of the mid-20th century, in which people like Norbert Wiener at MIT [Massachusetts Institute of Technology] tried to understand animal behaviors and computing and human intelligence, this kind of constellation of things, on the same model--all on the same model. And it was sort of axiomatic to them that you kind of describe from outside, in. You don't make assumptions about what's going on in the inside--the subject to it, of the organism. But it seems to me that those are questions of principle more than, or methodology, or approach. They are not questions that you can--you have to sort of adopt a stance. I don't know how you would ever answer that question through the science. Rather, you adopt a stance in kind of framing your experiment, framing your science. You decide, 'Well, I will either assume subjectivity, or not.'

Russ Roberts: That's a tough one, though, right? I mean it's--I presume that the cardinal does not, when at the bird feeder, have a flashback to a memory as a younger cardinal at a time when the seeds were better than the lousy ones I put out this year. Unlike myself, who might reminisce about some peanuts I had at a baseball game with my dad when I a little boy, and have a nostalgic moment. But, I don't know. Maybe cardinals have nostalgia. It seems we can't know--at least right now.

Jessica Riskin: Well, and also, it's interesting that Lamarck, I mentioned, said at the level of birds and mammals, these higher forms of responsiveness come in. Because I was just--my dog certainly has memories of things she's done in different places--

Russ Roberts: yep--

Jessica Riskin: even long after the fact. And we go back to that place, and you can see her remembering, 'Oh, there was a nice mud puddle here last time. I'm going to go see if it's there again.' You know. And so--and I think, at least according to Lamarck, organisms up to the level of birds and mammals, can have various forms of, almost unconscious responsiveness. But, from birds and mammals, they can respond deliberately and through acts of will.

45:04

Russ Roberts: Let's talk about emergence, which is one of my favorite things in economics. Neglected, in my view. And I get the impression you think it's been neglected in science, as well, even though it's incredibly hot right now as an overall concept. What is its importance in thinking about sentience? In thinking about the life-ness, the vitality of things?

Jessica Riskin: Well. Gosh. I'm not sure exactly how to answer that. I mean, it seems to me like emergence is a way of naming the problem, of a kind of gulf between--you know, if you give as minute a description as you can of a living thing, there's a kind of gulf between that minute description and the result: the kind of whole result of a living, sentient, acting, responding being. So, emergence is a way of kind of naming that, gap. You know, something happens in between the low level and the higher level--the low-level causes and the higher-level results--something happens. But it seems to me that often, it's a kind of a hand-waving. We don't really know what happens, so we just have to assume that something mysterious happens in there, in that gap.

Russ Roberts: I think in science, at least the way you've used it here, emergence is the idea that the sum is greater than--the whole is greater than the sum of the parts. Right? In economics, and in other aspects of science, yes, that's part of it. But it's also the idea that--that doesn't seem to cover it. It just seems to me that's not the--in particular, in economics, the idea that, say, a market might--here I'm going to lapse into my anthropomorphinization of a non-animate thing. Markets, they seem often to try to solve problems. My favorite example is, one of them, is that when hundreds of millions of Chinese leave the countryside and move to the cities and they start sending their kids to school and their kids start using pencils, so now all of a sudden the world needs a lot more pencils. And there's not pencils. Or there's nobody sitting around thinking, 'Gee, what are we going to do?' And yet, somehow, the market raises the price of cedar, and people start looking for substitutes for pencils; they use more pens. The things they use cedar for, they might use cedar less for those things, find substitutes, so that the cedar can go to the pencils. And so I might show up at Staples today, and I say, 'I'd like a dozen pencils,' and they don't say, 'Are you crazy? The Chinese got all the pencils this year. Come back in 2020.' That's a miracle, of some thing, of some kind. Not a divine miracle. It's an amazing--a marvel, is what Hayek called it. And, um, it looks like the market tried to solve that problem, and did. Right? That's what--there's an orderliness to emergence in some areas that's more than just, 'it looks orderly.' It seems to be purposive. I guess that's the way I'd phrase it.

Jessica Riskin: Yeah. Yeah. I mean, here's a way--okay. I was thinking as you were speaking. You asked whether, I think, whether emergence has been overlooked in the life sciences. And I think maybe one way in which I think it has been overlooked is that there is this--well, I was talking earlier about a kind of reductive tendency in Neo-Darwinism and a lot of 20th century evolutionary biology into the 21st century, a kind of insistence on there being only one kind of causal factor. Only one kind of causal explanation. Which is natural level acting at the level of the genes. And, in a sense, why should that be the case? The world is messy and complicated, and full of different levels of things competing and acting in different ways. And a kind of stew of lots of different kinds of forces. Why should it all reduce to just the one basic level of causation? And I think recent research in biology that I was mentioning--epigenetics and these people who are interested in extended evolutionary synthesis are trying to bring back some of those layers of messiness and complexity. And I would say the same thing must be the case--now I'm on shaky ground because I don't know a lot about economics--but it seems to me like the same thing must be the case in social systems, like economics: that there's a kind of mess of different factors. So if you try to explain it just on the kind of one level, you are going to be missing a lot of complexity. And so I think when people talk about emergence it may be also about trying to recover all of those layers of complexity that get filtered out in the most reductive versions of these sciences.

Russ Roberts: That's a really great example. I think a lot of people like to say--it's cute--like to say Adam Smith was the first behavioral economist. Because Adam Smith understood that we deceive ourselves; we're flawed; we're imperfect. And modern economics, oh, for roughly the last 70 years, has been about mathematical models that make absurd demands on what people are capable of deciding, and information--taking into account what information. And again, economists would defend that by saying it's just a simplification: it's not literally what people do. And, I don't want to ever suggest that's a mistake. It's obviously a good idea. I don't think--I use this example a lot--of football players--I don't think, when they're on the field they say to themselves, 'Well, I'm wearing a helmet; I can throw myself at 60 miles an hour into someone else's helmet.' And yet, if they're playing without helmets, I think they'd play differently. And so, there's obviously parts of our behavior that are not calculated, but still can be treated as if they are calculated. Milton Friedman liked to say that the truck driver takes the turn on a rainy night as if he knows the physics of the friction of the road, the tires. And he's onto something there. That's definitely true. I just think you have to be somewhat careful in how you push that. And so, today, people like to say, 'Yeah, so all those standard models of rational decision-makers--those are obviously wrong. People are full of flaws.' Of course, if you're not careful then you just don't have anything to say about anything: you just say, 'Well, people are stupid. They make mistakes all the time.' And you throw up your hands. So, it's a very tough thing.

Jessica Riskin: It is. I think that also the various disciplines in this regard. So, historians I think are people by and large who are drawn to complexity and messiness. Certainly there have been reductive schools of historical scholarship. Certainly there have been.

Russ Roberts: [?]

Jessica Riskin: Yeah. But still, I think, you know, we are interested in kind of storytelling. So that requires a certain multiplicity of forces and factors and characters and impulses. And so, it just seems to me that as a discipline, it tends toward complexity maybe more than some of the social sciences or sciences. So maybe this is something that historians have to offer the academic world, or the scholarly world, is kind of re-introduction of complexity and messiness.

Russ Roberts: Well, I make this claim. I think I'm alone. You and me. That's two of us. If I said to you, 'What was the cause of the Civil War?' or 'What was the cause of the founding of the United States?', no good historian would ever pretend there was one. It would be silly. It would be even sillier to say, 'Okay, you gave me four or five causes. Give me some percentages on each one.' You know, 'What percent was due to economics? What percent was due to culture? What percent--'. And I've had people do that to me with the Financial Crisis. Okay, there's a lot of different things. Can't it just be the truth, which is it's really messy? And every event might be somewhat unique. That's not good English. That every data point--every sample has one data point, in a certain dimension, in history; and yet there are things that are in common. And we understand that. But I think if economists acted more like historians we'd be more honest. Nobody--I use this example--we were about to invade Iraq a few years back. Would you call an historian and say, 'Well, tell me what's going to happen.' You'd say, 'What?!' But yet, we do a tax cut, or we do a trade war with China, and economists are expected to tell us "what's going to happen." It's weird.

Jessica Riskin: Right. Right. Yeah. I think actually a story is a good form of explanation. So, you know, if you ask a question like 'What caused the Civil War?' or some of the examples that you just gave, the best form of explanation in response to that is a whole story.

53:58

Russ Roberts: One of the things I got from your book which I found amusing, and I'd like you to talk about it, is the internecine nature of science, and discovery, particularly the Darwinian story where, you give people details about Darwin's doubts and fears that most people don't know about, or they don't want to think about them. Because it's true. 'What are you talking about?' And so, one of the things I've found--maybe I'm being unfair to the scientists, but I felt at times they were like religious believers who were afraid that something would refute their model, their story, the way a religious person might worry that a miracle could be explained by a natural explanation. That there's some, you know, some counter-evidence out there, it's like, 'Oh, phew! I was able to explain it away.' You're supposed to go, 'Wow! Maybe the world's richer; maybe I need to revise my theory.' But we're human beings and we struggle to do that, it seems to me.

Jessica Riskin: Right. Yeah. I really, especially loved writing the parts of the book about Darwin, because his--well, first of all, he was such an extraordinary writer. Such a beautiful prose--writer of English prose, both in his published writings and in his letters. And, he also--he had these voluminous correspondences with friends and colleagues all over the place. And, those letters--he really, he lays it all out there: what he's worried about, you know, his anguish over whether they eye, for example--the favorite example people making arguments from design in much of the 19th century was that the eye--the eye seems to be so perfect and so much like a lens instrument. Like an artificial lens instrument. And Darwin wrote to Asa Gray at Harvard that he lost sleep over this. Maybe it is--maybe it is kind of an irrefutable argument for a design. But then, he sort of pulled himself together and realized how one could give an evolutionary explanation of the eye. So, anyway, what I mean to say is that you see all of his worries and all of his agonizing and ambivalence about it. And in particular I think Darwin was torn between, as I said earlier, I think these two different models--the clockwork model that he got from Paley, the passive clockwork model, the watch on the heath; and this rather more mysterious but also on some level more essential model that he got from Lamarck of living things as fully material but in a continual process of self-creation and self-transformation. And that's what gave him--so, if you think about his theory as being composed of the idea of, sort of, two main ingredients: The idea of fitness or adaptation. He gets that from Paley. Partly. And then, the idea of transformation of living forms over time--he gets from Lamarck. And he has to somehow make them fit together. And he really, I think, struggled and suffered over this. I think he was also his own grandfather, Erasmus Darwin--had come up with an idea of transformation of living forms around the turn of the 18th and 19th century, and had expressed it in very romantic--actually literally as poetry in the footnotes to long poems. And he was a romantic writer. And I think Darwin was both very influenced by his grandfather's work and also kind of embarrassed--he wanted to, um, somehow, kind of set himself apart from that romantic vision. At the same time, as historian of science at Chicago, Bob Richards, has written, you know, Darwin was very drawn to romantic writing, German romantic writing. He loved the German romantic, Alexander von Humboldt, and carried his work around in his pockets to read it out to friends, and stuff like that. So, he was drawn to these things, and also worried.

Russ Roberts: Well, it's fascinating that you mention that he's trying to square the circle, or combine these two ideas--the idea of adaptation or fitness, because so much of the natural seems as if it has a purpose. Or it looks--the features of it look purposeful. With the--what was the second part? the?

Jessica Riskin: The transformation of living forms over time.

Russ Roberts: Right. Right. And so, the irony is, is that I think Adam Smith helped him a lot. Think about that. And the irony is--it's not that Adam Smith did. The irony is--

Jessica Riskin: And Malthus--

Russ Roberts: And Malthus, too--

Jessica Riskin: [?] of economic-- [?]

Russ Roberts: But they were living at a time when economic progress and transformation was so minuscule compared to what was coming. But it was already started. So they could write about it. They could write about change. Right? If you were writing economics in the Year 800, there's not much going on. I forget who--maybe Robert Lucas observed it first, in my experience that, through most of human history, there is no progress. It's just the same--ox pulling a plow. And the level of the standard of living is going to be pretty much constant. And then, suddenly something starts happening. And Smith, writing in 1776 with the Wealth of Nations or even 1759 with The Theory of Moral Sentiments--they at just the beginning. So, the beginning of the Industrial Revolution, when the possibility of transformation through the division of labor that he was so interested in could happen, combined with competition. And so, presumably Darwin was helped by that a lot. That helped him see how competition molded adaptation and led to change.

Jessica Riskin: Yeah. No, I think you are absolutely right. I think, actually, from Smith, from where he sat, you know, in the 1760s, 1770s--1750s, 1760s, 1770s--it didn't feel minuscule or slow at all. You see the Industrial Revolution just booming all around. When you read his prose, you see it all filtering into there. You can almost sort of see out his windows, what's happening all around him. Absolutely. And I think you are right that that pace of transformation of the world. Darwin also--actually another thing, maybe kind of related to this is that there was a kind of agricultural revolution in Britain in the early part of the 19th century. And Darwin was seeing--he joined pigeon-fancying clubs, and he studied animal breeding. And he got a lot of material from artificial selection--from breeding--as kind of evidence for him for the power of selection.

Russ Roberts: Yeah.

Jessica Riskin: So, he was responding to economic and social developments around him, absolutely. Yeah.

Russ Roberts: I guess what I was trying to get at--I just realized it now--is that if you'd been able to read Schumpeter, the idea of creative destruction, he would have made a lot--it would have been easier for him. Because that's when--and of course he was probably reacting to Darwin, also. Because Darwin is between Schumpeter and Smith. But that idea in economics, that things are constantly arising, and through the force of competition, either surviving or knocking off existing firms, existing technologies--is very Darwinian.

Jessica Riskin: Right. I mean, it's hard not to read history backwards, because it does seem as though people--you know, the earlier people are anticipating the later people. But, in fact, it's probably the other way around: The later people are building on the earlier--the later understandings are building on the earlier ones. But absolutely that's all part of one, I think, intellectual tradition that you are describing.

1:01:53

Russ Roberts: You want to close with Schrodinger? Now, if you'd asked me--I only know one thing about Schrodinger's Cat. We don't need to go into Schrodinger's Cat. We'll put a link up to Schrodinger's Cat for the interested readers, listeners who want to read about it. But: You talk about the import, toward the end of the book, of an essay that Schrodinger wrote called What Is Life?--

Jessica Riskin: What Is Life?--

Russ Roberts: And, I like that title because--it is an ambitious title. It does have a question mark, I think, at the end of it. Because it's a question that, I'd say, in many ways haunts your entire book. So, why don't you close by talking about what Schrodinger had to say about it, and who was a physicist, not a biologist--and why it's interesting and important.

Jessica Riskin: Yeah. I think that's an absolutely extraordinary essay, Schrodinger's What Is Life?. Because--well, apparently, I think many biologists consider it to be, have been a kind of, the kind of founding, whatever manifesto, of molecular biology. And he sort of anticipates DNA [deoxyribonucleic acid]. He describes--you know, he describes it. But, what was fascinating to me about it is that he, once again, returns to the clockwork model. But, it's a restless clockwork model. You know, he says, basically, that the kind of clockwork that would be at the core of, that could answer the question, 'What is life?' is a kind of restless, responsive clockwork that could conceivably begin to move all on its own. He has this passage in which he describes--he says, 'A springless clock might suddenly begin to move at the expense of the heat energy of its own cogwheel and of the environment. The physicist would have to say the clock experiences an exceptionally intense set of Brownian movement.' So, he is sort of groping for language to describe living things as machines. But, restless, unpredictable, self-transforming ones. Self-moving ones. And so, I, I, I found it fascinating when I discovered those passages and that essay, sort of long after Leibniz, but coming back to the same kind of imagery.

 

(7 COMMENTS)

EconTalk February 4, 2019

Gary Greenberg on the Placebo Effect

placebo-effect-200x300.jpg Author and psychotherapist Gary Greenberg talks with EconTalk host Russ Roberts about the placebo effect. Is it real? How does the placebo effect influence drug testing? If it’s real, what is the underlying mechanism of why it works and how might it be harnessed to improve health care? The conversation concludes with a discussion of how knowledge of the placebo effect has influenced Greenberg’s psychotherapy practice.

This week's guest:

This week's focus:

Additional ideas and people mentioned in this podcast episode:

A few more readings and background resources:

A few more EconTalk podcast episodes:

Time Podcast Episode Highlights


0:33

Intro. [Recording date: December 17, 2018.]

Russ Roberts: My guest is psychotherapist and author Gary Greenberg. He first appeared on EconTalk way in September, 2010, when we talked about his books The Noble Lie and Manufacturing Depression.... Our topic for today comes from a recent article of yours in the New York Times Sunday Magazine that we'll link to entitled "What if the Placebo Effect Isn't a Trick?" Let's start by defining what the placebo effect is.

Gary Greenberg: Well, you are going to start in a really hard spot, because nobody has a really good definition of the placebo effect. Let me give you two that will show you the extent of the problem. One version of the definition of a placebo effect is: Any effect of a medication that isn't due to the medication. Which is simple and straightforward. But there are problems with that definition. And, the other definition is: Anything that happens in a clinical trial that isn't related to the effect of the medicine. Or, to put it another way: Everything that happens in a clinical trial except for the medication effect.

Russ Roberts: And why are those different?

Gary Greenberg: Well, the difference is the placebo effect as we think of it now is almost entirely an artifact of the process of trying to experiment and find out which treatments--mostly medications, but to some extent other medical treatments--work. And which don't. So, to limit it, to define it by means of the clinical trial, which is the method by which the Food and Drug Administration [FDA] requires makers of drugs and devices to prove that they work--to define it in those terms is to give an idea of how the placebo effect really functions in medicine. It's the stalking horse against which all of the other horses have to race in order to show that they deserve to not be put out to pasture. And so, what that tells you is that the placebo effect is really just the flip side of medicine. It's like the evil opposite twin from the medical point of view--the evil opposite twin of the medication--because it also has a healing effect that nobody very well understands or control.

Russ Roberts: And in those clinical trials, the way this manifests itself is that a population will be split in half. One half will get the real medicine, so to speak; and the other will get--typically what? A sugar pill?

Gary Greenberg: Yes. Some formulation that looks and tastes and in every other way is exactly the same as the study drug. The only difference is that it is inert. It would be made of dextrose or something like that.

Russ Roberts: And I know this sounds like a stupid question, but after I read your article I realized it's not really a stupid question at all: The people who--the participants in these clinical trials have no idea which they are getting. They just get a pill.

Gary Greenberg: Generally, that's the case. It's called the double-blind, placebo-controlled method. So, what that means is that neither the experimenter nor the subject knows whether they are getting drug or placebo. And that, in turn, reflects the hope that they've managed to make the two treatments exactly equivalent with the exception of the molecule that's in the active drug.

Russ Roberts: Yeah. It's a strange test when you think about it, because, if it weren't for the so-called placebo effect, you wouldn't have to give anybody the sugar pill. Right? You'd just say, 'You're not on the trial. We're going to see how your health goes over the--you're not getting the medicine.' Or, 'You're getting a sugar pill, and we're just doing that just to kind of have you kind of come in and go through the same kind of stuff that the other people are going through. But, by the way, you've got a sugar pill.' That's not what they do, typically.

Gary Greenberg: No. And the reason is that--well, there are a couple of reasons for that. One is that the idea, the general received wisdom about placebo is that it works somehow or other by deception. That is to say: If you know that you are getting a placebo, somehow that's going to diminish its effect. Or change its effect. And so, telling people that they are getting a placebo theoretically would reduce the placebo effect. Now, interestingly, to the extent that that question has been researched, it doesn't necessarily prove out. So, the ongoing use of the placebo in the clinical trial is really just there to reassure everybody that they are actually seeing the work of the drug and not the work of treatment in general--not simply the work of being exposed to a healer or to the medical industry in any way.

5:57

Russ Roberts: One of the things I took away from your article is that that's something of an illusion: That they are only getting the medicine. And, of course, the part that--I don't think you wrote about this, but it's got to be an issue--it also means the way we conduct clinical trials that the people who get the "real medicine," the people who are getting the molecule that purports or trying to figure out whether it helps or not--those people have some awareness they might have a placebo.

Gary Greenberg: Well, part of the process of being in a clinical trial is being informed that you have a 50% chance of getting a placebo. So, presumably everybody in a clinical trial that's placebo-controlled knows that that's a possibility. They just don't know whether or not they've got the drug.

Russ Roberts: So, if I told half the group, 'Oh, you've got the placebo,' and I told the other half, 'You've got the real drug,' you'd think you'd get--from what I've learned--you'd get a different result than if everybody thought it was a 50-50. Because some of the people getting the real drug are thinking, 'This might not be the real drug.' And that's psychological awareness, perhaps, has a negative impact, just like the people who get the placebo are sometimes getting an improvement in the trial at all just from the possibility that they might have the real drug.

Gary Greenberg: That's right. And so, what you are really getting at there is the fact that every clinical trial has a placebo group--virtually, every one--and therefore is a study of the placebo effect as well as of the drug, there hasn't been a whole lot of inquiry into the placebo effect itself. So, the scenario that you just described--you could actually find that out fairly easily. You would have to have a group that you tell you are giving a placebo, but give them the real drug; and another group that you tell that to but you are honest; and then the same with the drug--a group that gets it thinking they are getting it and a group that gets it thinking they are not getting it. And that would really answer a lot of questions, once you crunched the numbers. The problem with that is, a). Who are you going to get to pay for that? And, b). Even if you get somebody to pay for it, you have to deceive your subjects. And, while that's not impossible, that's a higher bar to cross than most researchers are willing to go in order to get the research approved by the government funders or the university or whoever is providing the funding for the study.

8:26

Russ Roberts: It's a serious ethical question, obviously. And we're going to come back to it, I think, more than once. Especially when I'm talking to the author of a book called The Noble Lie. In which these issues that are raised by the placebo effect reminded me of your book. We all--most of us would say--'Well deception is wrong.' But if I deceive you and improve your health, it's a strange moral conundrum. And, the point I want to make--and, actually, I'll re-quote from the article. You say the following:

Give people a sugar pill, they have shown, and those patients—especially if they have one of the chronic, stress-related conditions that register the strongest placebo effects and if the treatment is delivered by someone in whom they have confidence—will improve. Tell someone a normal milkshake is a diet beverage, and his gut will respond as if the drink were low fat. Take athletes to the top of the Alps, put them on exercise machines and hook them to an oxygen tank, and they will perform better than when they are breathing room air—even if room air is all that's in the tank. Wake a patient from surgery and tell him you've done an arthroscopic repair, and his knee gets better even if all you did was knock him out and put a couple of incisions in his skin. Give a drug a fancy name, and it works better than if you don't.

Now, these are the--just various examples of the placebo effect in action. The willingness of our--of something to happen that is not related to what we think is the therapeutic treatment. So, tell us what we know about how the heck that's possible.

Gary Greenberg: Very little. You know, it's widely observed; it's been widely observed for many years. And, let's remember that prior to, say, 1860 at the earliest, almost all medical treatment was, worked by, well, relied on the placebo effect. Or, another way of saying that is: Most of it didn't work by the mechanism that it was thought to work. And, in general, there was no reason for it to work at all. There are a few exceptions. Aspirin is an ancient remedy. Some of the, you know--Pepto-Bismol has an ingredient in it that has been around for a long time. But, for the most part, we are--if you go back in history, all the treatments were placebo treatments. So, the fact is that, it defies in so many ways the standard model of understanding about healing, about illness, about how to study these things, that it's been very difficult to pin it down. But, let me say one thing about that list, which you prefaced by talking essentially about deception. There are some pretty strong studies that show that if you just tell people that they are getting a placebo, they get better. That has to be in certain conditions. And with certain medical conditions and under certain treatment conditions. But, deception may not be as central to it as we think.

11:34

Russ Roberts: So there are two pieces to your article that I was fascinated by. One is the possibility that the placebo effect is related to the level of empathy or the style in which the placebo is delivered; and the second is a possible genetic difference among people in having a stronger versus a weaker placebo effect--and that genetic difference is not stupidity. It's not somebody saying, 'Oh, I'm going to say a magic word here and your cancer is going to be cured.' It's rather that, literally, some of the placebo effects observed in at least clinical trials vary by genetic markers. So, let's start with the empathy question.

Gary Greenberg: So, there's a theory out there is that what's happening in the healing encounter is that the healer--the physician--is, in order to do his or her work, has to try to understand the patient's situation from the inside. Now, we know that there are many, especially as you get into rarified, specialties that the stereotype is exactly the opposite. That, the subspecialist is more interested in the particular disease or the symptom or the surgery or whatever it is that the person needs than he or she is in the whole person. But, at the level of primary care for sure, medical care involves being empathic with somebody who is suffering. And the idea there is that, when you do that, you set off a series of events that--and this is real preliminary--but that may modulate the body's own healing abilities. So, for instance, there's research we know from other areas in which, we know there's something called mirror neurons. And, mirror neurons are networks of brain cells that respond to watching somebody do something that you're familiar with as if you yourself were doing it. So, somebody having an experience like sadness that you yourself are familiar with, your brain actually looks like the brain of the person who is sad. And that's thought to be related to empathy. I would go so far as to say it's the cause of it. But it may be the signature of it in the brain, loosely speaking. And so there's research that's emerging--it's in the very early stages--which shows that when there's a successful therapeutic alliance between a healer and a patient is that one of the things that's going on is that their mirror neuron networks are being activated. And so that's very suggestive that if there is what they call brain concordance between a healer and a patient, that that may help the healing process. Which isn't to say that whatever the treatment is isn't also part of it. But that in a way the treatment is the occasion for this expression of empathy or care or concern or whatever you want to call it. And that that isn't just window dressing, and that isn't just their making you feel good for a moment. It's somehow related to the fact of healing. You know, we can look at, I don't know, an antibiotic eat a bacteria in a test-tube; and that will tell us that antibiotics eat, you know, eat bacteria. But nobody with an infectious disease can say exactly why that treatment is what makes you feel better. Or get better. We're pretty close to being able to state it as a fact, but if you think about it, there's still a little bit of a gap even in that most objective kind of medicine, of, say, giving somebody penicillin for an infection. There's still a little bit of a gap there that we just don't fully understand. And it's possible that that placebo effect is part of what's in that gap.

Russ Roberts: We had David Meltzer on here a few months back, and he's looking at--he's looking at a few things, but one thing he's looking at I would think of as empathy or more wholistic approach--this is my memory of the moment that you are reminding me of, where doctors interact more conversationally with patients rather than making sure they fill out all the right checkboxes and medical record data. Instead, they chat with the patients. They give them a lot more one-on-one time. And that also originated, by the way, as a story in the New York Times Sunday Magazine. In that article the author talked about Meltzer's physicians in these trials that they're doing learned things about the patient that they might not otherwise have known. They find out they were playing poker last night, ate a lot of French fries, and therefore maybe that's why their cholesterol spiked. That kind of fuller picture, or anxieties from their daily life, you wouldn't otherwise know about that might explain some of their conditions. But, hearing you talk, it makes me think maybe a lot of what they're doing is just a placebo effect. It's the emotional--and Meltzer may have talked about this, so I'll have to go back to the episode--but a lot of it may just be the emotional comfort, the body being in a healthier situation, that someone's listening to them and seems to care at least, or maybe actually does care, even better. So, that's the first thing I want to mention. The second thing I want to mention is Lynne Kiesling, economist, has looked at mirror neurons and the correspondence to Adam Smith's work in The Theory of Moral Sentiments; and as listeners know, I'm a big fan of that book. We'll link to that article as well--this question of what's exactly going on. And the fact that you raised this issue--when people are perhaps responding to a doctor's care--but this idea that we don't even understand fully--you say we're close. I wonder how close we really are in understanding the power of antibiotics or chemotherapy. It would seem, as an amateur, novice, layperson with no real knowledge, I always thought, 'Well, we know how these pathways work.' So, if we don't--if some of it is the unleashing of the body's own anti-immune system, I mean immune system; and also the body's ability to fight various infections automatically, which probably is just the English phrase for immune system. It's crazy. It's crazy to think that through emotion and the feeling that you are being taken care of or the idea that something you are putting in your body is going to help you--just the idea of it--could focus those inner strengths and stratagems that your body already has.

Gary Greenberg: Yeah. I would say that--'crazy' is an interesting word. To me--

Russ Roberts: Wrong word. For talking to a psychotherapist, maybe.

Gary Greenberg: Yeah. Maybe so. Unless you want a diagnosis. Um, it is a little crazy-making though. If you--if the definition of illness and healing is limited to the actions of molecules upon molecules--you know, an antibiotic on a bacterium--then it is a little crazy-making, because it makes it hard to talk about all this other stuff. So, even the little--even the things that you were saying just a minute ago, a doctor would hear that, could hear that and begin to really worry that you are about to tell people that, you know, vaccines don't really work. I know you're not. But, you know--there's such a strong set of beliefs that the way medicine works is objective: It works despite who you are.

Russ Roberts: It's science.

Gary Greenberg: It's science. Yeah. And science has been construed as this way of knowing that provides certainty. And doesn't, you know, sort of rules out the random. It rules out the subjective. And, I'm not--I think that there's some truth to that. But I also think that, when it comes to medical treatment, we underestimate the extent to which our experience, our expectations, our understandings about healing and illness are indebted to historical accidents. For instance, the first advances that really start modern medicine were advances that recognize germs as the cause of disease. The discovery of anthrax, of smallpox, of cholera--all of those 19th century--syphilis. Nineteenth century discoveries of these bugs that were creating illness.

Russ Roberts: They are real bugs.

Gary Greenberg: They are real bugs. They really exist. And really when you do something to not exist, or not so much, you end up feeling better. Or being better. Or surviving. You know. And this is--you know, I don't want to underestimate this at all. This is revolutionary. The fact that--it changed everything. I mean, look at the fact, what it means to know as a parent, today, that if your kid gets strep throat, 99.9% of the time you can give him some drugs and he's going to be just fine. A hundred and fifty years ago, that kid probably could have died. And that would be a real possibility. Or get scarlet fever and end up maimed for life. That was a real possibility. So, I don't want to underestimate this. But, because those were the early discoveries, this is our idea of medicine. It's a magic bullet model. You find the cause in the body and you aim your bullets at it and you kill it. And, while that works for some things, it doesn't work for others. And, more to the point, we may be, I don't know, mistaking the basic mechanism. We may not really understand the basic mechanism. You don't really have to. You know? If it works, it works. But, when you then go to branch out to other, more mysterious, more complicated illnesses, you find that it doesn't work quite so well; and in fact it's possible the low-hanging fruit has been picked. And that with the proliferation of immunological diseases, autoimmune diseases, or complex cancers, and so on, we may be looking at the kinds of illnesses that simply aren't going to respond to that model. And among those conditions, I think are some conditions that do respond strongly to placebo treatments: chronic fatigue syndrome, chronic pain, irritable bowel syndrome. And there's others. All are illnesses that modern medicine does a relatively poor job with. And that placebo seems to be--well, more effective than you would expect it to be.

23:18

Russ Roberts: So, I mean, pain, we know, is a peculiar thing because we know people can have pain from phantom limbs. So, obviously pain is weird. Pain is somewhat in your head. Of course, everything is in your head. So, it's a little bit tricky. But, you know, somebody who has chronic pain--you'd like to say, 'Well, so here's a painkiller; but actually don't take that because actually they may be addictive. So, instead I'm going to give you a sugar pill. Just think of it as a painkiller.' And that is not good medical practice, in general. Or, to tell people to "think positively," or whatever else. But there's a sense in which this research is heading in this direction, in some degree. Right?

Gary Greenberg: Yes. And what you just got at is--it's a double-edged sword. On the one hand, there's great evidence that techniques related to mindfulness can be very helpful with chronic illness, particularly with the pain component of it. At the same time, you know, you can end up with--you can end up blaming the victim: where the patient feels pain and he or she has been told that that's, his mindfulness could control it, and it doesn't. Like he's failed. And that, you know, that's also a function of what we expect medicine to do in the first place. It's all supposed to happen without us. You know, you could be asleep and we give you the drugs and you are better. So, to introduce human agency--we don't really know how to do that yet; and we certainly have to be aware of the fact that in doing it, you could introduce things like victim-blaming and unnecessary guilt and all sorts of things that could go wrong with that formulation.

Russ Roberts: And unnecessary doubts, for people who think they can avoid some challenge, health challenge by just thinking their way through it or meditating over it. I mean, if you read the Walter Isaacson biography of Steve Jobs, there are some strange things he did to himself when he was suffering from cancer that I feel--I worry, I feel sadly--that, you know, he was rejecting some--he was accepting some alternative treatments that probably didn't help him. So, as you said earlier, I want to make it clear: Nothing we're saying here is anti-science or anti- the many--it appears to be the many wonderful successes of what we might call Western medicine: the purely objective, scientific method for intervening in the body. But, there are just some mysteries here that we don't fully understand. And I have to tell a story--I've told it before, but it's so appropriate. I heard it told about Niels Bohr, I think. It's not really, I think, about Niels Bohr; I think it's been told about many people, Einstein and others. The student goes into Bohr's office, and, as he's leaving after chatting about some homework problem notices a horseshoe over the door. And the student says, 'Oh, well, Professor Bohr, you don't believe in that, do you?' And Niels Bohr answers, 'Well, of course not. But they say it works even if you don't believe in it.' It's the same kind of crazy, unscientific, unobjective, impossible result--that something magical is happening.

Gary Greenberg: Yeah. And actually, that's--that happens in real medicine, too, right? Because, why--you look at a pill. A pill is tiny. Right? It's just this little thing. And it has no taste. And you swallow it, and all of a sudden, something--or maybe not so suddenly, but eventually, something really quasi-miraculous happens. I mean, where's the--there's magic in that, too.

Russ Roberts: It's true.

27:10

Russ Roberts: So, I'm going to tell a story. I don't think I've told this before. But, I'll let you react to it because it's perfect for your article and this conversation. I had some shoulder pain. So, I went in to get a steroid shot. And one of the things that--I had a tear in my rotator cuff, despite my lack of baseball experience. And I--this happened 5, 4 years ago maybe: I'm 60 years old; I'm laying on the table; and it's a really cool thing. They've got a--of course, I'm not paying for it, so it's not perhaps as cool as it should--I should probably feel some pain about this, but I don't. I'm enjoying watching the fact that the doctor gets to put the needle exactly where she wants to put it. Because she's watching my shoulder on some kind of scanner. And I can see it, too. Which, of course, is a perfect placebo effect: I can actually see, 'Oh, the needle is going right where it's supposed to go.' And of course, my shoulder got better, either because of the steroids or the placebo effect. But while I was waiting for the doctor, I was chatting with the nurse; and I said, 'What's the coolest thing you've seen in this office?' And she said, 'Oh, it's this amazing thing. These people come in with back pain, and we put this cement in their joints. And it--it's magical. Their pain just totally disappears.' And I said, 'Well, that's very cool.' Which was restrained on my part, because a week or few, maybe a month before, I had at some point recently interviewed Adam Cifu, EconTalk guest, about his book, Reversing--I may get the title wrong but we'll put a link to it [Ending Medical Reversal--Econlib Ed.]. And basically what they find when they actually do clinical trials of this technique, which is called vernoproblastia [vertebroplasty?--Econlib Ed.]--I don't know how to pronounce it, but where they put cement into your vertebrae to get rid of back pain from osteoporosis--there is no difference between doing the treatment, where you actually go into this person's back and inject cement, versus laying him down, opening this cement so they can smell it, and then injecting saline into their vertebrae. And, of course, in a certain dimension--so, what did we learn from that? So, I kept my mouth shut. I didn't say, 'Did you know that doesn't work?' And now that I've read your article--the doctors in that office are particularly empathetic. They are wonderful people. They are great listeners. Maybe that's why their vertebroplasty does have a big placebo effect. But, what do you learn from that? You can't say to people, 'Well, you've got back pain, so what we're going to do,' you really don't want to inject the cement, 'we're just going to let you sniff this glue; and we'll inject some saline.' That's not a viable alternative. So, in what dimension is this placebo effect a horse that has to be beaten, a real horse? It's not even a real horse. It's strange.

Gary Greenberg: Well, yeah. It's because--you say with some certainty, and I'm not disagreeing with you, that you can't just tell people, 'This is what we're going to do.' But, in part, that's because we're pretty well socialized to expect a certain kind of treatment; and the kind of treatment we are led to expect is not, you know, of saline injection accompanied by a lot of really nice people. However, medical treatment, no matter what it is, is a ritual. And so, what we could learn from that is what we learn from all of these studies. And, by the way, that lower back study that you mentioned is one of a number of studies that show that lower back pain in general is one of the most responsive of troubles to the placebo effect--to placebo treatments. So, what we learn is that, in addition to that there's more things under heaven and earth than you've dreamt of, is that the ritual is very, very important to the outcome. That, especially in a certain group of people, and this gets back to your second point about genetics, especially in a certain group of people with a certain group of illnesses, the ritual part of the treatment becomes very important.

Russ Roberts: That book is called Ending Medical Reversal, by Adam Cifu, and it's co-authored with Vinayak K. Prasad. So, the ritual is important. And that's challenging to our view of that science.

Gary Greenberg: Well, you know, the very word 'ritual'--it's like myth. It gets people's--if you are a scientist or a physician, married to the scientific method, you start to feel like somebody's trying to say something bad about you, if they say it's a ritual. I actually don't think so. I mean, I'm a psychotherapist: I believe what I do is I practice--

Russ Roberts: A lot of ritual--

Gary Greenberg: Well, yeah. I believe I deliver a placebo treatment. I think I do a really good job of it. For the most part. But, I couldn't tell you what the active ingredient is in psychotherapy. And I think that to some extent, that goes on in all medical treatment. So, we have our rituals. And, by the way, one of the interesting things that's happening in placebo research is that there is a mystery as to why the placebo effect is getting stronger as time goes on, at least with respect to clinical trials. In other words, as time goes on, each clinical trial is more likely to show a stronger placebo effect than they used to. And this has become a problem, because if the drug can't beat the placebo, the drug can't get approved. And so many companies get their drugs as far as the Phase 3 Trials, which is where the rubber meets the road; and they find out that it doesn't really beat the placebo, and it's withdrawn from the market, as if that means it doesn't work. But, what it may also mean is that people have come to--that the placebo effect has been augmented, maybe by advertising or by expectation. Yeah. And, it may be that the clinical trial setting--if you've ever been in a clinical trial, which I have, you get treated like royalty. They are never late. And if they are, you know, 5 minutes late, they apologize. They love you. You are worth money to them. And they treat you really, really well. You get the undivided attention of many physicians and nurses. For many weeks. And it could be that that is one of the reasons it's increasing, not because the treatment itself is increased but because while that's been going on, the rest of our lives in the medical industry have been getting worse. The doctors are more harried, the treatment is more fragmented, etc.

Russ Roberts: It's also, I think, people increasingly, whether it's legitimate or not, think that doctors are saving the world and that everything works; and we've had a guest on here and I've talked to my own friends who are doctors--every patient assumes, and every family member assumes there's a cure for everything. You go in and the doctor starts describing why the patient is in very bad shape and people need to start getting their relationships in order and their affairs in order; and the family member says, 'So, what do we do next?' And the answer is, 'There's nothing to do. It's time to say goodbye.' Which we as human beings find infinitely painful. But we find it now intellectually perplexing, because of course we've figured out "everything"--almost everything. Surely there's another treatment to try, another drug to take in. And I think what you're saying is that would enhance the placebo effect. Bizarre.

Gary Greenberg: Yes. That level, that set of expectations I'm sure is related. And, you know, the rituals there are immensely important. Think about the patients that spend their last two weeks in the intensive care unit. Now, you know, a lot of times that is primarily treating--I mean, obviously, they are doing things. But who are they really treating? Are they treating the patient or are they treating the family, when nobody will say that it's a lost cause? So, it's only tangentially related to the placebo effect, but it shows you the extent to which we grant authority to these rituals.

36:24

Russ Roberts: Yeah. I'm thinking about pediatrics for a minute. I'll tell you why: I remember when we had our first kids, we were getting advice on doctors, and people recommended a particular doctor, and they'd say, 'Well, he's not very warm and he's not good socially, but he really knows his stuff.' And, in my mind, that's the kind of doctor I want. 'I want the doctor who knows his stuff. I want the doctor who has got the best training, who has seen the most cases, has the best hard drive--mental hard drive, this is slightly pre-internet, 'Right? I want them to be able to pull on all that knowledge. That empathy thing? It's just gravy. It's just--I don't need that. I'm not even willing to pay for that.' And I suspect--I suspect--we've been talking a little bit about how doctors find this alarming or puzzling or troubling--I suspect there are a lot of doctors out there, and maybe some of them are listening and I'd like to hear from them, who believe in this overwhelmingly. Who very much believe that their bedside manner and their level of empathy makes a difference. And some of that's self-deception, of course, and confirmation bias. But I think a lot of doctors believe that. And of course they're the ones who have the best bedside manner. The ones who don't, probably think it doesn't matter much at all. But, I'm thinking them about pediatrics where, I wonder--that would be an interesting place to look. Right? For this effect. Because, kids are going to, infants are going to respond at an incredibly visceral level--I'm not sure what the word 'visceral' means in that sentence, but, a primitive, non-rational level to emotional care. And we know infants respond to that. So it would be interesting to see if, free of all the baggage or knowledge we would still respond to some kind of placebo.

Gary Greenberg: Yeah. Right. These are all interesting ideas about how to study it. Of course, that's not getting done because there's no money in it.

Russ Roberts: There might be.

38:30

Russ Roberts: Let's talk about the genetic thing. We didn't get to that. What's the genetic recent findings, that suggestion, that have something to do with this?

Gary Greenberg: Well, there are findings that show, there are some studies, as I mentioned before, that have been done with open-label placebo--in other words, you tell people they are getting a placebo. And you compare their response to people for whom you literally do nothing. And you also compare the responses of people told they are given placebo to people who are told with a great amount of detail and attention and warmth. And what you find is what you might expect: the no-treatment people do worse; the placebo-receiving people--people receiving placebo with some explanation--do better; and the people that receive a lot of attention and care along with their placebo and explanation do the best. It's small studies; they are with irritable bowel syndrome. But if you then take the people who do the best on the placebo and you look at their DNA [deoxyribonucleic acid], what you find is that they vary in a predictable way. People who have one particular variant of a snippet of the genome are more likely to have a strong placebo effect than people who have the different variant of that same snippet of the genome. And so, what you find--and this finding has been, not exactly replicated but at least supported by large-scale studies that show--you know, one study that has 40,000 participants followed for 10 years--showing that the same set, the same area of the genome which produces a particular enzyme is related to the response to placebo. And this isn't for irritable bowel syndrome. This is the response to placebo for the prevention of heart disease and also, I think--this study will be emerging soon--for the prevention of cancer. That, there is a relationship between taking a placebo and avoiding those diseases--the placebo, people were taking placebo Vitamin E or aspirin. And there's a relationship between taking the placebo and not getting those or being prevented, having prevention from those diseases. And, the indication is that when you have a certain kind of genetic makeup, you are more able to make use of the placebo effect. Or, conversely, if you have a different genetic makeup, you not only can't use it, but in some ways it looks like it might affect you negatively, to be taking a placebo. Which is a very strange idea. In the absence of side-effects--you know, a placebo that somehow creates side-effects--it's very odd to think that the placebo could actually make things worse. And, the explanation for this is that all of these effects are modulated on the same neural pathways, which is a neural pathway that has to do with dopamine. And that, what the body--what we're really looking at is the body's ability to detect disruptions to homeostasis, and then to restore homeostasis. Not just in psychological disorder, but in physical disorder. So, there's this long chain of reasoning that is increasingly getting empirical support indicating that the reason that there's a placebo effect is because we've been misunderstanding healing all along--that there is this neural aspect to healing which is about more than just, you know, antibiotics eating bacteria or cancer chemotherapy agents eating cancer cells. That, it actually has to do with some healing process that is modulated by the central nervous system. And these findings are very suggestive. They are very early stages. But, when you really look into it, it doesn't seem all that implausible. And, one of the effects of this is that it indicates that the whole model of the clinical trial might be wrong, because it assumes that the placebo effect is part of the drug effect. Or that--sorry--that the overall effect is the outcome of the placebo effect plus the drug effect. It doesn't take into the consideration the possibility that they might interfere with each other. It doesn't take into account the possibility that a placebo might actually stop a drug from working. Or might make a person worse off to start with. Or vice versa. And this is a real challenge to the clinical trial model. But, it's really basic. Nobody has stopped to ask, 'Wait a minute. Are they really additive? Is the placebo effect plus the drug effect really the healing effect?' Nobody ever proved that. They just assumed it.

Russ Roberts: And I like to think of the body as a complex system--

Gary Greenberg: Yeah. Yeah, I guess that's an interesting--

Russ Roberts: well, [?]--well, for me, it brings a lot of baggage with it. It means I see it as an emergent system; it's something like the economy; it's prone to unintended consequences. The policy interventions are not always as straightforward as we think. We have to ask the question, 'And then what?' And actually what you are saying, in so many words, you are saying that, 'We don't fully understand the underlying complexity; and if we don't, we don't understand then what we are actually doing when we intervene in these particular ways.'

44:21

Russ Roberts: I want to take us down a path that you only allude to in the article, which is weight loss. We had Gary Taubes on here, a long time ago, a couple of times. And many listeners have told me they've lost tens of pounds--30, 40 pounds. It changed their life. And, I remember telling this to a friend of mine, and he said, 'Oh, no. That's all nonsense. The China Study shows that what we really need to be doing is x, y, z.' I've looked at the China Study; it doesn't seem to be a very reliable study. But my friend lost an immense amount of weight following a very different paradigm than the Taubes more Paleo approach, of low-carb and not worrying about fat. And, I've said this on the program--I've said it in humor, but it's always crossed my mind that if you believe in the diet you are going to lose weight even if there is no "science" behind it. And that's a joke, I've always thought. But maybe it's not such a joke. In which case, listeners who lost 30 and 40 pounds, probably shouldn't be listening to this next part. Because, I don't want to spoil it. But, I mean, that's where this kind of starts to get crazy--I'm going to say 'crazy' again. Weird, Ouroboros-y. I don't know. Circular. Non-stable.

Gary Greenberg: Yeah. I think that's right. I think the connection there is that--I mean, aside from the fact that maybe the weight loss is not a simple matter of metabolism. Right?--

Russ Roberts: okay--

Gary Greenberg: of what you eat and what you don't eat and so on, and how much you exercise. But that it also has to do with how you are, what your mind is doing. And there is--as you read that paragraph from the article, there is good research at Stanford that shows that the gut response--I mean, our gut is fully--people are now talking about the gut-brain, right? That there's so much neural activity in the gut. So, it's possible that the placebo effect could be related to weight loss. I just don't--aside from the studies showing the secretion of peptides is related to the expectation of the person who is taking them--which is a pretty astounding finding, really--you take, you know, if you give somebody a milkshake and you tell them it's diet that their gut behaves one way; and you tell them it's just a regular old milkshake, their gut responds another way--that shouldn't happen. But it does.

Russ Roberts: It also raises the question of how you clinically test dieting. Right? Because, it may matter a lot about what you tell people, and what you do to their expectations. I used to have this--I don't remember who first told me the joke, but, you know, somebody offers me a brownie, and I say, 'I'm trying to lose some weight,' and they say, 'Oh, don't worry. All the calories are in the last one.' And if I could just believe that, maybe it would be true. I mean, this is just--it's a terrifying--I don't believe that, by the way. I don't think that that would work. But you're suggesting there is something to that.

Gary Greenberg: Well, there might be. Yeah. If this research proves out, maybe you just order yourself 16 brownies and only eat 15 and you'll be fine.

Russ Roberts: Heh, heh, heh.

47:38

Russ Roberts: I think, to get serious again--not that that's not serious--

Gary Greenberg: Oh, come on.

Russ Roberts: There's some seriousness there about the psychological expectations part. But, you know, when you said there's no money in it: It would seem to me to be there's an immense amount of money in this, in fully understanding. It's not money you might be able to capture. But, you would think that foundations, and possibly the NIH [National Institutes of Health], would be deeply interested in getting a fuller understanding of the pathways of healing that we don't fully understand.

Gary Greenberg: Well, here's the sad part of that story. Everybody knows that--well, first of all, the reason I said so glibly there's no money in it, is because, in the end, the money to bring something to market--whatever that might be--is generally provided by private industry. But as I'm sure you know, they are essentially helping themselves to taxpayer-funded research all the time. So, what I really meant by 'there's no money,' is that the drug companies can't figure how to make money off of it. But, I agree with you. But, the sad part of the story is that, um, the NIH has had a Center for Complementary and Alternative medicine, for many years now. And it's run by good people. The fellow who I think was its first director, is no longer, he's retired. But, and some of the people I interviewed for the Magazine article are active and get a lot of their money from that Center. But, so far, anyway, they have been unable to come up with very strong results about anything. Whether it's complementary medicine like homeopathy or chiropractic or studying the placebo effect. Or, what happens is: The more you increase the population of your study--or, let's say you do a lot of studies and then somebody does what's called the meta-analysis, to do a study of studies--the placebo effect begins to recede. Because this contradicts everything we've been saying to the last 45 minutes, or whatever. Because it begins to look like well, maybe the thing doesn't exist after all. But, what has happened is that, we have not been able to detect a strong-enough signal to know in what direction to move, in order to exploit the placebo effect in the standard way that we exploit other medical knowledge. I think--this is part of what I was trying to write about in this article--that that may be because the placebo effect has never been something that we could study very well with the instruments of medical science. Bearing in mind, that the placebo effect was really first identified in an attempt to discover whether or not the claims of a, a guy named Mesmer, famous for being Mesmerist, of the whole hypnotic thing--

Russ Roberts: It's mesmerizing--

Gary Greenberg: It's mesmerizing.

Russ Roberts: That's where the word comes from, I assume.

Gary Greenberg: Yes. That's exactly right. And he's practicing this kind of weird, séance-like treatment in Paris in the late 18th century. Which was very effective. It was having very powerful effects on people with fatigue and malaise and odd paralyses and stuff like this. But, the King decided to investigate this, and appointed a panel of leading scientists, including Benjamin Franklin. And determined that the placebo[?]--I'm sorry--that the hyp[?] mesmerism wasn't really doing anything. That it was all in the imagination. And that, in fact, the only thing worth looking at were the things that happened when the imagination wasn't engaged--what they were calling imagination. And that's actually the birth of the placebo effect. That's when placebo was separated off from the rest of medicine. And it was in the century later--the subsequent, the 19th century and then the 20th century, that we became accustomed to looking at medicine the way we do, and developing the instruments and the techniques and the methods for answering questions about health and illness. And so, there's a mismatch that's built in from the beginning from how we investigate illness and healing on the one hand, and placebo effects on the other. And it could be that what's going on is that looking for the placebo effect for those instruments is like looking for feathers with a magnet. It's like, just because you magnet doesn't find the feathers doesn't mean the feathers aren't there. It just means that you haven't quite figured out how to find them yet. So, yes. There's probably money in it. But, that money would have to be, at least at first, based on a new paradigm for even understanding healing in the first place.

Russ Roberts: It seems we ought to think about it. You know, I'm not a doctor. And I'm not a medical philosopher. But, it seems like there is something there.

52:31

Russ Roberts: I am curious what your thoughts are as a psychotherapist, and did this research and writing that article affect your practice in ways you are comfortable talking about?

Gary Greenberg: Well, it didn't. I don't know if it affected it except insofar as it strengthened my conviction that--so, I'm in my office right now, as a matter of fact. In 20 minutes I'll start my clinical day. And people will come in, and they'll tell me their troubles; and I'll talk to them, and I'll listen to them. You know, I hope I can help them understand themselves a little bit better, and whatever--have a better life. But, I think that there's--and so that's what's going on at the manifest level. But I think that, underneath that, there's something else going on that I don't really have a lot of control over, I don't have a lot of knowledge of. But it's somehow transmitting care, on a kind of a, like a secret radio frequency, you know, that is being transmitted to them and they are receiving it. And it's not that it's the words or the thoughts are irrelevant. It's just that they are only part of what's going on. And I just think that maybe psychotherapy is the paradigm case of this. Now, could we find that, that beam of whatever it is--care, empathy, whatever you want to call it--and isolate it, and figure out how it works, and all the stuff? Maybe. But maybe not. I mean, maybe what we got is a situation is where we have a way of knowing the world that doesn't allow us to investigate, um, certain things. And maybe certain things are literally beyond our ken. And maybe this is one of them. I mean, there's a lot of maybes. So, it's changed it in the sense that I'm much more convinced that I am correct about that impression that I've had for many years, that there's stuff going on here that I don't fully understand. And that dates back to the origins of therapy, and the, even the Freudian idea of the transference--the idea that there is, the relationship is somehow primary to the, whatever the healing effect is. So, it--it's kind of strengthened that conviction. But it hasn't given me a better sense of what exactly that is, or how to find it, or how to manipulate it. It's just: There it is.

Russ Roberts: It reminds me a little bit of the Heisenberg Uncertainty Principle--that when you try to get too close--certain measurements aren't possible because the measurement itself affects the outcome. I'm thinking about--maybe you'll know the source better than I do--the old therapeutic phrase, 'Every day in every way I'm getting better and better.' Which, I have to say, I've thought of as a foolish thing. But maybe it's not so foolish. Maybe we can get the placebo effect to work on ourselves through our attitudes, and through our brain. In fact, it makes me wonder whether confirmation bias and overconfidence is just a fancy way to maintain better brain health and overall health.

Gary Greenberg: Well, that could be. And, you know, you start to talk about confidence, and then you are really wandering into the weeds. Because, that is, you know, that is--confidence is probably one of the most poorly understood and one of the most important aspects of our daily lives. And, we see that confidence has very strange effects. Especially, you know, we think about the 'confidence man,' and the idea that somehow confidence is related to fraud. And you think about some of the things that some people say about our current President, as a confidence man. And you see that this ability to believe is crucial. The credulity is crucial. And it's not necessarily a bad thing. But, it's definitely a thing.

Russ Roberts: Yeah. *heh, heh, heh[?]* That's very well said. It's--it can be a bad thing. You can be credulous, I think, about avoiding certain medical treatments that you desperately need, that aren't good for you, again to bring this back full circle. On the other hand, it may be it's good to be credulous about other things that aren't really scientifically known but maybe help you. My first thought, when you are talking about getting rid of your practice: I think it would be good a idea to hack your Yelp account, and whatever your ratings are, Dr. Greenberg, get you a lot of 5 stars, so that your patients, when they think, 'I wonder if this is going to work--oh, well--look how successful. Everyone else is healed by this man. That's all you need.'

Gary Greenberg: That's a brilliant strategy. If I have a Yelp thing. I don't know if I do this. I've actually never looked. But, yeah, sure. That's dishonesty in the service of making people better, right?

Russ Roberts: Well, you know, did you think about your book, The Noble Lie? Because a lot of this has--and I recommend that book. That book really had a powerful effect on me in thinking about a bunch of things. In that episode.

Gary Greenberg: In a funny way, all my books have been about the placebo effect. Either directly, like my book about depression, one of the central parts of it is that, you know, that the placebo effect and antidepressants has largely been created by the advertising. That placebo effects are about marketing. At least in that realm.

Russ Roberts: Yeah.

Gary Greenberg: And, in the earlier book, The Noble Lie, which I barely remember, but I do know that I wrote about, I wrote about my experience a clinical trial, there, and it was a placebo-controlled trial. And then a more recent book, which was called The Book of Woe, is about the making of the DSM [Diagnostic and Statistical Manual of Mental Disorders], which is the psychiatric diagnostic manual, which was a chaotic and vastly entertaining mess that the American Psychiatric Association went through back in the 2011, 2012. And I just sort embedded myself with them and watched it unfold. And you could see that so much of what they were doing with the DSM, by creating this big book of mental illnesses, was creating confidence in themselves. You know--they had these labels, and they could use them. And they could identify people. And that's all about enhancing power. And [?] many psychiatrists--well, I should say, more than one psychiatrist, say to me, 'Well,' basically, 'Well, don't yank the curtain back too hard here, because you'll undermine people's confidence. And people's confidence is crucial to their getting better.'

Russ Roberts: Yeah, that's a tough one. That's a real tough one. A critique of the, you know, the modern, psychological, psychiatric, psychotherapeutic movement is they've made many things that were just part of life--like being sad after someone passed away--a syndrome--

Gary Greenberg: right--

Russ Roberts: to be avoided. Like, disease should be avoided. So, if you get sick, you take medicine; you get better. Whereas I would argue that there are many things in life--tragedy and mourning being one of them--where the experience should not be altered by a medical intervention, except in the case where there's danger to the person, that the part of life is experiencing and enduring those challenges. And we're right at that--talking about the DSM and your book, The Book of Woe, that's really where the, uh, how you draw that line is really important.

Gary Greenberg: Yeah. For sure. Of course, that's a discussion for another day.

Russ Roberts: Well, I wish you well with your practice. In the next 10 minutes--

Gary Greenberg: Thank you--

Russ Roberts: My guest today has been Gary Greenberg....

(17 COMMENTS)

EconTalk January 28, 2019

Patrick Collison on Innovation and Scientific Progress

instacart-300x200.jpg Patrick Collison, co-founder and CEO of Stripe, talks with EconTalk host Russ Roberts about the pace of innovation. Collison argues that despite enormous increases in the numbers of scientists and researchers, the pace of progress in scientific and technological understanding does not seem to be increasing accordingly. The conversation looks at the challenge of measuring innovation and whether the pace of innovation should be a matter of concern and if so, what might be done about it.

This week's guest:

This week's focus:

Additional ideas and people mentioned in this podcast episode:

A few more readings and background resources:

A few more EconTalk podcast episodes:

Time Podcast Episode Highlights


0:33

Intro. [Recording date: December 14, 2018.]

Russ Roberts: I want to remind listeners to go to econtalk.org and in the upper lefthand corner you'll find a link to our annual survey, where you can vote for your favorite episodes of the year and tell us about yourself and your listening experience.

0:49

Russ Roberts: And now for today's guest, Patrick Collison.... Our topic for today is innovation, based on an article your wrote in The Atlantic with Michael Nielsen. But, I want to start with what Stripe is, for listeners who don't know.

Patrick Collison: Sure. So, Stripe is an infrastructure company that builds--well, we started out building kind of payment services for internet businesses, technology companies. And so, if they want to sell their products over the Internet, we build the APIs [Application Program Interfaces] and tools for them to do that. And we've kind of expanded kind of these initial payment services to now provide a kind of slightly broader set of, you know, economic or kind of financial tools and services, to businesses and so forth. So, for example, we help them with fraud detection; or we help them run a marketplace--you know, something like Lyft or Airbnb, those kinds of products. And, we provide an incorporation service, so that for founders--and especially founders not in the United States, for whom sort of getting access to the kinds of opportunities that we have here might be more difficult--we also help them do that. And so we kind of describe Stripe as building economic infrastructure for the Internet, and the kind of, the core idea, is we want to make the flow of money and the ability to transact kind of a true universal. We think there is a kind of missing layer of Internet infrastructure that sort of, kind of surprisingly, has not been built over the course of the Internet's history to date.

Russ Roberts: And why wasn't PayPal and other solutions like that, that solution?

Patrick Collison: Well, I think it's a very interesting question. And we certainly wondered about that when we were starting Stripe. And I think the--I think [?] PayPal kind of had the right aspiration. I mean, if you kind of read contemporaneous materials from kind of when they started--you know, their vision was slightly different: it was more about consumers, more about building a new kind of maybe online bank, and so on. So the focus was a bit different. But I do think they had the kind of right central idea, that, again, there's kind of a missing layer of infrastructure. And I think, really, the thing that kind of stymied them was their acquisition by eBay. There was sort of an outflux of talent--really immediately. And I think the--this is a--accomplishments of the company in subsequent 5 years, subsequent 10 years--you know, really just did not compare at all to that which they'd accomplished so far. And they--of course, that's a pretty common story. Right? I mean, that's not, I think, something kind of specific, perhaps, to the PayPal/eBay case. That's potentially a common pattern.

Russ Roberts: And, I have to ask this, just to let listeners know what we're talking about: Stripe's done pretty well.

Patrick Collison: Um, we feel very lucky, in terms of the adoption we've had. John and I--John's my brother and co-founder--we were developers ourselves. And when we started Stripe, we were in college. And we went to build Stripe for people kind of like us--in the sense of, as developers, we were just kind of mystified that it was so difficult to move money around online. Especially since so many other things, like cloud hosting and so on, were becoming so straightforward, and so easy to manage from a developer's standpoint. And so, we built what we felt was a kind of oddly missing component of sort of the building blocks of the Internet. But the thing that we did not anticipate--and again, we've been sort of very fortunate around, is, while Stripe was indeed adopted by, kind of people like, quote-unquote, "like us"--you know, individual developers, very early-stage startups and so on, and kind of those really were where our initial adoption came from--the kind of breadth has really expanded over the kind of 7 years since we launched. And so, you know, Stripe is now used by many such startups; but also by, you know, some of the largest companies in the world. You know, including Facebook and Amazon. And so, we did not expect that breadth of adoption. And I think it [?] just speaks to the, again, the extent to which there is a layer of stuff that's really needed which just was not being built.

5:37

Russ Roberts: So, the idea for this episode came from a piece we'll link to, as I mention, in The Atlantic. And the focus of the piece is that science isn't progressing at a particularly fast rate. Innovation seems to be slowing down. And, it's, perhaps something to be concerned about. And you start with an argument that I'd like to talk about first--which, of course, is very close to my heart. Which is: measuring this is quite difficult. It's very hard to know whether science is doing great, speeding up, slowing down. Different people in different corners of a field, different fields, are wholly different parts of the elephant: They don't know what's going on outside their field and they might have a perception that's very field-centric, or personal, from their own perspective. How do we even begin to get at this question? How did you end up, with Michael Nielsen, trying to get at this question?

Patrick Collison: Well, [?] clarify one thing with the argument to start, which is: We don't really take a stand on whether the rate of progress is slowing down, per se. We're--we kind of see arguments either way there. But, we're somewhat agnostic on it. What we are much more confident of--and I think the, sort of the hypothesis that the data very strongly supports, um, is that the rate of progress is declining very rapidly on a per-person, per-hour, or a per-dollar basis. Right? And so, perhaps because of the enormous increase in our investment, in our efforts, you know, perhaps we are in fact still sustaining, you know, constant or, you know, approximately similar overall aggregate progress, but again, on a sort of on an individual basis. That our per-person productivity seems much, much lower. In terms of kind of how we got to thinking of measuring it, I guess it's always seemed a bit strange to me that we just don't collectively obsess over this question more. Right? I mean, with Stride, we think a lot about, sort of rates of growth. We describe Stride's mission as trying to increase the GDP [Gross Domestic Product] of the Internet. And, you know, that's obviously kind of a trite phrasing. But the sort of core idea is we do want to sort of take a broad view of the Internet economy, of technological progress, how the company got started, how well they fare, and so on; and try to figure out [?] really broad-based measures and interventions that sort of can help create, that might help nudge that rate of growth to be somewhat higher. But, of course, technology, and especially kind of software technology and so on--that's a kind of application. Right? We're sort of in the translation field of sort of taking the results of science, of sort of fundamental knowledge and discovery, and sort of deploying them to the rest of the world. We think about the sort of aggregate, you know, progress of humanity--there is that really important applied aspect. But there is also, obviously, the kind of, the fundamental underpinnings of our understanding of nature and basic knowledge--you know, research furthers not a particular destination in mind; we might be really surprised at what it is that you discover. And I think it just as what we think as people. We think of, as a civilization, you know: What's the world going to look like in a hundred years? In a thousand years? Right? I think, you know, arguably the single most important input into, sort of, that prediction, is: What is the aggregate rate of progress in science going to be, between now and then? Right? Maybe some tail, really bad things are going to happen. But if they don't happen, I think that the single biggest determinant will be the aggregate rate of progress in science. And so I think the kind of first-order thing that should surprise us is that this is not something that we are collectively obsessed with. Right? These type of questions [?] about what the actual rate is--I think we should all be able to agree that the rate is super-important. And that we should really care a lot about it. And so, we kind of initially came to this, and in terms of just wondering about the rate itself. And then, kind of as we thought more about it and how one might measure it and what kind of other correlates might be, and so forth: Then we really became pretty convinced of--again, the case made in the article--that the rate per person is declining very sharply. And the reason, of course, that should be concerning, even if the aggregate rate today is, you know, constant-ish, is that, of course, we cannot sustain these--I say, exponentially in a qualitative sense, not in a sort of rigorous quantitative sense--where we cannot sustain these qualitatively exponentially increasing inputs indefinitely.

10:23

Russ Roberts: I interviewed Tyler Cowen, earlier on the program a number of times, but about his recent work on growth and the book he has now, called Stubborn Attachments.

Patrick Collison: Yes.

Russ Roberts: It's a very provocative and interesting book--

Patrick Collison: Published by Stripe Press.

Russ Roberts: I did not know that. That is so cool. And I was--well, first, I found his case very persuasive, in the abstract. And it certainly would have been my view 5 years ago--lately, as listeners know, I've become a little bit more skeptical about the value of growth and the value of the advance of technology. I mean, if we look back to 1900 and we look to today--if we've been in 1900 and say, you raise the question, 'What's the world going to look like in 100 years?' it's a really good question. In 1900, we would have been rather clueless about it. And we certainly--if we could go back to 1900, bring that person to the present and say, 'How does this look to you?' there would be many, many things that that person would be wildly exuberant about. Those things would include longer life expectancy, fewer women dying in childbirth, huge reductions in infant mortality; much more pleasant daily life. So, there are a lot of glorious things that have happened. And, if that person had been black, or a woman, or gay, there would be other things to be happy about as well--social things. And I think those--I've started to wonder and worry a little bit about whether we underrate those social things. So, I happened to mention some good things that have happened since 1900. There have been some not-so-good things that have happened since 1900 in daily life. People worry, as I recently discussed with Sebastian Junger--and this episode hasn't aired yet, Patrick, so you haven't heard it--but, we seem to be quite a bit more isolated. We seem a little bit more lonely. There's some dysfunctionality about our society. And science and technology, I don't think, solve those problems. And they might even make them worse. So, what are your thoughts on that? When you said, 'We ought to be obsessed about it,' maybe there are other things we ought to be more obsessed about, and we pick science because we have some idea of how it happens.

Patrick Collison: Um, you know, I'm certainly sympathetic to aspects of that view. Economic or scientific growth are certainly not everything. But I really want to stand up for growth here. The caveats I think do not diminish its central importance. And so, if you just look at GDP per capita around the world, I mean the scatterplot of that against self-reported wellbeing, the Rsup2/sup on that regression is 0.68. It's astonishing. As you know, it's very rare in sort of anything around human psychology and sociology and so on that you get a correlation that's that strong. You look at it visually, it's really pretty amazing. And even--again, I don't want to sound like an absolutist here. There certainly are some things that have gotten worse about the world since, for example, 1900. But even if you take for example the case of isolation loneliness, while, yes, I think there are aspects or communities that have degraded or where there have been unintended and unfortunate kind of second-order consequences, be it the automobile or single-family zoning and all the rest, at the same time, there does seem to be some aspect where isolation is a kind of consumption good that people tend to purchase as they become more affluent. And so it's not entirely clear to me whether all of that observed isolation is in fact undesirable--

Russ Roberts: Yeah, I agree with you--

Patrick Collison: and [?] people's underlying revealed preferences. And so again, not an absolutist here, but I do think the central case for growth remains extremely strong.

Russ Roberts: Yeah. I'm sympathetic to that also, of course. I just wonder--I think there's an issue of focus. And, I think it's much easier to focus on technological change and the things we can count, like GDP. It's ironic a little bit, because we're talking about something that's hard to count--knowledge. Eventually that knowledge gets translated, we hope, into innovation; and we hope that innovation translates into a better experience for human beings. But it does get complicated, each piece of that chain.

15:10

Russ Roberts: Let's move to the evidence. So, on the surface, how would you know--as you point out, we're not obsessed with it, so there's no index that most people would agree is the right way to think about it. What are some ways that you and Michael Nielsen looked at it and that others have done?

Patrick Collison: Right. So, I think there are maybe 4 or so key ways you can--that we've seen so far--that you can take a look at this question. And, obviously, we are and would be kind of super-interested to read or to study any other analyses of this question. So, I think the most obvious one is actually to just look at the macroeconomic statistics; and in particular I think, for some obvious reasons, TFP [Total Factor Productivity], kind of productivity growth, is sort of the most relevant variable here, where, if science is working super-well--if we're discovering tons of new knowledge, things that enable us to produce economic output, economy value, more efficiently, we should really see that in the TFP statistics. And, you know, perhaps [?]--

Russ Roberts: Total Factor Productivity--

Patrick Collison: Exactly. Yeah. And so, perhaps not every single discovery manifests here, but sort of overall, over time, it really should be visible. And, of course, you know, as I'm sure most of your listeners know, that kind of the story of factor productivity growth in the United States over the course of the last, call it, 150 years is one of sort of lowish growth, and then sort of, you know, a real growth spurt over the course of the middle of the 20th century. It's been a much lower level since perhaps 1970 or so--slight kind of peak around, you know, 2000, hypothesized to be because of the quote-unquote "ICT [information and communications technology] Revolution." And now back to, again, quite historically low levels, at least if we take our window as being the last 150 years. And so, I mean, that is--that chart, that picture, is very consistent with one where sort of mid-century science worked really well: we discovered a lot of amazing things, but somehow the rate of discovery seems to be lower since then. So, that's one way of looking at the question. Another way of looking at the question is to try to do that kind of TFP calculation, but within fields. Within specific domains. Because, you know, you might say, 'Well, the economy is so big and so many other things going on, and there's so many confounders[?], and all the rest, it's really hard to conclude a whole lot when you look at something as coarse as the total economy of the United States.' So, you know, perhaps you could choose some sort of specific domains. Perhaps you could choose drug discovery. Or maybe you could choose crop production techniques. Or maybe you could choose semiconductor production. Right? And within any of those fields you can try to do some more specific, granular output measures in that: Maybe it's drug discovery; maybe it's semiconductor density; maybe it's [?] of volume of wheat production and so on. And if you do that--and this, in particular, was done by a really fantastic paper from Michael Webb, Nick Bloom, [?] Jones--

Russ Roberts: Charles Jones and John Van Reenen--the paper is called "Are Ideas Getting Harder to Find?" And we'll link to that.

Patrick Collison: Yeah. "Are Ideas Getting Harder to Find?" And I really do encourage any of your listeners who are interested in this to go read it. It's a very kind of readable paper. And the kind of central conclusion is that not only do they find that kind of per person or per dollar productivity is declining within these specific fields and industries, but they find that it is in fact declining exponentially. And at surprisingly sort of consistent rates, in a way that really should be, I think, at the very least, thought-provoking for us. And moreover, quite concerning. And since that paper came out--I think the first pre-print was probably about two years ago or so, perhaps even a bit more--there's been no strong refutation that I've seen. And so, kind of this picture of, again, exponentially-defined productivity growth across a sort of quite broad variety of industries, is definitely striking. Thirdly--

Russ Roberts: And just--one sec. Hold that thought. I just want to--for listeners who are puzzled by that: The point is that, you say 'declining productivity'--it's because innovation is continuing. We're improving our knowledge of various things. And it's a great example in that paper about Moore's Law. So, we have a lot more capacity on our chips, our computer chips. The problem is, is that it takes an enormously larger number of workers and researchers and scholars to produce that improvement--

Patrick Collison: That's right--

Russ Roberts: and so the per-scholar rate is what's going down. Not the overall level of innovation, say, in certain fields. And the question, then, is why? We'll come back to that. So, continue on. So that's two types of evidence.

Patrick Collison: Yep. Third one you go look at is, kind of micro-data within sort of the shape of the production of scientific knowledge. Um, and so, for example, Ben Jones and Bruce Weinberg have done some kind of neat analysis of just the profiles of Nobel Prize winners. And in particular they observe that over the course of the Nobel Prize, in the early days, the average age of a scientist who won was about 37 years old. Whereas, today, across, essentially all fields, all Nobel Prizes, that has grown by 10 years to about 47. And again, this is kind of thought-provoking. Right? In that, I mean, you can of course imagine explanations that sort of have nothing to do with sort of rates of progress, and so on. Like, you know, maybe something has changed about the kind of structure of academic institutions or something. Um, but, you know, it is of course also very consistent with a picture of: It is just getting harder to discover things. It's taking longer. It takes more time to get to the frontier of knowledge. You have to sort of accumulate more comprehension, understanding, of, you know, more different fields. And so I think that kind of data is thought-provoking. In a similar vein the sort of size of scientific teams, the sort of extent of kind of co-authorship and the number of authors in publications and so on--you know, that's also sort of really growing very substantially. And again, it's like this picture where it takes bigger groups, more work, larger teams to create, you know, this new knowledge and these breakthroughs. So, I say that's kind of a third category, these kind of analyses of, so that the structure of knowledge production and science. And then the last one--and, the--as far as we're aware, at least, a kind of new one that Michael and I sort of introduce in this article--is to try to come up with some kind of aggregate measure of the sort of significance of scientific breakthroughs--because that is in some sense the relevant output measure here: Are we discussing kind of--are we discovering important new knowledge? And so what we decided to do is we took sort of pairwise comparisons of different Nobel Prize winning discoveries, and we asked scientists to kind of, in these comparisons, to choose that which they considered more significant. And then to use, sort of, all those kind of partial orderings to produce kind of total scores for different Nobel Prizes. And then we can kind of buckle[?] a little bit and just look at, for those scores of individual prizes, we can maybe generalize to a decade and so on, and get some kind of trend line for the kind of, you know, generally-perceived significance for Nobel Prize winning work that's occurred. Now, that, of course, is very subjective in very obvious ways. And therefore, I think, quite imperfect. But, I think it's not--we should not totally dismiss it. In the sense that, I think it's hard to dismiss this methodology without also dismissing the Nobel Prize itself. Because the whole conceit of the Nobel is that you can assess a very broad array of work, and you can sort of choose that which is most significant, most prize-worthy. And so if you can do it, kind of, in order to issue a single prize, I think you should also be able to do it across Nobel prizes. And, hey[?], when you kind of construct that dataset--and we did it for three Nobel Prizes: physics, medicine, and chemistry--what you see is that physics kind of has this picture that kind of accords in some way with that of TFP in the United States for kind of--really did well in kind of early and middle parts of 20th century; has really kind of declined somewhat since then, though the error bars are relatively wide. And then, chemistry and, you know, medicine/physiology--it's kind of high variance, but it looks relatively flat. And so, anyway, I think this is, again, quite thought-provoking and striking, because when you look at the number of researchers or the number of papers, or the, you know you calculate sort of the number of hours invested in these fields, these are growing enormously. Like, it, it's--

Russ Roberts: Hmmm--

Patrick Collison: it's really worth kind of looking at these charts to see just how much. Right? And so, if you kind of have, you know, 50 X [meaning 50 times?--Econlib Ed.], say, more researchers in one of these fields, but as judged by scientists themselves were producing significant discoveries at a nearly constant rate, you know, on some level, on some just very naive level, that does suggest that researchers--like an individual researcher--is becoming kind of 50 X less likely to produce, you know, this kind of really significant work. Um, and so, that I'd say is the fourth category. And it--looking across the board, I don't think that any one of these, um, sort of, um--I don't think any one category is itself knock down. Any of these ways of looking at the question, you know, has its sort of limitations and flaws. Um, and, you know, I have no enormous confidence in any of them. But, I don't see a reason as to why they should all be biased in the same direction. Right? In that, if this, you know, if this hypothesis that the productivity of science is not declining, that hypothesis is not true. I think we'd expect to see some kind of, some kind of contradictory data, when we look at different kinds of analyses. Whereas, we kind of see all of these analyses pointing in the same direction. And so it's when you take all of them together--and they are all sort of pointing the same way--that is something I think we should really take seriously.

26:32

Russ Roberts: I don't disagree. But I'm not quite as convinced as you are that something obviously is happening that we understand. And I know you don't pretend to understand it thoroughly, either. But, I just think a silly counter-example, published work in the sciences has increased dramatically. And I'm guessing--I could be wrong about that, but I'm guessing.

Patrick Collison: You mean the amount of published work?

Russ Roberts: Yeah. The number of articles--

Patrick Collison: Absolutely. Yeah, yeah. It's increased enormously.

Russ Roberts: And that's not--it doesn't tell us anything, particularly, except that there are more journals. And we know why there are more journals. It's that there's an enormous return to publishing an article. So, academics have innovated to increase the supply of that precious thing in response to those incentives. And I think--and the same is true of collaborative work: I don't know how much more collaborative work is really--how much more collaborative work is. Because, there's a big incentive to help people get more publications. Of course, you water down your own credit to some extent, but maybe not. I don't know. But, all these things--and, just to pick on you just for a second, Patrick: You know, the 'happiness data'--maybe people in rich countries think they are supposed to be happier, and so their self-purported happiness is listed to be higher. I just--we have--a lot of these kind of data are so complicated. So, just to take the--I love what you did by asking scientists about previous discoveries and sort of ranking them, Nobel Prizes: What are the great Nobel Prizes? It reminds me a little bit about baseball. You say, 'Who are the greatest baseball players of all time?' This is an age-old argument. People say, 'Well, obviously, there's nobody as good as Babe Ruth, or Ted Williams.' And there's a good argument to be made. There's also an argument to be made that, 'Oh, my gosh, Babe Ruth or Ted Williams today wouldn't be very good at all.' And present players are much, much better. It's so obvious. But, there's a lot of romance about Albert Einstein, and a lot of romance about Rutherford, and a lot of romance about Niels Bohr. And maybe that's why they rated the 1920s and 1930s so much higher. So, it's just hard to know. Right?

Patrick Collison: So, it is certainly hard to know. And again, I do want to emphasize that I do not think that any single argument here is sort of dispositive and definitive. Right?

Russ Roberts: Yep.

Patrick Collison: But, I do kind of want to push back on that degree of agnosticism, in the sense that, like there are some things we really do know. We do know that the number of working scientists has increased enormously. Right? And so I think it's kind of a very reasonable and valid question, 'Well, okay: For that increase,' and again, it is vast, you know, 'Have we gotten a proportional increase in the rate of discovery?' Right? And like, that should not be a hard question to answer. If the number of scientists have increased by, say, 20%, you know, perhaps the kind of error bars and all this stuff are so wide that we can't tell whether it's a 20% increase or not. But we are not talking about, um, sort of a 20% increase in our inputs. Depending on the measure you take, it varies. What we are talking about is increases of between sort of 10 X and 100 X. And if we are investing 10 X to 100 X more, it should really not be a difficult question: Are we getting 10X to 100X more output than we were previously. And--

Russ Roberts: So--

Patrick Collison: And so the fact that it's so hard for us to find that kind of vast improvement in our output--like, the mere fact that the answer to the question is not blindingly obvious, I think is itself suggestive.

30:04

Russ Roberts: So, an analogy, I guess would be, well--it's hard to figure out what the analogy is. I'm thinking when we have a lot more workers in some areas. Of course, most fields we have a lot fewer workers and more productivity. Because--

Patrick Collison: Absolutely--

Russ Roberts: which is interesting in and of itself.

Patrick Collison: That's what we should be squaring[?] to.

Russ Roberts: Right. So let's shift, let's take what you've claimed as true. And now let's think about two things: What might be the explanations? Of course there are many. And, what might be done about it if we wanted to change that? Because, it's a great example of how I think the disease--if you want to cure the disease, you'd better know what the disease is, rather than just, say, 'We need more science, education, and school.' Which is a kind of mindless corollary people draw, which I think is wrong--although we might need more science education in school or better science education--

Patrick Collison: Yes--

Russ Roberts: But, so, we can think about, I think, different things. One answer, of course, which you talk about and which we'll go into is that this is the nature of reality. The lowest-hanging fruit's been picked. We might also argue that the lowest-hanging scientists have already been chosen. And as we expand into the population with more and more people in these fields, we'd expect the gains to be smaller. So, that's one possibility. The second possibility would be, we organize the search for knowledge poorly. Universities and innovation labs and Silicon Valley need to be overhauled, because we are not getting the return that we are getting. And the third would be we need to change the rules of the game in the larger society. Obviously, you can lower your rate of total factor productivity by passing some really bad legislation--

Patrick Collison: yes--

Russ Roberts: that hampers people. And, of course, legislation and the rules of the game are changing all the time, as are cultural norms. And, all those things, all those three things get tangled up together. So--

Patrick Collison: yes--

Russ Roberts: So, talk to me about what you see as those possible explanations, and if you think there's any reason to think one of them is maybe more compelling than the other.

Patrick Collison: Yeah. So, I think you are absolutely right to kind of want avoid that sort of politician syllogism of, you know, 'We've got to do something and this is something therefore we've got to do that with, you know, science education in schools,' or whatever the case might be, even though, on that specific intervention, who knows? Maybe it does work. And so it's one thing to really emphasize at the outset of this, is, Michael and I, we really want more science, and more sort of scientific discovery, and more knowledge, and all the rest. And so, kind of, you know, one might in some sense kind of take this claim or this article or something to be kind of pessimistic about science. We're in some ways almost the opposite, where, um, we think it could be so much better. And we think it is so important that, if it is possible for it to be better for it to kind of get there, we really think we've got to engage with this question. Um, and, I think you are kind of dead right with that framing, in terms of kind of separating sort of contingent institutional or kind of sociological explanations for this line from those that are kind of about the metastructure of knowledge.

Russ Roberts: Yeah. The nature of reality, versus, I would say, the rules of the game. And I want to mention, by the way, that one of the more obvious implications of your work, if you take it just barefaced, is that we are spending too much money subsidizing graduate education and science; and we have too many scientists. That would be--I don't think that's, I know that's not your goal, but you could easily draw that conclusion as well.

Patrick Collison: Yeah. Well, I really think such a conclusion would be premature. To be very clear. That is not the case we are making. But, yes: I do think there should be, um, a more, sort of robust discussion about how it is we should be allocating our efforts and how all that input should be structured. On sort of this core question of like, okay, is this about the nature of reality or is it kind of just the nature of, you know, how we're doing things? I really think that that's very difficult to know. And people have been sort of making the case--you know, people like Sean Carroll have made the case in physics that, you know, we, there is a sense in which we've kind of gotten there and really explained a very large fraction of, you know, that which is to be explained. And, of course, you can always push back on that. And, you know, there are quotes, and you know, real, some apocryphal, of people who sort of thought we kind of reached the end of frontier in the past. But, you know, even if those assessments are wrong in the past, it doesn't mean they are necessarily wrong today. And obviously--so, I think there is kind of some sort of some credence to be ascribed to that argument. However, Michael's and my view is that, even if it is the case--or, well, I think it is assuredly the case that, depending on the field, that some of the story is kind of possibly of low-hanging fruit, and some of the story is sort of these kind of more contingent factors--and, we're pretty convinced, I guess, that a nontrivial part of the story entails these, sort of, again, sociological, institutional considerations. And so I think you sort of don't actually need to answer the question of, 'Well, is it 80-20 this way,' or the other way. Even if it is only 20% institutional factors, like the return to science is so enormous that still it's sort of overwhelmingly worth fixing those. And then, as we fix them, and as we experiment there and so on, perhaps we will learn more about which it kind of truly is. And, you know, I think you really--it's not hard to kind of discover that, or to, I've come to realize, that how we sort of produce knowledge today, how kind of our scientific industrial complex works, is not optimal. I have yet to meet a scientist who has even called it, you know, pretty good. Whether that's kind of the, you know, conservatism of funding mechanisms and apparatus, or the kind of assessment criteria and so on, or the time horizon of them, or the kind of rigidity with which fields and sort of career tracks are prescribed and so on--there's, I think there really is a lot that holds scientists back. And to kind of--it's been sort of widely reported that NIH [National Institutes of Health] R01 grants, NIH of course being the largest funder of science in the United States. The average age of kind of first receipt of NIH R01 grants has been kind of steadily increasing. Sort of, so, indicating, in kind of some sense it's getting even worse to be a sort of new scientist arriving on the scene. And there's very suggestive evidence that kind of perturbations in, you know, some of our institutional mechanisms, can really yield higher returns. There's a--a great paper on the Howard Hughes Medical Institute, HHMI, which is a really neat funder of science in the United States. And, you know, they kind of fund science somewhat differently than NIH. They give longer grants. They give grants to people rather than for kind of a specific work and project and so on. And so, anyway, this paper from Pierre Azoulay looked at sort of as you tried to take two populations that, you know, by most observable characteristics seem pretty similar; and as you look at those who, you know, received it, HTMI[?HMMI?] funding and those who did not, Azoulay concluded that, or showed, that HHMI grant recipients were 98% more likely to produce work that is in the top 1% by citations. And so, really not a small effect size. And, of course, you know, they are going to--actually perturbing that much; you are changing how funding works. But, you know, these people have sort of been trained in the same way; they still have the same kind of institutions. They are still, you know, working with the same kinds of colleagues and so on. And the fact that you can get such a large effect size just by changing one variable suggests to me that--it would be very surprising if, sort of perturbations and, you know, shifts and occurrences and so on, with other variables--you know, it was not possible to kind of create such of other, such improvements. And it's easy to forget, of course, how, kind of, in some way how accidental it is, where we've ended up today. Kind of, how the sort of U.S. post-War structure of science came to be. I mean, you know, as with anything like that, it's the product of, you know, all sorts of semi-random, you know, political, human factor and considerations. And, you know, obviously it's working pretty well on some level. You know, we've made more progress in the last, you know, hundred years than we've made in any prior century. But, I think we have very little reason to believe that it's close to optimal. And so, I guess Michael's and my core, strongest view, is that we really should be experimenting more here: the return is seen likely to be very high.

39:47

Russ Roberts: Yeah. That's a--well, we know one thing that post-War institutional setup is really good at, and that's producing more scientists. Which is not our ultimate goal.

Patrick Collison: Right.

Russ Roberts: But I do think you raise--you made me think of some really interesting cultural norms and responses that the current, complex way that different factors interact might be handicapped. Just going to think some thoughts out loud; and you can respond to it. You mentioned that Nobel Prize winners are getting older. The whole idea--and you mentioned that, you know, the Nobel Prize has to inevitably try to rank the quality of innovations. Well, maybe it's not very good at it. And, in particular, it's conservative. It's cautious. It's prudent. In the early days, not so much. Didn't know what they were doing. Didn't matter so much. Didn't have much of a brand name. Now, the idea that the Nobel Prize would be awarded to something that turned to be, like, wrong, would be very embarrassing. And so, as things--there's a sclerosis, it seems to me, about scientific knowledge as it's become more organized and more institutionalized. And I think there's a general lesson there that's really important. Because, people tend to talk about, assume, 'Well, the more organized, the better. Because then we can make it do stuff.' But it couldn't be--because of groupthink and caution and risk. As things get more advanced, and as we get richer--as society and as reputation has longer and bigger impacts--that a lot of the creativity has been, you know, wrung out of the system. And I'm very drawn to that for a bunch of ideological priors I have, so I have to be careful about my biases here. But it does seem to me--

Patrick Collison: But, but, but--no, I think you are right. I mean, you read the early history of sort of the great academic institutions in the United States, or the biographies of many of those who made some of the most important breakthroughs. And there is a kind of free-feeling nature to them, that does seem far less prevalent today. I was having this conversation recently with David Deutsch, the physicist--you know, some really significant work in quantum computing. Foundational work. And, you know, we were kind of reflecting on and sort of chatting about his career. And he was very firmly of the view that he could not have had the career he did, and could not have done the work that he did, had he been starting out today. Because, he didn't fit in any neat box. He wasn't exactly kind of, you know, fish or fowl and so on, and kind of flitted a little bit between different fields. And, you know, of course, that is also his great strength: he's such a sort of a deep and original thinker. And, as things have gotten a little more, kind of more striated, a little bit more structured and a little bit more--perhaps not a little bit more, perhaps a lot more--but, at least more, kind of formalized, I think there is kind of a real question as to the degree to which we are losing some of the, sort of, you know, very intrinsically necessary creativity and sort of--you know, discovering[?] new knowledge necessarily involves kind of breaking from existing models. And you know, perhaps in some way we are somehow disincentivizing that.

Russ Roberts: Yeah. I worry about groupthink. I know that NIH, having had family and friends in that research world, there are a lot of fads. There are things--there's political correctness. Not of the, necessarily the kind that people think about in, say, campus life or day-to-day life. But, within ideology--within fields, within science, there's political correctness about what's okay to think about and work on.

Patrick Collison: Yep. And it's striking, I think, how we've shifted a little--well, in particular, as we've kind of formulized funding mechanisms. How, I think, the dynamics of those mechanisms have really changed. Where, you know, I was just recently reading this biography of Gammal[?] and Delbrück, who kind of became a molecular biologist and also Gammal[?], the physicist. And it's, it's very striking how sort of they really relied upon sort of specific interventions by particular people to sort of sustain their careers and keep them going. It wasn't that they kind of hopped through the hoops of, again, standardized funding and [?]-making apparatus. It's not really clear to me--and I guess the kind of implicit thesis of the book is that they probably would not have. They, again, did not fit these standard molds. And so I do wonder a lot whether--I mean, this is of course always been group-think. Right? But perhaps the groupthink has become a little bit more potent, you know, over the past couple of decades [?].

45:12

Russ Roberts: So, let me suggest a hypothesis, then. And then maybe when we're done with this we'll think about some other--we focused on one piece of this puzzle as a possible main problem. But, let's imagine the following. Einstein did his innovations while he was a patent clerk. At night. Or probably some of the day, some, too--let's be honest. There was work on the job, even in the early 1900s. I mean, leisure on the job. The opportunity to do things other than your explicit tasks. But he didn't need a large lab. He didn't need a nuclear, an atomic accelerator, a SLAC [Stanford Linear Accelerator Center], which I incidentally see at Stanford, Stanford Linear Accelerator Center, whatever SLC stands for I don't know. But it's obviously--one thing that's obvious is that a lot of scientific innovation today requires capital. And, once it requires capital, it requires funding. And once it requires funding, it requires wealth. We have a lot of it, which is a glorious thing. The question is: How do you channel that wealth in ways that are going to be the most productive? A lot of it we channel through the political process--through NSF [National Science Foundation] and NIH. A lot of it is taking place even though, obviously, a lot of this work is more applied, in the corporate side; there is still real innovation taking place in the corporate sector. But, these fundamental science things take--not all of them, but a lot of them take money. And this sclerosis--and I would call it sort of the maturing of any industry--it gets a little less eager to take risks. It's not any one person doing that, although it does happen also at the personal level. I think, you know, it's not surprising that Bill Gates has not done a lot of innovation in computing lately. He also became a little more staid and a little more cautious and little more eager to maintain his current position. So, it's hard to break out of that. And, the challenge is: What kind of changes would we think about that would let us get to that more innovative, wild west frontier?

Patrick Collison: Yeah. I mean, it's, obviously, I come to this question from my kind of own perspective and biases, and no doubt highly incomplete view of the world. But one thing that is striking from sort of technology is obviously sort of the, certainly in this domain, the very deep truth of what you just said. Where, there is not a chance that the kind of innovation we see in kind of software and IT [Information Technology] and kind of, electronics and so on, there's not a chance that that would have occurred over the past couple of decades had we been reliant on a small handful of companies or institutions to produce them. Or even if we'd been reliant on one or two major funders. Because, of course, within the funders there's kind of biases and, you know, group think, and all of the rest. And so you actually have sort of--you have multiple layers of kind of competition, right? Competition among companies; and then competition among funders. Um, of course all of, coming to approach the world with sort of, you know, quite varying and substantially different theses about, you know, what even yields innovation. Some of them are very founder-oriented. Some of them are very market-oriented. Some of them are really, you know, want really robust and rigorous execution plan and all the rest. And, there is no right answer here, right? For some kinds of companies, for some kinds of founders, whatever, some approaches are going to work better than others. Right? And, so the fact that--well, and of course, that is indeed closer to kind of what science looked like sort of before it was professionalized. And before kind of institutions formed with kind of the same potency that they have today. And so, yeah. I guess the big question that I wonder about is: How do we--it's not that I have, or I think really anyone can have a strong view of kind of what the right funding mechanisms are, what the right institutional mechanisms are, and all the rest. It's more that it seems very surprising to me that the kind of structural monoculture is as strong as it is. And I think that's really the thing that we should be trying to break out of. And yeah, so, for example, an intervention that I think we need to try is having more scientists allocate more dollars directly themselves. Right? In that, let's say we carve out, you know, 100 million dollars, or a billion dollars a year; and we somehow, through whatever mechanism, choose, you know, really good scientists, and have them each allocate--maybe it's just a million dollars every year. Right? And, but they can kind of unilaterally direct that to whoever they think is doing kind of important work, where, you know, the marginal returns will be very high. And, you know, you kind of begin, talk to top scientists--they almost all know top people who they think are doing really important work not likely to get funded through current mechanisms but they would really, they think it's important to see make progress.

Russ Roberts: Well, if my claim--

Patrick Collison: Well, I guess my--

Russ Roberts: If my claim is correct about this cultural risk aversion, then, having that process be anonymous rather than named--

Patrick Collison: Sure--

Russ Roberts: would be an interesting model. Normally, we'd say, 'Well, we want to know who said this; we should spend a minimum [?] on x,' because they'll be more responsible. But maybe they'd be--we know they'd be more cautious.

Patrick Collison: Right. Maybe it should only be revealed if it works. Or something. Right?

Russ Roberts: Yeah--

Patrick Collison: And then they should be showered with credit, after great risk[?].

Russ Roberts: There you go.

Patrick Collison: But, I guess my point in raising this is not to claim, again, that sort of, I think this is the sort of quote-unquote "right" intervention, or that this is kind of the model where we should kind of shift to, or I think that. It's more that I think we should have a portfolio of approaches that we're kind of experimenting with and observing the results of. I had dinner earlier this week with Howard Chang, who is a fabulous and indeed HHMI-funded professor at Stanford, and, you know, he was making the point while we were discussing this question that, we really should have some people who are becoming PIs, Principal Investigators, leading their own labs at much earlier ages. Some people are just ready for that in their early 1920s. But, again, kind of our current institutional structural mechanisms don't support that. And: How good an idea is that? How great would the returns be? I, of course, don't know. But I think that sounds like a great idea to try. Right? And so, I think we should be assembling our portfolio of bets here and really experimenting more.

52:03

Russ Roberts: I want to raise a different angle on this that we haven't talked about yet. I want to think about Nassim Nicholas Taleb, who has been a guest on the program many times, and he is famous, among other things for the idea of a Black Swan--a rare, catastrophic event that comes out of the far lefthand tail of a distribution that is not normally distributed; and that much of our intuition about life comes from the normal distribution. And I think some of what we're talking about here implicitly is making that error: We are talking about White Swans--

Patrick Collison: Yes.

Russ Roberts: It's not the right word: Black Swans are rare; White Swans are everywhere. But, by White Swan I mean a wildly pleasant unexpected event.

Patrick Collison: A positive catastrophic event. Yes.

Russ Roberts: And by our current--you and I are both talking about this, and I think the way most people think about it is, 'Well, if we had a lot more scientists, we'd have more people in the righthand tail, in a normal distribution.' But maybe it's actually--that's the wrong way to think about it. I want to read a quote from Scott Alexander, who--we'll link to this post he had. He attended a conference that you and Michael Nielson created, and he has some very thoughtful reflections on the issues we are talking about right now. But he said the following. He said

Shakespearean England had 1% of the population of the modern Anglosphere, and presumably even fewer than 1% of the artists. Yet it gave us Shakespeare. Are there a hundred Shakespeare-equivalents around today?

Meaning, my interpolation here, meaning, 'We have so many more people; we should have a lot more Shakespeares.' And Scott Alexander continues:

This is a harder problem than it seems--Shakespeare has become so venerable with historical hindsight that maybe nobody would acknowledge a Shakespeare-level master today even if they existed--but still, a hundred Shakespeares? If we look at some measure of great works of art per era, we find past eras giving us far more than we would predict from their population relative to our own. This is very hard to judge, and I would hate to be the guy who has to decide whether Harry Potter is better or worse than the Aeneid [Vergil's classic work--Russ Roberts]. But still? A hundred Shakespeares?

End of quote. And so, one way to think about this challenge that you are articulating is that we need to be thinking about Shakespeares. The Einsteins. The one in a million--and realize that if you have one in a million, if you have ten million you don't necessarily get ten of them. And how do we, culturally, create the opportunity for that very outside-the-box mind to flourish?

Patrick Collison: Yeah. So, I guess two points to that. So, first, kind of just to what you were saying previously, I think you're kind of exactly right that in these kind of, in these domains with these kind of convex returns where, or some power law returns, whatever you want to call it, I think you're going to be exactly right that what you want to do is you want to increase the number of samples and you want to kind of push towards more variance. Right?

Russ Roberts: Yeah.

Patrick Collison: And again, I think kind of another way of articulating that, which we're talking about, is that kind of there are all these mechanisms that actually seem not only not designed to increase the variance, but in many ways they kind of structurally attenuate us. And that just is really bad when we get these positive catastrophes--to abuse the [?] term. And on the a hundred Shakespeares point--I think that's actually a quite interesting example, because it's certainly not obvious that we do in fact have a hundred Shakespeares today, or that even in 500 years people will think that we had sort of a hundred people who were kind of sort of at the same level. And so, perhaps on some level, within drama or theater, however we want to define Shakespeare's field, perhaps we're seeing diminishing returns. Right? But, when we take a kind of broader view of, Shakespeare was also an entertainer, or in some way part of the entertainment production edifice, it's not clear to me that we don't have a hundred Shakespeares.

Russ Roberts: Absolutely. I agree.

Patrick Collison: Like, let's think about YouTube stars--

Russ Roberts: Yep.

Patrick Collison: or funny Twitter accounts. Digital arts.

Russ Roberts: Netflix.

Patrick Collison: Netflix. Video game designers. Right? And, of course, most of these things don't nearly have the kind of luster and status that sort of Shakespeare now holds; but that takes time. Status always lags. And so I think if we take a broader conception of the set of eligible fields, you know, again, it's really not clear to me that have seen any such decline.

Russ Roberts: Yeah. But there were probably a hundred Shakespeares available to be productive during Shakespeare's time, but most of them died young or spent their time hungry and didn't burn brightly enough with ambition or passion for their work to spend their time writing plays all day. And today we have the luxury that thousands and thousands of people can be in the entertainment industry. And, I have said before on this program--as soon as I say we are in the Golden Age of television, the Golden Age of movies: I think we are in the Golden Age of story-telling. YouTube is one example that you mentioned; and I mentioned Netflix. But the quality of the mini-series--and they are miniseries. So, something like, a show like The Americans which I'm in the middle of--no spoilers, please--but is really extraordinarily good, and is sustained over 6 seasons--I hope; I'm in Season 2, or 3--Season 3. But 6 seasons of 13 episodes each--that's just, that's 72--did the math wrong--84--what's 6 times 13? 78. It's 78 movies that this person--they're short; they're only 40 minutes long--but the creativity and the quality of the film-making, there or in The Crown or in The Wire or in--there's so many. So, there's a lot of Shakespeares out there in a certain dimension. That, yes, it's true that they don't have quite the--they don't have the luster because that's almost--it would be by definition. But the quality of riveting entertainment in our time: There's at least a hundred.

Patrick Collison: Totally agree. And, on your point that in Shakespeare's time there were probably a hundred more who sort of did not get access or the same kind of opportunities, that's something we think a lot about at Stripe. It's kind of part of our core thesis, in that we sit around and talk about this notion that talent is approximately evenly distributed, but sort of opportunity, of course, is so much more uneven. And I think the returns to fixing that, you know, we really should presume would be very high. And it's why we do things like Atlas; it's why we care so much about global expansion. And it's even why Stripe has invested in some sort of semi-adjacent companies, some of which you might be familiar with, like Pioneer or Lambda School--efforts like this. And I think that it's going to be easy to sort of structurally underestimate, I think, the returns to expansion of opportunity, because you can't really measure it ex ante. You have to sort of take it on some amount of faith. But, sort of, our intuition is that those returns are likely to be very high.

59:51

Russ Roberts: So, I want to move to a slightly different focus. We've talked about some of the cultural shortcomings, perhaps, and the way the funding is organized. You're an interesting case. You are--if listeners haven't noticed, you have a lilt in your voice because you grew up in Ireland. I think you came to the United States for college, at a young age--

Patrick Collison: That's right.

Russ Roberts: And, if you had been born in--we can name a lot of places where if you had been born, you wouldn't be here having this conversation and Stripe wouldn't exist, along with your brother. And fortunately, you were able to come to the United States. You were smart enough and risk-taking enough, I think, to drop out of college. Is that correct?

Patrick Collison: Yes.

Russ Roberts: Dropped out of college. Found a place--the West Coast of the United States, California, where there were really wealthy people willing to take a chance on you--and if that isn't true in your particular story it doesn't matter because it's true in lots of stories. And that strange confluence of opportunity, which is: The opportunity to move--we let you in; you had a chance to use your gifts in a way that required an enormous, some investment--it may be a big investment; and it came through--most of them don't--we know that. That system is really powerful. And, of course, some of that's at risk all the time. It's at risk all the time. Every piece of it. There's worries about we have too many immigrants. There's worries that we talked about, that Silicon Valley has become a little bit sclerotic and less innovative because of certain cultural or, because, we don't know, but all the good stuff has been discovered. But, I know you and I don't believe that. I don't think that's the problem that's holding us back. And so, what do you think of the--well, talk from your own story. What's your--what allowed you to flourish fully? Or somewhat fully--I don't mean to suggest that you've fulfilled your potential, because obviously, you are young--you're very young: you're 26, I think.

Patrick Collison: Oh, no, no, no. I've now aged a bit. I'm now a far older 30.

Russ Roberts: Oh my gosh.

Patrick Collison: I'm now old by Silicon Valley standards. But, yeah--I think you're really right in bringing this up, in that I think that a lot of, I think my perspective does come from, perhaps as with all of us, the kind of particulars of the background I had. And, I think kind of your characterization of it is, you know, exactly right. And, yeah. I conclude very strongly from kind of my upbringing and the fact that I had the opportunity to come to Silicon Valley, that there must be many more people like me, but who, for whatever reasons, sort of the, in sort of the Pachinko Machine of outcomes, it didn't all kind of all kind of fall out the right way. And, for me, there was, like: I think if you kind of ran the experiment multiple times, that plausibly in most outcomes I didn't make it here. And it's because of so much random happenstance. I [?] was really interested in this programming language called LISP. Because of that I decided to go to a conference at Stanford when I was 16. I discovered--so it was my first time in the United States--I kind of discovered college in the United States. And had I not have gone to that conference, I wouldn't have applied to school in the United States. And I'm pretty sure if I hadn't applied to school in the United States, I wouldn't have dropped out to go start a company; because when I got to the United States, I sort of discovered--I got to know the folks working on Reddit, and I was like, 'Oh, cool: starting a company seems pretty neat.' And so, there was so much kind of happenstance in my upbringing that led to where I am today that it really feels kind of necessarily the case, again, that there must be people who are every bit as capable as me--or much more capable than me, but, again, things have not come together quite as they did in my case. The other thing that is very striking from my story that again kind of gets back to some of these sort of science questions is, not only is it sort of potentially the case that some kind of committee might not have been willing to take a bet on Stripe or to fund Stripe: it was the case that most such committees that we approached, most VC [Venture Capital] firms, you know, were extremely unenthusiastic about the prospects of two near-teenagers going and sort of entering the financial industry and told us in no uncertain terms that they thought the idea was pretty foundationally ill-conceived. And, it was only because of a couple of specific individuals, among them Paul Graham and Peter Thiel, who were willing to, themselves, place that bet. If that had not happened, there would be no Stripe. And I'm really pretty convinced that sort of it was sufficiently--our success was sufficiently implausible that there was almost no committee that would ever have come to unanimity on the worthiness of a bet on Stripe. Just, if you take that for any one person there's a 1 in 10 chance they would believe in us--no need to--one in ten to any power starts to rapidly become a very small number. And so that's really very striking. And then of course as we work on Stripe itself, I mean, we're in the business of working with and sort of aiding the success of, again, these positive catastrophes--these, like, amazing companies that start out as two people and become these enormous, you know, forces in the world. Like, it's so vividly clear to us how fragile and delicate and implausible they are at the larval stage. And we see so tangibly the kind of potency of mechanisms to shepherd them to provide them with kind of role models, with inspiration, with cultural capital, with education and so on, that, again, I really feel like this must be case in other domains besides.

1:06:33

Russ Roberts: So, I want to think about a particular area for a minute, and I think it will pull a lot of the factors we've been talking about together. I just--I listen to you talk, and I have a lot of romance about innovation and entrepreneurship. I find it actually quite moving--not just the reality but your awareness of the tenuousness of success and achievement; and it's really an extraordinary thing. But as you were talking I kept thinking how everyone's response to these original conversation, piece of our conversation, about lagging productivity is, 'Well, we need to find the right way to structure funding science.' Or, 'We need to find the right way to reform scientific education, science education at the K-12 [Kindergarten through 12th grade] or at the college level.' And one of the things I wish--I think I've learned; and I think it's true: I'd like to get your response--is: that whole idea is just a dead end--

Patrick Collison: That's right--

Russ Roberts: The whole idea of finding the right way. And that most of the time, the right way is something we haven't even thought about at all. So, the idea of doing what we do better is almost certainly the wrong way to think about it. It comes up a lot in education: You know, 'We just need--what's the right curriculum?' And so much of the great education takes place on the ground, at the 1-on-1 level, the teacher-classroom level--we don't fully understand that interaction well at all. And we need to think about how to make that better. And we know how--I am pretty sure I know how not to do it. Which is: I don't want a national curriculum, and I don't want a national education requirement that people have, say, a Master's Degree in Education. All the standard things are--the only thing I know is that most of the standard things are wrong. So, we need new things. So, when I think about, say, one particular area, which is health, where there is so much potential. Forget all of our previous conversation about whether we are going to solve a theory of everything in physics that will be like Einstein's. We're just thinking about the ways we might innovate in health: So much of it is so focused on the current structure. And it would seem to me that there is such potential for someone like you, and the people you know well, who have, fortunately, have very large sums of money--you have been extremely successful. And, do you think that that success can be risked? And done in ways that are not traditional right now? That are--you mentioned Paul Graham. You were in the Y Combinator [YC]--is that correct?

Patrick Collison: Um, yeah. YC invested in Stripe, yes.

Russ Roberts: So, Paul Graham, we've had him on talking about the Y Combinator. Y Combinator is a pretty cool innovation, [?] quite like it--

Patrick Collison: It's an amazing innovation.

Russ Roberts: So we need, it seems to me, we need people with wherewithal, like you, and others, to get together and say, 'We've got to be brave enough to try to fail.' And it's ironic, because everybody knows in Silicon Valley that failure is acceptable; and it's even a badge of honor. And yet I worry that as people get more and more successful, they worry about their reputation. They worry about losing what they already have--

Patrick Collison: yes--

Russ Roberts: which is the human impulse. But, it would be great if you guys took a few more chances.

Patrick Collison: I agree with you very strongly. I think that--I'm very optimistic about sort of individual human agency; and I'm very optimistic about sort of the width of the right tail. And I'm very optimistic about the sort of transmissibility of new knowledge. And I'm sort of pessimistic about the ability of groups of humans to engage in effective, ex ante, top-down design. Again, I'm sure most of your listeners are familiar with the book Seeing Like a State, the sort of great screed against sort of monoculture in some sense. And so I think, you know, oriented that way we quite clearly need exactly what you're describing--which is mechanisms to break out of the monoculture. It just does not serve us well.

Russ Roberts: And this is, maybe--I don't know if it's the right thing to say, but, it's not my money. Easy for me to say to you, 'Patrick, you've done so well. Now take a chance.' So, that's none of my business; and I do think there is an enormous challenge, an opportunity, for some of the more successful people in Silicon Valley to do something outside the narrowest of spaces that are profit-oriented. And I've talked to a number of folks in that situation. And they all have an urge to change the world beyond the commercial. They have an urge to change the world beyond the rate of return. They don't just care about creating the next unicorn. They care about making a difference. But I guess I'd start by saying: Although that's not my money, the part that is my money, it's being taxed to fund NIH [National Institutes of Health] and NSF [National Science Foundation] and public education at the state level, the state university level. We just might re-think that; and then let other flowers blossom outside that way that we've been doing it for so long.

Patrick Collison: Yeah. One thing that's striking about HHMI [Howard Hughes Medical Institute] is they are very thoughtful about how they re-allocate their dollars. As in, they think that, 'Well, what are our lowest productivity dollars, and what can we do with them that might move the needle more?' Because they have--not exactly fixed, but, you know, fixed-ish endowment. And so their budget doesn't change a whole lot, year to year. And so, because of trying to maximize the impact of their work and the extent to which they move the needle on, you know, biomedical sciences, they, again, they really think hard about this question of, 'How should we change what we are doing?' And I think that a lot of the sort of individual incentives and institutional structure of some of our centralized funding mechanisms kind of militate against this sort of reconsideration, this kind of reapportioning and reallocation. And to kind of get back to an earlier point that you made, which is that one could construe the argument we made as a case for reducing funding in science. I really wouldn't consider that for a second. I think the questions we should be asking ourselves are much more about reapportioning and reallocation.

Russ Roberts: Yeah: Who makes those decisions, and--you haven't heard this episode, either; it's also been recorded recently with Mariana Mazzucato. She wants the government to be actively innovating--not just funding, but actually doing the innovation within government. And--obviously, I'm not in agreement with her, but that's another approach. But I think--obviously I agree with you, that the secret is to--we don't necessarily need to spend more money; we do need to spend it differently probably than we are spending it now.

Patrick Collison: Yeh.

1:13:50

Russ Roberts: Anything you want to add, Patrick? Anything we didn't talk about that you wish we had?

Russ Roberts: No, I think--I'm delighted we had the chance to have this conversation. Again, as we discussed at the outset, I really think that this is--I mean, it sounds kind of hyperbolic and overstated to say it, but I think this is kind of one the few things that is truly sort of a question or set of questions of kind of civilizational importance. And so, I guess my goal in talking about them and thinking about them and making kind of the very small contribution we did is hopefully kind of elevate their prominence somewhat. Like, if somebody else sort produced an analysis that showed that we are completely wrong, and actually the way to kind of improve the metastructure and institutional aspects of science is something totally different, I'd be delighted. That's great. Whatever makes the whole thing work better is what I'm in favor of. And, again, I think it's just something we should focus more on, take more seriously, and again, hopefully break out of the status-quo monoculture.

(32 COMMENTS)

EconTalk January 21, 2019

Jennifer Doleac on Crime

handcuffs-300x197.jpg Economist Jennifer Doleac of Texas A&M University talks with EconTalk host Russ Roberts about her research on crime, police, and the unexpected consequences of the criminal justice system. Topics discussed include legislation banning asking job applicants if they’ve been in prison, body cameras for police, the use of DNA databases, the use of Naloxone to prevent death from opioid overdose, and the challenges of being an economist who thinks about crime using the economist’s toolkit.

This week's guest:

This week's focus:

Additional ideas and people mentioned in this podcast episode:

A few more readings and background resources:

A few more EconTalk podcast episodes:

Time Podcast Episode Highlights


0:33

Intro. [Recording date: December 13, 2018.]

Russ Roberts: I want to remind listeners to go to EconTalk.org. In the upper-lefthand corner you'll find our Survey where you can vote for your favorite episodes of the year and tell us about yourself and your listening experience.

0:50

Russ Roberts: And now for today's guest, Economics Professor Jennifer Doleac of Texas A&M University, where she is the Director of the Justice Tech Lab. She has done extensive research on crime, which is our topic for today.... The home page of the Justice Tech Lab, which you are the Director of, says, 'Technology is transforming the criminal justice system: Let's make sure it's for the better.' I want to take each of those one at a time. 'Technology is transforming the criminal justice system': In what ways? What are some of the ways that's happening?

Jennifer Doleac: So, yeah. There are a lot of ways. So, I think people probably watch shows like CSI [Crime Scene Investigation, television show], all the super-high-tech potential, advances, that could be making police investigations better or just making crime-fighting more efficient. A lot of those, you know, TV depictions of how technology is affecting things aren't entirely accurate, but there have been a lot of advances in recent decades. And we don't fully understand them. So if you think about things like just having cameras everywhere, I think we are kind of used to or almost expect that there will be surveillance cameras in most public places now. GPS [Global Positioning System] monitors for people who are, yeah, on probation or have been arrested and waiting for their trial. DNA [deoxyribonucleic acid] databases. Just a whole bunch of things that have been, that are all relatively new advances, and that can make our crime-fighting more efficient.

Russ Roberts: And, what are the worries about those technologies being used poorly? Why do you have the tag-line 'Let's make sure it's for better'? Because, we would hope--naively, of course, but we would hope that adding technology would make it better. But it doesn't always.

Jennifer Doleac: Right. It doesn't always. And, for some of the same reasons that all government programs do what we hope they will do, right? I mean it's just hard to--it's often hard to predict how all the players will adapt to the implementation of a new technology. And so: so, measuring those effects in the real world to make sure we are actually getting the benefits that we hoped that we will, I think is important. But then, in addition, a lot of these tools have substantial costs. You know, partly financial costs. I mean, these are just really expensive, and we could imagine spending our money in more productive ways if they are not that useful. But, a lot of the tools are--really, they are core surveillance tools. And they could make policing and crime-fighting more efficient and productive by increasing the likelihood that you get caught for your crime. Which means at its core, they are keeping, it's keeping better tabs on everybody. And so that has privacy costs. And those privacy costs are extremely difficult to quantify. Right? That's something I still haven't figured out a good way to measure, what those costs would be. But, I think people like me, economists, can add to the conversation by at least calculating what the benefits are, so that we can have a more informed conversation about whether there were any potential costs.

Russ Roberts: 4:19 Yeah. My view on that--we'll talk some more about this later--but my view is that economics has something to contribute in measuring costs and benefits. But there are certain things that are inherently--they are not unquantifiable, but they are not easily quantified. And we are going to have to make a tradeoff, then, between, say, the financial costs and benefits and some other costs and benefits. Unless you are a utilitarian. I'm not. We'll come and talk more about that later. But I think that's the issue. And as exactly as you say: You don't know how to quantify privacy loss. I don't think that's what--economics is[?] particularly good at it[?]. You got a good paper out of it, potentially. If you can take a stab at it--

Jennifer Doleac: Sure.

Russ Roberts: But I'm not sure it will be very accurate.

5:01

Russ Roberts: One thing you did not mention in your list of technology was artificial intelligence. And we had Catherine O'Neil on the program, quite a while back, and she voiced concerns that artificial intelligence and machine learning or being creatively used in the criminal justice system without full regard for what their impact might be. Do you think that's correct?

Jennifer Doleac: Um, yeess, with some caveats. So, I think a lot of people are thinking very deeply about this. I actually have some ongoing work with Megan Stevenson, who is an economist at George Mason Law, looking at the impact of risk assessment in sentencing. And a lot of the--you know, risk assessment as implemented in a lot of places is not a fancy machine-learning tool. It's, you know, a checklist. And you add up the points. But it's based on a regression based on existing data that kind of comes up with, with a prediction, of your likelihood of re-offending. And then, they apply the coefficients from that regression to come up with a risk score for future defendants. And, part of the reason we are interested in this question in studying it is that we think there's a lot of hand-wringing on both sides about the potential of this type of technology and this type of innovation and application in criminal justice, but a whole lot of other contexts, too. And one potential downside, one reason that they might make things worse, is that you could imagine them sort of baking in existing biases or doing a really a good job of predicting the bias behavior that is currently exhibited and then sort of like baking it in and, you know, accompanying it with a sort of veneer of science that gives it more credibility than it might have in the current courtroom. At the same time, there's tremendous potential, where we know, like--so, the way I push back on those concerns is usually: We don't have to come up with a tool that's perfect; we just have to come up with a tool that's better than the status quo. Right? And so, if what these machine learning algorithms or any algorithms are doing is removing some of the bias that we know exists in the current system--police officers operating based on their hunches; they don't like the way that that guy looks; he seems suspicious; a judge, his football team lost this weekend and so now he's in a bad mood and the kid in front of him gets a long sentence--if we can get rid of those biases, then we could be moved in a much more--we could be moved in the right direction. Even if we are not, even if don't wind up where we want to be in the end.

Russ Roberts: It's kind of a perfect example about all that's wonderful about social science and all that's horrific for me. I'm more of a skeptic about empirical work than most economists. And I look at that and I think, the average person--excuse me--the average economist, will say 'It's better than nothing.' Because the judge just has a gut instinct, as you say, or a hunch. Or worse, is affected by some life event that is way outside of the life of this poor person standing before the judge. And yet, as you say, the challenge is, if you are not careful you'll over-convince yourself that you've done something scientific that is actually not, and is merely what Hayek called scientism: It looks like science but it's not really science. For me, it's very similar to the example we just talked about in costs and benefits: It's a useful tool. It would be good for a judge to be aware of that analysis. I just would never want to be the determinant by itself.

Jennifer Doleac: Mmmhmmm. And, in practice it isn't the tool, the determinant itself. Right? And it's actually in some ways part of the problem, I think? So, one of the reasons that--Megan--I think this is an interesting topic for economists to study in particular is that what we really want to know is, when this tool is implemented, what are the impacts on things like recidivism, or racial disparities in sentencing? Do we have the sense that this is making our decisions more accurate or more efficient or better for society in some way--kind of beyond how it's--the challenge here, right, is we never know in and individual case what the right answer was. Whether the person was actually guilty or innovation, or what the optimal sentence should be in a particular case. And so, so, we want to know, like, when you consider all of these potential pros and cons of this policy, and how it's implemented in practice through the judge: the judge is kind of going to look at kind of the score, in addition to everything else they are looking at, how does that affect their, you know--and they have a whole bunch of incentives that they are weighing; and so, um, how does this affect their decisions in the end? That's ultimately going to have an impact on social outcomes that we care about. And so, what economists can contribute here is measuring what the impacts are on those ultimate outcomes rather than getting really bogged down in the details of whether the algorithm is accurate.

10:18

Russ Roberts: It reminds me a little bit of the attempts we have, we've made in the past, as economists, to measure the impact of schooling on wages, various other outcomes--but typically wages. Some form of income. And, at some point, somebody realized that 'years of schooling' is not a really precise variable. That, for some schools, were awful. And a year of having your rear end in the seat is not necessarily the accumulation of human capital that occurs at a different school or different university. It depends on what you do. Your grade point--a thousand things. And yet, we spent an enormous amount of effort trying to measure "the return to a year of schooling." Whatever--with all the flaws that that means. And I'd like to get your thoughts on what a year in prison means. Obviously--what we ultimately--well, we care about a lot of those--I was about to say, we care about a lot of things. Different people care about different things. One of the things I would care about, would be an important thing for me, would be the post-prison life of a prisoner. And whether prison reduced the chances of that person committing future crime. And equally important to me would be whether their life outside of prison can be a life of some potential and flourishing or whether that prison sentence has a lifelong effect that's destructive, way beyond the physical time spent behind bars. What are your thoughts on that?

Jennifer Doleac: Yeah, I agree that this is a really important question and there's definitely the research frontier, in economics research. I think--so, there are a lot of things to consider here. As you know, there are a lot of factors that judges weigh that we as citizens consider when we are thinking about the right sentence for somebody. I think economists in particular take a view that if we want to allocate incarceration efficiently, we're most focused on what the impact of incarcerating someone is on social costs and benefits; and that would include any sort of rehabilitation effect on the individual who is being incarcerated. And ideally we would love to move to a world, I think, where we can implement programs and policies that really transform the person's life for the better, give them the best chance to have a good life when they get out; and that might mean very short sentences but a whole lot more investment in mental health programs and substance abuse treatment, and education, and all those things. So, in terms of the research that we have, there's been some good research--so, the challenge is we don't have great data on any of this. In the United States we don't have any big surveys like in the census we don't have a question on whether you have a criminal record. Right? And so it's really hard, actually, to get the data that you need to study these questions, to look at the population that has a criminal record or is incarcerated, link that data with what their educational outcomes are, what their employment outcomes are down the road--if they get married; if they have kids, what the kids are doing. This is all the stuff that researchers are currently working to link those kind of data, that's the United States. In Scandinavian countries it happens a lot more often; so our best evidence comes from that context but it's probably not--it's unclear how relevant the Scandinavian experience in prison is to the United States. So I think in the United States, Mike Mueller-Smith, at Michigan, has a nice paper showing that for people who are on the margin incarceration--so if you get randomly assigned to one courtroom, you have a judge who is really harsh; if you are randomly assigned to another courtroom, you have a judge who is really lenient. That's essentially equivalent to being randomized to incarceration or not. And so, if you are unlucky and have the harsh judge you are more likely to be sentenced. And, for people in that situation who are really on the margin of being incarcerated, where it really comes down to which judge you saw, incarceration harms their outcomes. So, employment decreases. He's able to look at a bunch of different effects on social services and so on. So, in general it really does seem--it seems like here in the United States, the punchline here is that we're incarcerating too many people. Right? We could scale it back a little bit. That said, we've got other evidence, kind of similar effects for juveniles: Aizer and Doyle have a paper showing, again, that your mental effects for juvenile incarceration, but there was a more recent paper that looked at juvenile incarceration in Indiana and found that actually the marginal kids who were sentenced and incarcerated actually were better off than the kids who weren't. And so it really does come down to the context, what the programs are in the prison, what the outside options are; what's the alternative for the kids who wouldn't, or adults who aren't incarcerated any more. And I think we're just beginning to have kind of enough studies on this that are really good at identifying this causal effect to be able to start thinking about how much the estimates differ across different contexts, and we need to think about what could explain that.

15:49

Russ Roberts: Do you have any thoughts on this issue of year in prison? Obviously prisons have different characteristics. We did an episode with David Skarbek that I found very thought-provoking on the norms that emerge within prisons for how prisoners treat each other. But, along the way in that book he highlighted how street crime culture extends into the prison and then back out again. That we have a certain--I think the average non-criminal, which I think is me: I've never been in prison--has a weird and unrepresentative view of prison life that comes from TV and movies. Mostly--overwhelmingly those two. And some of them may be accurate: I assume most of them are not. But, do you think there's a lot of variety in what a year in prison means, depending on what prison you're in? Forget the judge, and the length of the sentence--a three-year sentence in one place must be different than a three-year sentence somewhere else.

Jennifer Doleac: Yes. Absolutely. I think especially a lot of programming winds up being tied to local community services and people come in and volunteer and do tutoring and hold yoga classes and all that kind of stuff. And that's going to really depend on the local environment. Certainly, so, criminal justice policy in the United States is primarily state and local; and so, that's a huge benefit for researchers like myself because it means there's a lot of variety and a whole bunch of different dimensions. It also means that you're not dependent on the Federal government for a lot of different policy changes. And so, when changes happen it's up to state and local officials. That definitely means that there's a lot of variety across the United States. But I think it's also, to kind of think about the impact of prison is in different contexts. One of the most striking examples is there was a nice--speaking of Scandinavian countries--a nice paper a couple of years ago finding that for people who were sent to prison in Norway, they are much better off when they get out. It's essentially going to, like, job training camp for a year or two, and you get all these incredible services, and you come out a much better person, much more ready to take on the world. And, it's a great paper, but it is--it says more about the potential of prison than anything that we have in the United States right now.

Russ Roberts: Well, we just need to send our prisoners to Norway.

Jennifer Doleac: Right; exactly. They've obviously figured it out.

Russ Roberts: That's the policy lesson.

Jennifer Doleac: Export. Outsource Norway.

Russ Roberts: Yeah.

18:26

Russ Roberts: Let's talk about a particular study of yours on body-worn cameras [BDCs], which is an awkward phrase, but it means police wandering around, I assume, videoing their every move. First, tell us how widespread that is. And, is it every move? When are they allowed to turn them on and off? Some places it's mandatory; some places, I assume, it's maybe voluntary? I don't know. But, tell me about that landscape; tell us about that landscape; and then, what are some of the effects of that technology? Which, I think most of us would assume that's a good thing: 'It adds to transparency, so it must be good.' Talk about the landscape of usage of the technology and then what you found when you studied it.

Jennifer Doleac: Yeah. And just to clarify--so, I haven't--I actually have a couple of ongoing projects on body-worn cameras, but I think the study you are referring to is by the lab at Washington, D.C. I was not an author on that study. I've written about this--

Russ Roberts: Yeah; I think maybe you blogged on it.

Jennifer Doleac: I've blogged on it. Yes. So, I've paid attention to this literature. So, body-worn cameras are at this point increasingly common; and the hope--so, it depends on local rules and guidelines, when officers are required to turn the camera off and on: different places have different standards for that. Some places it's voluntary--it's kind of entirely up to the officer's discretion. Other places, as soon as you get out of your car you'd have it on. Part of the challenge in--I think the reason that it's not the default that it would be on all the time is partly just financial: it's the storage costs for all the video that that racks up get to be pretty high. But, it's also I think a reasonable reaction to the knowledge that a lot of the interactions that police have with citizens over the course of the day are during the worst moments of those people's lives, and they don't necessarily want that recorded. Think about kind of domestic violence situations or someone who is having a mental break of some sort. There might be times when you might want to turn the camera off. But that also--so that's just in terms of whether the camera is on or off. But then there are also policies about when the footage is available--is it public record? Right? Does any citizen have the right to go in and ask for the camera footage from Officer Jones from the past year? And again, there are very strict guidelines and differences across different jurisdictions about what's available and what isn't. And all of this, the goal here is to increase transparency and accountability for police. We've been having a lot of very difficult but important conversations in this country over the last couple of years about unnecessary use of force by officers, and the extent to which that force is disproportionately used against African Americans, and there have been a lot of viral videos going around, usually caught by cell phones--videos, not body-worn cameras--showing officers using force when it seemed very clear that they should not be. And so, this has prompted--certainly a lot of discussion about what should be done about this: How should we reform the rules governing police behavior, training, or, you know, what else, to try to reduce the number of these incidents? And one potential solution is to have these officers wear cameras all the time so that we can see for ourselves in any interaction whether, you know, whether the facts were on their side or the person they were interacting with said. My take on this is, this has become so popular because we don't know what else to do. We don't have any better ideas. And this seemed--there was one, say[?] from Rialto, California, that showed that the use of body-worn cameras in that city reduced the number of, dramatically reduced the number of complaints from citizens against the police department; and people thought, 'Oh, good. That's a good outcome. Fewer complaints means that they must be doing fewer bad things, and so this is the solution to all of our complicated societal problems. We'll just have all the cameras where all these police officers wear cameras.' And, of course, there are firms that are happy to sell cameras; and that data storage that come with it. And they're very, very expensive. But, so in terms of what we know, what's been done: There have now been a number of really good randomized control trials looking at the impacts of body-worn cameras. The first--the one that, I think I wrote about in that blog post that you saw--was, I think in the first major U.S. city. It was in Washington, D.C., where they randomly assigned cameras to some officers and not others. And then they waited, and saw what the impact was on the officers' behavior. And they had a zillion different potential measures that they could look at to get a sense of whether officers' behavior and interactions changed in any way--after when they were wearing cameras or when they didn't. And then the end result was that nothing seemed to change. There was just like, no result, all across the board. This, it turns out, is in line with previous studies, more or less. So, there have been other previous studies in the United States and in Europe. Some find that body-worn cameras increase use of force, actually. Some find that it decreases use of force. On average, there's no effect. In the Washington, D.C. context, my hunch is that most of those officers just assumed they were on camera all of the time anyway, because it's Washington, D.C. and there are cameras everywhere. So, that seems like an easy way to explain why there's no effect in Washington, D.C. But, yeah: The punchline here is that policies that we implement for good reason don't necessarily have the impacts we think they will have. And it then becomes critical that we understand--that we go in with particular goals in mind. So that we can sort of be honest with ourselves about whether it's working.

24:57

Russ Roberts: What do you think we would expect those cameras to do? I mean, I think the average person's first thought is that, 'Well, if you know you are on camera, the joke'--it's not a joke--the saying is morality is about how you behave when no one's watching.

Jennifer Doleac: Mmmhmm.

Russ Roberts: So, the idea of a body-worn camera is that someone is always watching.

Jennifer Doleac: Right.

Russ Roberts: Of course, there was always somebody watching before. There was the person you were interacting with. There was your colleagues, often--your fellow officers. Police officers. So, it's a little more complicated. But you'd think it would add to a feeling of being responsible. And it would reduce the worst kinds of reactions in those kinds of high-stress situations. And I guess my--that's the first thing. But it's not the end. Of course there's the classic economics question: And then what? How does it change the behavior of potential victims? Of criminals? You name it. And then, how does it change where the police go and how they spend their time? I mean, if you know you are on camera, you might avoid certain places that, or settings that you thought might lead to stress and putting yourself in an awkward situation being recorded. So, those are the things I think economists look at. And if I've left any off, I'd love your reaction. But the last one I'd have is that, you know, in many ways, one unnecessary death because an officer overreacted is one too many. So, on the other hand, there aren't very many of these. There are a lot--horrifyingly, for the people whose lives are lost and their families and loved ones. I'm not minimizing it at all or suggesting--it's a horrible, horrible, horrible thing and it seems to be on the rise. But my point is, as an economist is, it's a very infrequent event. And it's not likely that the cameras are going to pick those up. And so, in any one study, we might see no effect. But that's just because it's rare. And what the camera does is reduce the odds of a rare, horrifying event, and so they are really important, even though in the sample period "no effect." So, what do you think of those arguments?

Jennifer Doleac: Yeah. Absolutely. Yeah. I know. Just to start the one thing I would add to your list about potential behavioral effects here: the one reason we might expect that these cameras would actually increase use of force is, you could imagine that most officers try very hard all the time not to make the front page of the newspaper. And, like, when in doubt, whenever they think there might be any question, they back off. And you could imagine that when they are wearing a camera and it would be clear to anyone watching the video that the facts were on their side, then they might use force more often. And so that might be how you get this kind of policy backfire. But, yeah: Your point about the rare events here I think is crucial to interpreting these studies. You know, I think when D.C.'s results came out, the--it was, I think somewhat frustrating to the people who ran the study, because the city then said, 'Well, even though there are no results and we said that that was what we cared about, we're going to keep the cameras anyway.' And, I think, you then have to think, you then have to ask yourself: 'Well, what do you really care about that? Because, you told us these were the outcomes you care about.' And, you know, city officials were certainly not the only ones who went down this road, and basically saying, 'Well, we really care about this--just the possibility that we could find out if, when one of these terrible situations happens and someone dies and we are suspicious about the circumstances, we want to be able to go look at the footage.' And, that is a completely reasonable goal, and a completely reasonable thing to pay a lot of money for. But it will never be picked up in an RCT[Randomized Control Trial]. Right?

Russ Roberts: Randomized Control Trial--

Jennifer Doleac: Randomized Control Trial. Right. These studies would never have been able to measure the impacts on, yeah, the one, you know, very rare death or being able to quantify in any way kind of what the impact is on just sort of community trust of police, if it doesn't show up in day-to-day behavior. And so this is where you really have to, again, be really clear on what the goals are, and make sure that the studies that you are doing are actually informing you about whether those goals are met or not.

Russ Roberts: It's a really interesting example of policy, because--when I think about it, I think--I mean, there's obviously some kind of virtue signaling going on here by the politician, saying, 'Hey, look: we're letting you look.' So, it's good. There's some amount of money that that would cost that would be not worth paying because you could do something better with the money, in theory, at least. But it also strikes me that, given the power of the state to use force and the risk of a very tragic outcome at times, which we know happens, that this just seems like a good idea. I wouldn't say at any cost: obviously there is a cost that would be too high. But I think it's worth quite a bit even if it doesn't show up in the data.

30:25

Russ Roberts: The other thing that strikes me, that I find strange just about the nature of life: You could imagine a school putting cameras in every classroom to make sure there isn't an incident where a student is say, bullied by a teacher, bullied by other students, humiliated, or a teacher loses it--which, of course, happens even in first-rate schools. A teacher after a long day, there's student that gets under their skin and they just explode; and that's a horrible thing. It often is very destructive to the teacher, the relationship with the other kids, etc. But it would be a weird thing--think how weird it would be that you would put in a video camera in every classroom and you would only use it for disasters. So, it would seem to me--tell me if I'm wrong--but, these cameras, they actually, they are capturing lots of data that have nothing to do with these tragic encounters with often-innocent people that end in terrible tragedy. They are capturing every day-to-day moment. And there's an enormous opportunity to improve the teaching--the style, the coaching, the way that police behave on the job. And I doubt that's happening. Or am I wrong?

Jennifer Doleac: I think, I think that people are trying. I think it is definitely a logistical challenge to think about how to do this, though. My sense is that police departments are using footage in training. It's unclear, you know, if that is helping in any way. But there are researchers who are trying hard to think about--you know, how to study the footage that is captured from all these zillions of hours of police interactions with citizens, to try to say something useful about, you know, what police behavior or policies or practices are beneficial or, you know, whether, you could imagine even seeing like if there's a policy change and there's a new training program, does that improve the interactions with people? And to be able to use the footage in any sort of productive way, it's going to require, you know, running it through machine learning algorithms and looking for [?]. I think people have, you know, people have done this and just listened for the words, like, 'Please,' or 'Thank you.' Like, to measure like whether police officers seem polite. Right? But that's basically like, when you think about what's required and what you'd be trying to train the algorithm to look for and it just gets very complicated and it's hard to think about, you know, to some extent we kind of know when we see an interaction that is, you know, maybe could have been de-escalated or something else. But thinking about training an algorithm to detect that seems harder. But, there are people thinking about it. Certainly, it is not possible in these departments for people that just, like, watch all of the video. Right? Like, that is not going to happen. Because it's just--the storage costs for the video will fall dramatically as the years progress. The human, like, labor costs of having someone sit there and watch all the hours of footage to see if anything went wrong--that is only going to get more expensive. And so, that is just not--it's not on the table.

Russ Roberts: I'm just struck by the similarity between being a good police officer and being a good teacher. We often judge teaching based on outcomes, not what happens day to day on the ground. But a good teacher, and a good principal knows who the good teachers are and is often in those classrooms; and knows the techniques that work well. Doug Lemov, previous EconTalk guest--he creates all these videos online to help people see how to do these techniques well. And to really pick an unattractive analogy: A lot of what being a good teacher is, is keeping order in the classroom. And, that's an art. It's not something--first of all, most 24-year-olds straight out of school or 26-year-olds out of grad school don't know how to do it. They learn from experience. They learn from other teachers. I'm sure it's true for police officers, too; and I think about the work of the great Jane Jacobs and how in older times police were walking the streets rather than driving in cars and had an intimacy and familiarity with the neighborhood, and vice versa, that must have been, I think, much healthier than the current world. So, the idea that somebody comes out of police school ready to be a police officer--there's a thousand things they don't know how to do in various encounters. And there's just an art here that it just seems it would be a useful thing to think about. Somebody's got--there's an opportunity there. That's all.

Jennifer Doleac: No, I totally agree. And I'll add to the sort of complicated situation, when someone comes straight out of the training to be a police officer and they are put on the force, and typically the rookies wind up in the worst neighborhoods, because they are sort of like, as you gain seniority you get yourself out of there. And so that's, that is surely not most efficient way to run things; but you understand how it happens.

Russ Roberts: Same analogy with students, right? You give the new teacher the worst classroom in some schools. That's a terrible thing to do.

Jennifer Doleac: Absolutely. Yes. Yeah. So, I think there is currently some active academic research, but I also know that in-house police departments are working very hard to come up with ways to identify the problem officers. Early. So that there can be some sort of intervention. Yet to be determined what that intervention is, and whether it has any effect. But at least it, you know, identifying the problem officers first, before they get to a point where they've killed somebody. And so, different--there is an active work there. But it definitely--this is sort of all related to the black box of policing, which we know much less about than, you know one area that I think we've sort of settled in the economics literature at least is that more police equals less crime. We know from study after study after study that when you have good causal identification, hiring more police officers reduces crime rates. But that obviously--that is on average. Right? And the best evidence suggests that most American cities are under-policed, not over-policed. But, that is, again, on average. And certainly, we know from all the conversations we've been having in the last couple of years, not every officer is doing good things; and not everything that police officers do over the course of the day is beneficial and productive. And so, figuring--I think we're just at the point where people are starting to figure out ways to kind of get inside that black box of how police officers spend their days and the variation across police officers. And, you know, try to figure out--you know, we try to say something useful about how we could potentially reform training or reform our, the incentive structure for police officers to get their outcomes.

Russ Roberts: Yeah. And again, it's the same issue in teaching: you don't really want to incentivize teachers to be rewarded based on the grades of their students or their test scores: you get all kinds of perverse effects there. Similarly, this is a big challenge. But it's one that I don't think government does very well. It struggles to--I would say to customize the way it treats either employees or situations. So, I'm not sure it's going to get better any time soon.

38:28

Russ Roberts: Let's talk about another piece of your work--you're actual work, I think, I hope--which is on DNA [deoxyribonucleic acid] databases. Again, I have no idea how DNA databases work. I assume there's--I assume I can't get at one. I don't know, even. So, tell us what they are, other than every once in a while you hear, 'Oh, somebody checked into a DNA database and they were freed.' But I don't know how--so, tell us how they actually work, in a thumbnail; and then what you've studied and what you found looking at them.

Jennifer Doleac: Sure. So, DNA databases in a criminal justice context are computer databases, as you might expect, where you basically store identifying profiles of offenders, along with the DNA profiles from crime scenes; and then occasionally, or on a very regular[?irregular?] basis those databases occasionally are scanned to see if, to find matches. So, to match known offenders with evidence from unsolved crimes. So, who is required to be added to the database depends on state law, in the United States. National law in other countries, for the most part. But, these databases at this point in the criminal justice context are extremely common: every U.S. state has one. We've had them for a long time. They gradually expand to include additional categories of offenders. So, most of them start out with sort of the worst of the worst--people convicted of homicide, or rape--and then gradually we added--burglars actually tended to be next, because people thought of rape as often being a crime of opportunity, and it was burglars who broke into a house where someone happened to be home that would be most likely to commit a rape offense. And then we added more, you know, more property crimes and less severe crimes. And at this point, the policy frontier in the United States is states adding arrestees. So, if you are arrested for a felony, you'd be added, or convicted of a misdemeanor. So, basically just adding additional groups that, you know, are plausibly at high risk of committing a crime. And then, we've collected the crime scene evidence and look for matches. And so, the hope is that the technology will reduce crime in two ways. One, it's--so, the main mechanism is that this increases the likelihood that you'll get caught for a future offense if you weren't already a suspect. If you're already a suspect, then the police can get a warrant for your DNA and compare it to the crime scene evidence themselves. They don't need the database. Um, this is truly in situations where it was, you know, especially in sort of crimes committed by strangers, or where someone wouldn't have been on the police radar as a suspect. So, if you are in that situation--if you are that offender, now, once you are [?] database, you are much more likely to get caught for a future crime than you were before. And, if you think about the standard Becker model of crime where we have--that you are a rational offender who is deciding whether to commit a crime and they consider the likelihood that they'll get caught, and the potential punishment that they would receive if they are, and they weigh that against the benefits to themselves of committing the crime--if we increase the probability of getting caught, then that should deter crime. And so, so, one way these databases could reduce crime is that they deter people who are added to the database from committing more crime. Um, but then in addition, anyone who isn't deterred, who says, 'Yeah, I'm more likely to get caught, but who cares? This is what I do,' or they are crimes of passion, or whatever else--if it doesn't deter crime, we can at least get those repeat offenders off the streets more quickly. They're still more likely to get caught, but we'll incapacitate them and make places safer. So, those were the hopes, as these policies went into effect. And so I have studied the effects of DNA databases in the United States as well as a more recent paper in Denmark where we have much better data. And in both cases, what we look at is, the--if you think of, you know, you've got an existing database and suddenly there's a database expansion, so on, you know--April 30th, there's, if you are a robbery offender, if you are a robber, you are not going to go in the database, but if you had been charged or convicted on May 1st then you are going to go in the database. And it sets up this nice, natural experiment where we can compare people who would have been eligible for the law for their DNA to be added to the database just before and after the law goes into effect. And what we find, in both the United States and in Denmark, is that people who are added to the database are dramatically less likely to re-offend. So, recidivism evolves[?] a lot. Sort of much bigger effects than I ever would have expected going into these projects. And this tells us a lot, I think, both about the power of increasing the probability of getting caught versus increasing the sentence--which has traditionally been U.S. policy, and the way that we try to deter crime. But also says a lot, I think, especially in this context, how much potential offenders think the technology--how powerful they think the technology is. And I kind of think that there's a bit of a CSI [Crime Scene Investigation, TV show] effect going on for them. Like, they think that they are in the database and they will instantly be picked up if they re-offend--

Russ Roberts: There will be a helicopter hovering--

Jennifer Doleac: and it doesn't quite work--right. It doesn't work quite that quickly in reality, but certainly [?] their chances.

Russ Roberts: Shhhh! Don't tell 'em. Don't tell anybody.

Jennifer Doleac: Exactly. As long as the technology keeps advancing faster than offender learn, I think we will be okay.

44:44

Russ Roberts: So, what are some of the downsides of those databases?

Jennifer Doleac: Hmm. The biggest one is the potential privacy costs, or the perceived privacy cost. So, the information that's actually in the database is--there's no sensitive information. It's essentially a string of numbers. You can think of it as akin to a Social Security number. It doesn't really contain any information in and of itself. And the way that they collect the DNA, a saliva swab, and then they, at this point it's a very mechanical process--they put it in a machine; it prints out the string of numbers that goes in the database. And so, the government is not, is not using people's genetic material to sort of determine people's all kind of health information or your predisposition to schizophrenia, or other things that might even be relevant. But people worry about that. Right. People do worry about sort of a slippery slope--

Russ Roberts: I worry about it--

Jennifer Doleac: Yeah. And so, the way I kind of frame the results of my research in this area is, you know, all of those costs are, you know, are real. And people are going to perceive them to be what they perceive them as. Right? I mean, it's going to differ from person to person, how much you worry about this. But, so at the very least let's think about what we're getting in exchange for that privacy. And, if you know that, you know, recidivism--I think in Denmark we find recidivism falls by about 40%--you know, there are a whole lot of tools that are a lot more invasive than this one. And so, if you're okay with having cameras everywhere but not okay with this, I think, you know, there's sort of a scare factor here because it's genetic material. But, at the very least, it gives you sort of a benchmark to think about. You know, if we're saving x dollars every year due to reduced crime, and you look at that number and you say, 'I don't know--it's still not worth it,' then that just means that your perceived cost in terms of the privacy is higher than that. And that is useful information.

Russ Roberts: Yeah. No, I--it opens up a bunch of interesting things. One, of course, is to[?] take the DNA swab and throw it away, but you don't tell the person. That's, of course, dishonest and would be a bad policy you would think in a democracy. But it might be a lot better than storing genetic material on people or[?] background issues. If you watch the movie Gattaca, which I recommend--it's a fantastic film--it's about the awareness of how inevitably you leave genetic material around. And I think it's somewhat true--whether it's a strand of hair or a fleck of skin or whatever it is. And, it's great, because, 'Hey, we're going to get him.' And it's horrible, because it means there's a level of potential control by the state that's not healthy. So.

Jennifer Doleac: But, yeah, but I think in some ways I think one of the benefits of this technology is spreading the risk of wrongful conviction if they are, if you want to think about it that way, to a broader group. I think it's healthy that we are all thinking now about, like, 'Well, what if I get caught up in the DNA database?'

Russ Roberts: Good point.

Jennifer Doleac: Like, you know. And right now, again, the comparison is not some sort of ideal system where we know the truth. The comparison should be the status quo, where police officers make, you know, wrongful--arrest the wrong guy all the time. And I think if this moved us--and so, there are extremely high privacy costs for certain communities in this country who are targeted and sort of the usual suspects for police. And this, I think these advances where you've got scientific matches should make most of the arrests more accurate and in cases where you've got, you know, you happen to be in the wrong place at the wrong time and so they found your DNA there, or there's, you know, certainly human error active, human malfeasance, that is occasionally reported in these crime labs--you know, the rest of us could get caught up in that sometimes. But I think it is, that's actually a, that's useful somewhat to making us think about the problems that others have already been dealing with.

Russ Roberts: But it also can, as you say, it can also prove someone's innocence. Which is wonderful and glorious.

Jennifer Doleac: Absolutely.

49:35

Russ Roberts: Does it--besides errors like coding errors; and there's human imperfection, obviously, in entering the database and so on. But are there any strange things? I remember a story about a cousin getting tangled up in something because they shared DNA with somebody. Am I remembering that correctly?

Jennifer Doleac: So, I don't know about the specific story, but I know that one of the more controversial policies that states can implement is allowing familial DNA searches, where they basically look for partial matches that could lead them to the family member of someone who is in the database.

Russ Roberts: Yeah; that's probably what I'm thinking of.

Jennifer Doleac: Yeah. And so, you can imagine--it essentially expands the database to be not just people who have been convicted or arrested in the past, but basically everyone in their family. Which--I mean, still, you have to then demonstrate that the person was actually there and committed the crime. And the DNA, the partial match is certainly not going to solve the case. What's really interesting to me in this space right now is all of the, the recent stories about how they caught that serial rapist in California by uploading--like, citizens uploaded--maybe the police [?] were involved--uploaded DNA samples to a private DNA database used for genealogy. And so--and a lot of these--23andMe, and those types of databases, don't allow you to kind of upload your own string of numbers. You have to actually send them the DNA sample. Which the police would not have. But some databases do. And suddenly, so they caught that one offender that had been a cold case for a long time; and then, other police departments were like, 'Whoa, that's a great idea.' So, other police departments are now doing this. And, it's just been fascinating to think about, like, I suspect most of these databases will start ending, you know, change their privacy practices to not allow this, because they imagine most people are going to stop paying for the service if they know that they could be pulled into investigations. But it is really interesting to just think about, like, if you don't perceive this as having big privacy costs--if we have in[?] all the safeguards in place that you need to make sure that they are not coding other stuff, your genome and sensitive information, or you trust the process more in terms of it not, there's a high burden of proof to show that you did it and all that stuff: What an incredibly cheap way to catch offenders and reduce crime. You know. It's just like one of those advances that is both terrifying but also really exciting. Because this is just so--like, if this type of tool can dramatically reduce criminal offending, it is surely a whole lot less, uh--well, I suppose this is somewhat controversial. But I think it is a lot less socially costly than putting lots of people in prison for decades on end.

52:45

Russ Roberts: Yeah. I'm going to put on my Left-wing hat, which, I have to reach--it's not readily available but I think I can find it here in my office. And I want to just mention, I think another cost of this kind of improvement or solution, which is: It diverts us from thinking about the underlying reasons that people cause, commit crimes and have miserable lives, and do irreparable harm to people around them. And, I think for most wealthy, successful, un-prisoned people like me, it's tempting to say, 'We care about it. It's just, you know, catching criminals.' But we don't, really. What we really care about is--I hope--is creating an opportunity for human beings to flourish. And this kind of solves that kind of problem in a way-too-late[?] way that is seductive. So, that's my worry.

Jennifer Doleac: Yeah. That's totally fair. If we think of crime as--it is a costly outcome itself; but it is a proxy for other things that are going wrong in someone's life. And so if you think of it as more like a symptom than a, an integral[?], then you are totally right. So, a lot of my work right now is, I've been doing all this tech-in-crime[?] stuff, but I wrote a paper a couple of years ago on Ban the Box policies, which we can talk more about if you'd like--

Russ Roberts: Explain what that is.

Jennifer Doleac: Sure. So, Ban the Box policy has become really popular in the United States to try to improve the access to employment for people who have criminal records. And the idea behind it, the motivation for it, is that we know that employers discriminate against people with criminal records. So that the name of the policy comes from this idea that there's a box that you are asked to check if you've ever been convicted of a crime; and that employers would just sort of like throw out the applications that had the box checked. And so, a lot of very well-meaning people said, 'Well, we can solve this problem by just banning the box. We'll just tell employers they can't ask any more.' And then, as you noted earlier, the question that economists love to ask is, 'And then what?' And it turns out that's really important here, because the policy doesn't do anything to change, to address why employers were worried about hiring people with criminal records. And so, it turns out that when they are not allowed to ask any more, they try to guess. And then they reduce their hiring of black men. And so you see a net reduction for young black men who don't have a college degree--the group that is sort of most likely to be helped by this policy if it's helpful but also the most likely to be statistically discriminated against if employers are just trying to guess who has a criminal record--their employment rates fall by 5% in the years after Ban the Box goes into effect. So, a great example of unintended consequences of well-meaning policies. And so, sort of in the process of writing the paper and in the years since, I've become very interested in prison re-entry. And, like, what do we know about--what would be better than this? Right? Because I think I always try to--ultimately, I do research because I care about making policy better, and trying to achieve the outcomes that these policies had in mind. And want to be able to recommend alternatives to Ban the Box for people who act, really just want to help people with criminal records build better lives. And unfortunately, we just know so little about how to do this well. So that is--that is sort of another area where it's just, I think, [?], as you said, we want to help people have opportunities and build better lives so that they don't need to be involved in crime or don't wind up going down that path, but also so they can get out of it if they want to change their lives. And, figuring out ways to kind of help that process along, and make the opportunities available to people who want to seize them is something that we just don't know much about, yet, as researchers.

57:05

Russ Roberts: I want to come back to this parallel, which is just haunting me in our conversation, which, between education and crime. You know, you say we don't know much about it. I'd say we don't know much about what makes a good school teacher, in the sense that it's not easily quantified. Like: Have a Masters' Degree. That's not an important part of being a good teacher.

Jennifer Doleac: Sure.

Russ Roberts: And so, as researchers, we inevitably look where the light is. Like the drunk stumbling around for the keys under the lamppost when they were lost further from the scene. And so, we're always looking for measurable, quantifiable things that can enter into a regression. When in fact I think we ought to be looking at videos and intangibles and subtle things, and enhancing the opportunities for people who we know we're[?] good at even though we can't explicitly measure why. And getting the people who aren't good at it out. So, for example, you know, it seems to me--this is an example where you want 500, or 500,000 non-profits funded by voluntary contributions to help transform people's lives out after prison. Most of them will not be good at it. But there will be a handful that are good at it. And we want to scale those up. And, again, I'd get the government out of this for a lot of reasons. But one reason would be is that they are not going to be able to discriminate in any way. They are just going to have to fund--they are not going to be able to make the judgment call the way the head of a really first-rate non-profit could of who is doing a good job and who isn't. They are going to need measurable things; we're back to square one again. So it just strikes me that, again, just like I think people are doing really fabulous things trying to figure out the subtle things that people do to become better teachers: The subtle things we can train people to do after prison to have better lives is not going to be a scientific enterprise. It's going to be an artful enterprise, and we ought to let a thousand flowers bloom and let the good ones thrive.

Jennifer Doleac: So, I--I'm with you in spirit to a certain extent. I think the challenge is that we know that well-meaning policies and programs backfire all the time. Like, there are unintended consequences all the time. So there's actually--a great example of this in the re-entry space is, a real emphasis recently on wholistic wraparound services. So the idea is that people coming out of prison have just a tremendous number of needs. They have generally had [?] higher rate of substance abuse and to illness, no work history. You know, on and on and on. Nowhere to live--

Russ Roberts: A full-court press--

Jennifer Doleac: Yeah, a full-court press. So, we give people, you know, just intensive case management. They have someone that they can go to 24 hours a day and who will help connect them with all the services they need. And the best. So then, these programs, these types of programs, are typically so highly praised in communities across the country. They are fairly--typically the most common type of intervention. And, then, it turns out that when you actually do a Randomized Control Trial of them, they don't have any benefits. And, in fact, so, thinking of, your example of, just give funding to local communities to kind of do whatever needs to be done there: The funding was coming from the government, which you might not like, but basically the idea was, in recent years the government has poured a ton of money just into finding non-profits that do, especially, that really focus especially on these more holistic[wholistic?] type of treatments: It wasn't just job-training or something like that. But just like gave them money and said, 'Just keep doing what you're doing.' But, again, it was implemented as an RCT, so that we could see what the impacts were in these local communities. And, on average, people who were in the treatment group who got access to the services in these programs that got all the money were more likely to wind up with another conviction down the road. Not less. And so, it--it just highlights how hard this is. Right? So there's--of course, you are trying address needs and trying to do good things, but there's also the potential that by, kind of, that the full court press itself could actually do more harm than good in the sense of, maybe it just takes up a whole other person's time that they could have been spending some other--you know, looking for a job or something. Alternatively, there could be something about, you know, holding someone's hand through all of these different facets of their lives that kind of reduces their own sense of agency.

Russ Roberts: Yup.

Jennifer Doleac: And that more targeted intervention, just cognitive behavioral therapy and then leave it at that, or something like that, just more targeted intervention could give the person the freedom to kind of rack up wins on their own without help. And that--that could be just incredibly beneficial. And so, this is something where I think it just--you know, some things are not going to be measured; some things, it's just going to be really hard to--we'll never have all the answers. But I do, I do believe in the power of good research to be able to point us in the right direction better than sort of our guts are able to do.

1:02:32

Russ Roberts: I agree with that 100%. In particular, you know, what you were saying, while you were saying, I was saying, 'But agency? What about this feeling that if someone's constantly hovering over you?' So, again, there's an artful way to do it. And your other point, which I think is crucial, is: It's really hard to do. And so, I would expect the modal impact to be zero. But that doesn't mean there aren't 5 or 10 or maybe even 20% of the people who are helping others who do it really well. And they get lost in the noise, because it's hard to measure. Or they get a bad--even though it's random, they just happen to draw particularly difficult people so it's not really random: it just really looks--the process is random but the actual outcomes, what they are dealing with, are not. And so, I just think--anyway, well said.

Jennifer Doleac: Yeah. I'm totally with you. And I think, when I go around and talk to policy-makers about this, my last line[?] is always: We should assume everything we try will fail. And it's not coming from a place of pessimism. I think of myself as a very optimistic person, in the sense that I think that there are answers out there. I think we will figure out what works. But, we are slowing ourselves down by not--by, sort of becoming invested in certain programs before we know that they are working. And the best way to figure out quickly what's going to have the biggest impact is to just implement--implement things, try new things, do it in a way that allows us to test what the impact is. And then, as soon as we figure out it's not working, move--try something else. Right? But if we go in with the expectation of failure, then we are much less likely to wind up in a situation that I see all the time in government agencies--who care deeply this; but they have a pet program that has been running for years; and they just--they don't want to know if it doesn't work, frankly, because like they believe in it so strongly. And that's just that it's just so detrimental to sort of this, to figuring out what can be beneficial.

Russ Roberts: Just to make one last--at least for now--analogy to education: I think there's a terribly mistaken belief that we need to figure out what is The Solution to education: What's the right way? What's the correct curriculum? And it comes back to the, in a way, to the Norway example, you said about Norway--training in prison--

Jennifer Doleac: Mmmhmmm--

Russ Roberts:'Well, that's the solution. That's what we need to do. Let's take everything they do; we'll just do it here.' When in fact the real solution is going to be multivariate, manifoldly different, depending on the individual, depending on the location, depending on the neighborhood, etc.--and that's the artfulness part. And we need 10 different solutions, not one.

Jennifer Doleac: Yes.

Russ Roberts: And we ought to be ready for that.

Jennifer Doleac: Yeah.

1:05:26

Russ Roberts: Let's close with some bigger-picture issues. You are an economist. Economists have been studying crime, I think probably since Gary Becker now, which is about 50 years, which is pretty amazing. And when Becker came into the field, he was ridiculed by sociologists and others who said, 'People, criminals, aren't rational. By definition.' And his response, of course, was, 'It's useful to treat them as if they are, and incentives matter even for criminals.' And, of course, your work is, in many ways--not 'in many ways'--your work is in that tradition. And I'm curious what you think the challenges are facing economists in interacting with a policy space that has lots of non-economists who don't really, who don't always respect what you are doing.

Jennifer Doleac: Yeah. Great question.

Russ Roberts: What's your personal experience on that?

Jennifer Doleac: Yeah. So, I think, it's--you're right that economists don't view the world the same way as non-economists do. For better or worse. So, when people ask me, like, why, you know how an economist would end up studying crime, my first answer is we're interested in incentives, and incentives are relevant here to, not just for, you know, rational offenders but also police officers and judges and all the rest. But we're also really focused on weighing costs and benefits. And, in order to do that we are much more focused than, I think, any other social science discipline on identifying the causal effect of a policy. You have to know you've nailed down what the impact of the program is, in order to calculate what the benefits of the program are. And so, we just have developed as a field, as a discipline, a toolkit that allows us to focus on that, on measuring that causal effect. And so that distinguishes us from researchers in other disciplines. And, I think--you know, we have discussions within economics, ourselves, about the extent to which our focus on causal identification distracts us from the important questions, and those are useful discussions to have. But, for, you know, I do think measuring the causal impact is important. And that is definitely one of our big contributions. I think the crime space, the pushback most often tends to be around how you can possibly place a value on, say, a human life. Right? So, how could you possibly--clearly the--if we are thinking about whether some crime reduction policy could reduce the homicide rate, some people will say, 'Well, then, we obviously have to do it, no matter, if we save even one life, it's worth it.' And, I think economists just come at this, because we are used to thinking about trade-offs, and thinking in terms of, sort of, of you know, quantifiable numbers, can react, or will react I think for the most part to that sort of reasoning and say, like, 'Well, the way we are all living our lives suggests that we don't place infinite value on other people's lives.' Right? I mean, we are all--we drive cars. We do things all things all day long that might potentially have negative impacts. And so obviously we are weighing tradeoffs, and we place some non-infinite value on these things. So, but in order to weigh those tradeoffs, we have to put numbers on them. It's just sort of--it's the nature of the game. I have other work on opioids, and I've kind of dipped my toe into that debate a couple of times now, looking at the unintended consequences of policies that reduced the risk associated with using opioids. And, that debate--so then I wind up interacting with the public health research community. And, they also, I think, have a really hard time with the way economists approach things. And so that--I have not figured out how to have productive discussions with that group, unfortunately. I think there's just a lot of talking past each other about, you know, what--what economists are bringing to the table and the value of causal inference, and the value of--and just the possibility of tradeoffs. I mean, I think economists are much more used to thinking about tradeoffs than most other disciplines are. And comfortable with it. Like, no policy is all benefits, right? It doesn't mean it's not worth doing. We just have to think, if we know what the costs are, maybe we can mitigate those costs. And that's useful. And I think a lot of my interactions with those in the public health space suggest that they view any cost or potential tradeoff as a threat to the possibility that the program will happen. And I think that's unfortunate.

Russ Roberts: That's the--that's the 'something better than nothing impulse' I think we all have. Which is a human impulse. And I think economists are fairly well inoculated against that, because we are trained relentlessly in unintended consequences. Which is a beautiful thing. And sometimes very difficult, as you say, for other disciplines, other people, to listen to. They don't want to hear--either they don't want to hear it, or they think we're just wrong.

Jennifer Doleac: Which maybe we are.

Russ Roberts: Right--well, one of the challenges--

Jennifer Doleac: Ultimately a lot of, all these questions--most of these questions are empirical questions. And then you can take it to the data. I think one thing I love about being an economist is that I think we, as a group, we rarely let each other coast on our priors. Right? Like, almost no hypothesis is off limits in an economics seminar room. And, you can disagree with--you can think that the person asking the question is dead wrong and their hypothesis is crazy; but you need to be able to show in the data. Or, in your model, or something. You need some evidence that they are crazy. You can't just call them a bad person; and that's not going to end the argument. And so, for better or worse, I think economists are used to being called bad people--heh, heh, heh--and it's not persuasive to us. So, I think that makes our research better.

1:11:38

Russ Roberts: I think before we started recording our conversation, you and I talked about the--I would call it the, one of the costs of being an economist, or costs of acquiring this inoculation and our natural tendency to worry about unintended consequences. Which is: We can fall in love with contrarian results--results that show that the public health profession's priors are wrong. I mean, just take a famous example--you know, Sam Peltzman, he's not so popular in some circles because he showed that many safety measures encourage people to drive more recklessly, say, or to behave more recklessly. And I think he's right. I think he's onto something. I think the--

Jennifer Doleac: Mmmhmm.

Russ Roberts: And when people say, 'Well, people don't take those into account,' I just ask them: 'If football players didn't wear helmets, do you think they would play the same way?' And the answer is: 'They would not.' That doesn't mean that every football player, when they make a play, is thinking, 'Well, at least I have a helmet on.' You know, and tragically[?] we've been forced to come to grips with this very unpleasant, unintended consequence of safer helmets. They've led to less-safe play. And it looks like terrible damage to some people. But, if we're not careful we fall in love with that.

Jennifer Doleac: Mmmhmm.

Russ Roberts: And those are the things--those unexpected results, those contrarian results, those unintended consequence results, we're a little bit--I think, not a little bit--I think we're over-enamored of them. It tends to push us toward research findings that more publishable, and cleverer, and maybe not always true.

Jennifer Doleac: Yeahhh. I mean, I think that, um--I do think that there's a reason we are enamored with them. Right? I mean, this is the unique perspective that economists bring to the table. And to the extent that, like, you know, if you just want to focus on good program evaluation, there are plenty of people who can do that. Heh, heh. So, the fact that it's going to be economists who say, 'Oh, well, if you make it safer to do that, people will probably do more of it. I wonder if I can measure that.' Um, I think you are right that that is the sort of natural experiment, the sort of analysis that economists just love. Like, it just puts a smile on our faces to hear about that sort of thing. But, I--but that's partly because it reveals something about human behavior that wouldn't be revealed otherwise. And in many cases it's important. Right? And I think, one thing I sort of learned to do is just to highlight out front is just that recognizing these unintended consequences doesn't necessarily mean we should do the--we shouldn't implement the policy. Right? We just need to recognize that there are tradeoffs, and knowing what the tradeoffs are--having a full understanding of all of the costs and benefits in a situation--allows us to implement other policies that maybe can help mitigate those costs. Or find a better policy that doesn't have the costs. Right? I think that if we just settle for the first thing that seems to work, regardless of all the downsides, we're missing out on opportunities of doing even better things. And so, yeah. I think economists--economists are always bringing the bad news to the conversation. But I think--I hope--I mean, the reason I'm an economist is I think it ultimately leads us to a better place.

1:14:59

Russ Roberts: I'll play public health researcher for a minute.

Jennifer Doleac: Heh, heh, heh--

Russ Roberts: and point out that I think we have flaw, as economists, to assume that, 'Oh, we'll save this money because it will be spent more wisely elsewhere.' And you could argue that the public health people really have the right view. Which is: That money is not going to be spent at all in this area. That, the public reacts to certain research findings with, in a non-rational, irrational ways. And we're better off at least with some money going there. And so, I think that's the downside of our engineering focus: that we'll just reallocate the money more efficiently. Because it often doesn't happen. It's-- So, that's relevant--

Jennifer Doleac: Yeahhh. I mean, so do I hear that from public health groups a lot. And when I--but when I talk with actual policy makers and practitioners, who are on the ground trying to figure out what to do about a certain policy, or, you know, how much to invest: They are very thoughtful about this. Like, my sense is that none of them are saying, 'Okay, end all the safe injection sites,' or something. You know, like they are not just, uh, no one's behaving that rationally. I think people on the ground making these sorts of decisions are pretty, are very aware that there are tradeoffs. Like, they are the ones who have to balance their budgets every year. Right? They are fully aware of this stuff. And I think we should--I think we should just give people more credit for being able to kind of handle complexity. And, you're right that, a lot of this is just kind of, voters and, um, all kinds of people respond with things without full knowledge. But, I do think that we're capable of having more complex conversations than we often give ourselves credit for.

Russ Roberts: That was very well said. Safe injections sites is a reference to?

Jennifer Doleac: So then the often--recently wrote a Brookings blog post, kind of reviewing recent research, mostly economists, not all economists, about what to do about the opioid crisis. And we got a lot of pushback on our review of the evidence of harm-reduction policies. Mostly around these moral hazard concerns that Sam Peltzman made so famous, and safe injection sites, and syringe exchange [?]--are in that category. Where, you can imagine them having huge benefits, on net. But, coming with the unintended consequence of leading to more drug use, because it's safer. And so it's thinking about that kind of trade-off, and what we can do to try to mitigate that, I think it's really important.

1:17:28

Russ Roberts: I want to close with one other thing I worry about, which is that--I mean, I think you are a very careful scholar. You are working in an area that's extremely important. It's an area where people's lives are going to be affected by what you find. But you are a human being; and you obviously are going to be drawn--are going to be drawn to the contrarian result when you see it. And, one of the challenges I know we have in our profession is that, you know, when you go out to "measure,"--measure the impact of policy acts--which is a phrase like it makes it sound like you've got a ruler or a calorimeter or some kind of measuring device. But, in fact, what we do in our field is we run, maybe 500 or 5000 regressions. Econometric analyses. And we figure out--we convince ourselves as to what the right one is. So, reflect a little on the humility that should engender. And I'm curious if you worry about that, as your career advances, and the incentives you face for dramatic findings as much as accurate ones.

Jennifer Doleac: [More to come, 1:18:46]

(5 COMMENTS)

EconTalk January 14, 2019

Stephen Kotkin on Solzhenitsyn

Aleksandr_Solzhenitsyn_1974crop.jpg 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.

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0:33

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

Russ Roberts: Before introducing today's guest, I want to encourage listeners to go to econtalk.org, and in the upper left-hand corner you'll find the link to our annual survey where you can vote for your favorite episodes of the year, tell us about yourself and your listening experience.

0:55

Russ Roberts: And now, for today's guest, historian and author Stephen Kotkin.... Our topic for today is Aleksandr Solzhenitsyn. We're taping this on December 10th, the day before Solzhenitsyn's 100th birthday, if he were alive. And, we did two episodes earlier this year with Kevin McKenna of the U. of Vermont on In the First Circle. Today's conversation is based loosely on an essay you wrote for the Times Literary Supplement on a number of recent books by and about Solzhenitsyn. I want to begin with his impact. As an historian who has written on Stalin among many others, I know you've thought and written about the role of individuals in history versus larger forces. It's a common issue in thinking about history generally. How would you describe Solzhenitsyn's impact on history?

Stephen Kotkin: Second most important after Stalin himself. Solzhenitsyn was able, as a single human being, to blacken the image of the Soviet Union globally, even though he was prohibited from publishing most of his works inside the Soviet Union, they nonetheless appeared and spread--usually underground, sometimes through denunciations of him. So, he had a massive impact at home as well as abroad, and this impact was devastating for the Soviet system. Many people believe the Soviet system had redeeming features. For example, Hitler--Nazism--was absolutely beyond redemption. The Holocaust and what Hitler did made it seem that if you said anything nice about the Nazi system, you were apologizing for it. In the case of the Soviet Union, people imagined that there was a better revolution inside the Stalin regime, somehow. That 1917 was a purer, better form of Socialism that had been usurped or degraded by Stalin's rule. Solzhenitsyn proved the contrary. Not only did he prove the contrary, but he did it in a way that tens of millions of people were interested to read. So, that's an incredible accomplishment now on his centenary.

Russ Roberts: And when you think about his impact: obviously, we see it through his work and the reaction that he engendered, as you say, in the public as well as with the Soviet leadership. But it would be an interesting thought experiment to think about, had he not had the courage to do what he did, or had his work not survived--not gotten outside the camp, not been dispersed through various underground networks and then made its way to the way to the West--do you think Soviet history would have been different? And if so, how?

Stephen Kotkin: Yes. The debate we had about the Soviet Union, it's much muted now. It's hard for us to appreciate the Soviet Union has been gone for more than a quarter century. However, which the Soviet Union still existed, the debate about its reformability, its redeemability, and why we should have a détente with the Soviet Union, and why maybe even the Soviet and American systems were evolving in the same direction, in what was called 'convergence theory'--those debates were really important debates. And confusing. Solzhenitsyn entered into those debates with the searing moral authority of having suffered, long suffered, under that system. And he brought the voices of all who suffered under that system to the fore in his work. This achievement, it was not paralleled by anybody else. Yes, there were many other courageous people. Yes, there were people right there at the Hoover Institution like Robert Conquest who wrote magnificent books covering the truth of the Soviet Union. However, Solzhenitsyn did something more. What he did was to show the Soviet Union was evil not just a political point of view but from a moral point of view. And he did it in a way that was persuasive.

5:37

Russ Roberts: Yeah. I find it fascinating--of course, in the 1920s, there were a lot of apologists who believed or hoped that the Soviet system was creating a new man, a new human being, a new system, a better system. There are people who lied on its behalf, who covered it up, who trusted the propaganda that was pumped out by that system and the lies that were told when people visited there. I can't help but think of Walter Duranty as a shameful piece of that story. And a lot of Western intellectuals, of course, fell prey to that. They were eager to believe that something new and better was going on. And then there came a time--you'll correct me if I'm wrong--but there became an awareness somewhere between, I would say, 1935 and 1955; you'll be more precise--that something was very rotten there. That there was an incredibly repressive regime. That it abused its citizens in terrible ways. And although a handful of people, intellectuals, continued to apologize for the system, or for Stalin, most Westerners turned against Stalin's vision. Why did it take--so, what's the independent contribution of, say, Solzhenitsyn's first-hand accounts in the Gulag Archipelago that he collected, his own story and that of dozens and dozens of other zeks--other political prisoners? What was the extra impact of that literary achievement, above and beyond what was somewhat well known?

Stephen Kotkin: Well known, maybe, Russ. We have to remember that the French Communist Party was Stalinist during the whole period of Stalin's rule. And even after Stalin died and was denounced. We also have to remember that many people downplayed the evil nature of the regime. That is to say, they would acknowledge, 'Yes, there were famines. Yes, millions of people died. But these were not intentional; these were mistakes. These were not core to the system. The Gulag where the labor camp--otherwise known as the Labor Camps--where millions of people were incarcerated often for so-called political crimes--these were not so big. The numbers were exaggerated. Yes, there were excesses, but nonetheless, even Stalinism was not beyond the pale.' Let us also remember that in this confusing debate where some people defended Stalinism: Once again, Russ, just about nobody got away with defending the Hitler regime. In this confusing debate where some people--including prominent people--defended Stalinism, we also had a large number of people who saw a better revolution inside this Soviet regime, which maybe could be recuperated once Stalin died. So, Khrushchev's "Secret Speech," which denounced Stalin for his crimes, was actually an attempt to rehabilitate the Soviet system. It harkened back to a purer version of the Revolution, supposedly associated with Lenin. And with Leninism. So that Stalin became a cult of the personality, in Khrushchev's term, a degradation of the Revolution. And therefore, there would be a second wind. A socialism with a human face. Or Communist reform. Many people were newly attracted to the Soviet phenomenon upon Stalin's death. In fact, there was a split on the left between those who denounced Stalin and those who continued to praise Stalin. What both sides shared was a belief in either the Stalin version of the Revolution or an original Lenin version of the Revolution, as being historically necessary and correct. We forget those debates, because now, of course, very few people will defend that history in the same way. But that's the context in which Solzhenitsyn arrived. And he started out trying to figure how he could capture, describe this reality. And he wrote a couple of really important novels on the Labor Camps from firsthand experience. And, they stood the test of time. In fact, in 1970, he won the Nobel Prize in Literature for these novels. And we know them as One Day in the Life of Ivan Denisovich; we know them as In the First Circle; and of course Cancer Ward. So, he won the Nobel by tackling these themes. But, that wasn't the big impact yet. The big impact came from the Gulag Archipelago, which would be published not in the Soviet Union but abroad beginning in the early 1970s--1973--after he had won the Nobel. And that book was one of the main ways in which many people, not just intellectuals but the mass readership, the public, the kind of people who are core to any country's democratic order--those people began to see that the regime was rotten in its roots. That there was no better revolution inside the Stalin regime. That Stalin's years of the 1920s through 1953 were no worse than Lenin's 1917 coup d'état in October 1917. And so, this achievement of Solzhenitsyn, 1800 pages, much longer than War and Peace, longer than Homer's Iliad and Odyssey combined, and yet readable--a page-turner in many ways--this incredible achievement which was well-documented despite him having zero access to the secret archives--of course, today people like myself and other scholars, we can read those archives. But Solzhenitsyn had no access to those whatsoever. He read published sources. Soviet newspapers and other periodicals. Soviet books. And, of course, his own life experience and the life experience of 226 other political prisoners whom he interviewed and whose stories are related in that magnificent, 3-volume Gulag Archipelago, the first volume of which as I said appeared in 1973. This is a singular achievement. There was nothing else like it. And so, all those people who are making these fine distinctions between Leninism and Stalinism, between the original Revolution and the supposed degradation[?], now had to contend with what Solzhenitsyn showed: which was the Gulag started years before Stalin, and his despotism. Before Stalin was the sole ruler, the system was in place. And it was in place from the beginning.

Russ Roberts: And it feels--you know, as a non-specialist in the area, it feels like--it's even more than just the historical fact that there was oppression before Stalin. It's also the intellectual corruption and impossibility of the ideals of the Soviet system just shines through over and over again in his work.

Stephen Kotkin: Yes.

Russ Roberts: I used to tell--I think I've told listeners before, but when I used to teach undergrads, on the last class I would recommend a series of books I didn't think they might think of reading that I would recommend, encourage them to read. And for years, over a decade, certainly in the 1980s and a lot of the 1990s, I would recommend that they read the Gulag Archipelago--just out of tribute to his courage in writing that book. I felt like, morally he deserved people to read that book. I also would recommend Anne Applebaum's book, the Gulag, which is a very nice shorter version of the history. And of course there's now a one-volume version of the Gulag Archipelago that, as you write in your essay, that Solzhenitsyn approved of--do I have that right?

Stephen Kotkin: Yes.

14:35

Russ Roberts: So, you mentioned some of his interactions with the regime in passing. I want you to talk about the roller coaster of his relationship with the Soviet leaders. It begins in some sense with his imprisonment after returning as a veteran from WWII. So, he suffers at Stalin's hands. He's then somewhat rehabilitated by Khrushchev. Then he's on the outs again. So he has this incredible up-and-down relationship with authority, and at the same time, it seems like much of the time the authorities don't know what to do with him. And have unleashed him with effects that they didn't anticipate. So, I get the feeling--and tell me if I'm wrong--that Khrushchev thought he was using Solzhenitsyn to advance his own political aspirations in putting down Stalin; but eventually he just lost control of that.

Stephen Kotkin: You're right, Russ. Solzhenitsyn was somebody who served in the Soviet Army in World War II. He was part of that invasion force that swept into Poland, and then Prussia, on its way to Berlin. In the midst of that, he was arrested for some indiscreet comments about Stalin, which normally would be considered harmless but in such a regime as the Stalin regime were considered a political crime. And so he was sentenced. Sent to the Gulag--the labor camps. By the way: We should acknowledge that it was Solzhenitsyn who made that word 'Gulag' widespread in multiple languages, including English. Of course, he was released eventually. And Khrushchev, like you said, did see him as an instrument in this de-Stalinization. Khrushchev was denouncing Stalin's crimes and excesses. Not denouncing, for example, collectivization of agriculture, where millions of peasants died and survivors were enslaved. He was not denouncing the state-owned and so-called state-led planned economy. He was not denouncing the Communist Party's monopoly on power and the censorship on the public sphere[?]. He was denouncing that, as Khrushchev was denouncing, Stalin's arrests and execution, executions of loyal Communist cadre. And so, it was a kind of: Keep the system but get rid of the excesses. And for that, the denunciation of the Camps that one could see in Solzhenitsyn's novels looked like an important instrument that Khrushchev produced. So, in fact, One Day in the Life of Ivan Denisovich was approved by Khrushchev for publication in the Soviet Union. And it's a story about one of the Labor Camps, loosely based on Solzhenitsyn's first-hand experience. However, Solzhenitsyn, soon enough, as you alluded to, ran afoul of the authorities. Because, Solzhenitsyn was something that the regime didn't count on. First of all, he was very determined and resolved. He was resolute. Unlike a lot of intellectual class, who wanted, let's say, favors, apartments, awards, a better life, recognition, a mass audience. Solzhenitsyn wasn't against those aspects of a literary life. But he was after much more. He was after the truth. He was writing not because he needed to become famous, but because he believed in a different moral universe, opposed to the Soviet regime. Solzhenitsyn was a Russian Nationalist. And the Soviet regime was supposed to be above nationalism, and incorporating a so-called brotherhood of peoples. Solzhenitsyn was a conservative. Not on the left. He hated Marxism, Leninism, and revolution. Solzhenitsyn was also a Christian. And the Soviet regime was, of course, officially atheist and attempted to suppress Christianity and destroyed thousands of churches, also attacking mosques, synagogues. So, Solzhenitsyn came from a different moral universe with a different set of beliefs. And, he was not as susceptible to the blandishments that many people in the intelligentsia, who complained about the regime, that many people were susceptible to. So he was very difficult to handle for the Soviet regime. Moreover, we now have the Secret Documents--KGB [Komitet Gosudarstvennoy Bezopasnosti, Soviet Union state security agency] documents and Politburo documents about Solzhenitsyn, which were published a number of years ago as the Solzhenitsyn files--which show, exactly as you suggested that the regime did know how to handle him. You see, for example, Dmitry Ustinov, who was Leonid Brezhnev's Minister of Defense. Brezhnev was the head of the Soviet Union following Khrushchev for 18 years, during the, from the mid-1960s through the early 1980s. His Ministry of Defense--Dmitry Ustinov, at a Politburo meeting, said that, 'If we try to organize a denunciation of Solzhenitsyn in our organizations--meaning in all the Party Cells across the country--it might not turn out the way we hope. Or the way we want.' In other words, they were afraid that Solzhenitsyn and his belief system and his written works could spark not a pro-Soviet consolidation, but in fact critiques of the Soviet Union from a Russian nationalist and a Christian conservative point of view. And so, yeah: He was trouble for them. Trouble in a big way. They had a lot of issues. Don't get me wrong. Solzhenitsyn wasn't the only one. They had economic issues, Russ. Which of course you understand well. They had Eastern Europe, which was in revolt. Soviet satellites of Eastern Europe which were supposed to be a security belt that they acquired in World War II. But instead had become a source of vulnerability. Like, in Hungary in 1956 and Czechoslovakia in 1968--the so-called Prague Spring. They had multiple vulnerabilities. But somebody like Solzhenitsyn, they had no answer for. And he was only a single individual. And yet they feared him and didn't know what to do. Finally, they bundled him onto a plane and deported him, to the West, where he lived the next 20 years of his life. Beginning in the early 1970s. And so, this life in the West, however--which is also an important subject--we must remember that Solzhenitsyn wrote in Russian, for the audience back home. He not only wrote open letters to the Soviet leadership: All his novels, all his political tracts and interviews and speeches--they were directed at his homeland. He was trying to effect change at home, even when he lived those 20 years in exile in the West.

22:33

Russ Roberts: Do you think--do you find it surprising that they didn't kill him? Obviously--Stalin would have killed him if he'd known what he would become. He killed people for far less than that. Do you find it--do we know anything about those internal debates, about whether that was talked about, considered?

Stephen Kotkin: The regime changed. When Stalin died in 1953, it was still the same regime, obviously. And it was still the same people in power. Just Stalin was gone. But the ability to enact mass violence on their own people had diminished. It had diminished in part because of external changes in the world, but also because of internal changes. Yes, they could still execute some people. Yes, they could still organize, for example, accidents, fake car accidents to get rid of people. But, they didn't have the same wherewithal, either ideologically or even their own determination to just wipe people out. And so what they began to do instead was a combination of internal exile, which had always been practiced but now was practiced more in lieu of executions, and what was called prophylaxis, which was to try to preempt people like Solzhenitsyn by either intimidating them or seducing them with offers of goodies. So that change in tactics by the KGB marks a change in Soviet society from uneducated, third- or fourth-grade education on average to completion of high school education, completion of college education, and plus, as we said, external changes in the world. So, there was no longer Nazism in Germany and Fascism in Italy and Hirohito's regime in Japan. And so the ability to just kill people in large numbers because they were dissidents, they disagreed with you, they criticized you was sort of lost by the regime. And so, they did to Solzhenitsyn what they did to many other people--Bukovsky, Vladimir Bukovsky, for example; Andrei Sakharov, for example--they tried to banish them internally and cut them off from the public. It worked, in many cases. It didn't work in the case of Bukovsky. It didn't work in the case of Sakharov. And obviously it didn't work in the case of Solzhenitsyn. But they were exceptions. Many other people were broken--as we would be, probably, in such circumstances. They made their peace with the regime; or, they simply were trying to survive. They had families; they had livelihoods. Not everyone could be Solzhenitsyn, Sakharov, or Bukovsky. And so the regime's new policy of internal deportation, silencing and/or prophylaxis/pre-emption worked, to a very great degree against the dissident movement. It just didn't work against somebody like Solzhenitsyn.

26:04

Russ Roberts: So, you get the idea, certainly from reading In the First Circle--and I would say it just screams out from the man--that, first of all, there's the moral courage that you alluded to earlier. But there's also another advantage he had, I think, in standing up to the regime's threats and blandishments, which was: He appeared to believe very deeply in the redemptive nature of suffering. And I'm curious if in his youth or his upbringing or his personal experiences before he entered the camps--other than the fact that I know he was a big fan of Dostoevsky, who also I think believed in the redemptive power of suffering--I'm curious if we have any hints as to what made him so distinctive, so strong, so powerful in not being broken.

Stephen Kotkin: There's a determination there which has to be attributed in part to personality. This goes back to your earlier question, Russ, about: had there been no Solzhenitsyn, maybe things would have turned out the same. Maybe somebody else would have stepped up and played this role in history, as, for example, 'History selects people for certain roles; and this was a role that needed to be played, and if it hadn't been for Solzhenitsyn, someone else would have been found.' Well, I have to say that, writing about Stalin, I don't believe that. Stalin's personality was absolutely crucial. It took a person like Stalin to impose this system and stabilize it the way he did, at those colossal human costs. And I see very few, if any, people besides Stalin inside that regime--as horrible as those other people were, as low a view they took on human life as they did--I see very few other people with that same combination of resolve and skill that brought to that immense task of building Socialism--as he called it--that is to say, imposing that system. Solzhenitsyn, in the opposite direction, is a similar, unique personality: that combination of moral values beyond corruption, as well as resolve and determination no matter how much he suffered. Solzhenitsyn discovered a lot of Russian philosophy and Russian authors--that is to say, literary figures--over the course of time. Partly it was in Soviet education to begin with. For example, figures like Tolstoy and Dostoevsky were brought back into the curriculum under Stalin. Partly it was looking, as he did, for unorthodox figures that were not part of the official Soviet schooling. Many of them he discovered only when he got out to the West and he could read the emigration[?] in full. For example, when he worked at the Hoover Institution Library and Archives. Or, he worked through other émigré publications that were sent to him or preserved in different locations besides the Hoover one. And so, he discovered reinforcement of views that he had developed, partly on his own through growing up in that country and just partly because he was looking for a value system beyond the Soviet one, even while he was still there. And so, his education in the broadest sense--his upbringing, his intellectual trajectory--is a really big story. And we have some pretty good biographies which try to trace this. But even so, some mystery remains about the person, about this combination as I'm calling it--right?--of moral force and just in general stubbornness or political resolve as well as moral resolve. This is what's special about him, Russ. And so, we have to acknowledge that he's not alone. Other people shared this, including some who are not famous--who died in the camps alongside him. Or who survived the camps, but as invalids. Or who were not great writers and so couldn't transmit their stories the same way that he could. We all want to make him seem to be one person among 300 million. But, nonetheless, he speaks for those others who were less eloquent and even those courageous others, he stands out against that background.

31:02

Russ Roberts: In the novel In the First Circle, which we've talked about here in those episodes I mentioned earlier, I think there are four chapters that relate to Stalin. And, it's quite lengthy. Some editors would have cut them. They don't add a lot to the plot, directly. They are sort of a--they could be interpreted--I don't think this is correct, but they could easily be interpreted as an indulgence on the part of Solzhenitsyn to get it off his chest, to satirize and poke fun at Stalin. His portrait of Stalin is, I would say, Stalin as egotistical buffoon. As a petty child. As an insecure enfant terrible. And I was also struck watching the movie that came out recently, The Death of Stalin, which I watched with some unease, I have to say. I didn't find it funny. It's supposed to be a comedy. Sort of a comedy. It's the darkest kind of humor--that paints Beria and Khrushchev and the survivors of Stalin himself, as well, as sort of comic book Keystone Cops--inept, blundering this way and that. And--what are your thoughts on, first, Solzhenitsyn's portrait of Stalin? And on the movie, if you have any thoughts on it?

Stephen Kotkin: It's tough. What do you do with a guy like Stalin, when the evil is so immense? Scale is just unfathomable. And you yourself suffered directly under him. Solzhenitsyn's portrait of Stalin is not really successful, except as an exercise in kind of psychological revenge. He diminishes Stalin. As you said. He makes Stalin out to be a nothing, a nobody. And, in some ways, it was Solzhenitsyn's criticism or joking about Stalin that put him in the Gulag in the first place. That launched all of what happened, including Solzhenitsyn's successful blackening of that regime at its roots. And so, in some ways In the First Circle returns to that 1945 episode. However, it isn't integral to the novel and it isn't a successful portrait, however understandable it is psychologically. Sometimes we forget that evil is also human. That Stalin was a human being. That Hitler was a human being. And that, the more we understand them as humans, the scarier their evil becomes. It doesn't mean we justify them. It doesn't mean we validate them, we make excuses for them. But it does enable us to reach a level of understanding. Solzhenitsyn was not interested, at all, in moral or political or biographical terms, of reaching an understanding of Stalin's character. He was just interested in countering Soviet propaganda and belittling this figure who had been inflated the way he had been. If you take Iannucci's movie, The Death of Stalin--Iannucci is a great film director, and many people find the film entertaining. And, of course, it is very clever. And there are moments that I found funny--not the whole movie, but many moments, which were, I thought, hilarious. At the same time--and also, I'm not afraid to engage in satire when it comes to something even as monstrous as the Stalin regime. Brooks [Mel Brooks] did it for the Hitler regime. Charlie Chaplain did it for Hitler. When it's done well, it can be very effective. However, one of the problems with Iannucci is that just like Solzhenitsyn's portrait of Stalin in In the First Circle: Now once again, it can make you feel good. But, to portray that regimes operatives--those around Stalin when he died--Beria, Malenkov, Molotov, Khrushchev, Kaganovich--to portray them as idiots, as venal, corrupt politicians like we would find, I don't know, in the urban political machine of any major city--right--graft and bribes and favors--to portray them as corrupt and venal in that way, and then as not very intelligent, is to miss, of course, how that system could have arisen in the first place. And how it could have functioned. If everyone was so stupid, and if everyone was merely corrupt, the Soviet regime never would have happened. The people who ran the Soviet regime were not geniuses. But they weren't buffoons. They were blinkered ideologically, but they were effective administrators in a dictatorial regime. In a dictatorial way. And so, the film, for me, falls short as a portrait of the reality there. I do recognize it, once again, as an entertainment. And it may be harsh to judge it in historical terms, rather than as a piece of entertainment. However, as a piece of entertainment, it falls short for me--precisely because, you can do satire well, of a regime that big; but it's a little one-dimensional, ultimately. Iannucci when he does this about a Democratic or Western political system--the U.S. system, the British system--it works much better. The stakes are lower because the political system doesn't matter as much. And also because they don't have that monstrosity, that evil, on a mass scale that these officials perpetrated. So, I wish Solzhenitsyn had done better with his Stalin; but I acknowledge that he probably derived some pleasure from being able to ridicule Stalin in print.

Russ Roberts: Yeah; I would make a distinction between the two in the following way--between Solzhenitsyn's portrait of Stalin and the movie portrait in The Death of Stalin movie. And I don't know if this is accurate or not. But in the movie--I will not, there will be no spoilers here--but the opening scene, I found quite powerful and creepy. It's a concert scene. It did capture some of the--it tried to be humorous about it, but it did capture some of the other abject fear that people had of being on the wrong side of Stalin. And, it tried to be--it didn't work for me--aesthetically, but it tried to temper the buffoonery with periodic gunshots. People just being executed in the background of the film. Which is an interesting way to try to deal with what we are talking about. But, the reason I found Solzhenitsyn more affecting, and more effective, is that, while he did belittle the man, we had the rest of the book. And, the rest of the book is about the utter horror and human debasement that Stalin was perpetrating on his fellow citizens. And so, I thought that contrast was quite powerful. And I found it quite--I think it went it went along too long. But I didn't find--it wasn't just a psychological exercise, you know, a catharsis, in my view--

Stephen Kotkin: Hmmm--

Russ Roberts: But that's neither here nor there. Let's move--but I just wanted to get that in.

Stephen Kotkin: Hmmm--

39:26

Russ Roberts: Tell me: Why do you think there's a renewal of interest in Solzhenitsyn? As you point out, historically he's incredibly important. But at the same time, as you point out, the Soviet Union has been gone for over a quarter of a century. The historical lessons seem to be no longer relevant--I disagree, but many would argue that there's no threat of labor camps. As you say, there wasn't even the threat of mass imprisonment or execution after the death of Stalin--

Stephen Kotkin: Hmmm--

Russ Roberts: On the surface you could argue Solzhenitsyn's just an historical curiosity, and important figure, he struggled and shows the courage of one man. Yet, I think it's more than that. What are your thoughts?

Stephen Kotkin: Yeah--Solzhenitsyn's going to stay relevant, Russ. And the reason he's going to stay relevant is because it's not just the system that's gone. Not just the horrors that he described, which are now, hopefully, dead and buried the way Stalin is dead and buried, but because he tapped into something larger. He tapped into this, how to organize our politics when countries have different cultures. One of the things we've discovered about globalization and about integrating the world economically, is that countries still have their cultures and their identities; and that these matter. And that people often welcome economic integration, but not necessarily at the expense either of their own wellbeing economically or of what they value in cultural terms--in identity terms.

Russ Roberts: Yep.

Stephen Kotkin: And so, Solzhenitsyn was ahead of the curve in speaking to those issues. He was arguing, many years before the Soviet regime fell, that the West could not universalize itself. That the institutions which made the West what it is, and from which Solzhenitsyn benefited tremendously--living in freedom, owning private property, publishing without censorship. He understood those values. He appreciated those values. But he didn't think every country's history, tradition, and culture was amenable. Right? That combination, that package, was amenable to the same institutions. That, countries had national traditions, national institutions, which had to be taken into account. And so, the post-Soviet for him, which was, as I said, he was thinking about well before the Soviet regime collapsed in 1991, was a matter not of Westernization per se. He wanted some measure of local rule. Local self-rule. Democracy at the local level. But he wanted to marry that with a strong, centralized power in Russia. Because he felt that that was part of the Russian tradition. He wanted a spiritual renewal in Russia. He wanted a country based on morality, not solely a predominantly based on the law. He wanted many things, which people in the West did not understand, and was one of the reasons behind his difficult reception, having been hailed as this great, courageous dissident who helped blacken the Soviet regime. He was then seen as a bizarre, 19th century reactionary figure who criticized the West in its values and institutions, and didn't understand the West. But, in fact, the kind of Liberal condescension--the attempt to impose a single world view or a single political system across the globe, which we've seen backfire in our lifetimes. That was something Solzhenitsyn worried about and he presaged. And so, he became a figure who fit in well with the post-1991--post 1990s, in fact--mood in Russia. And his works are assigned in high school in Russia today, by the official federal curriculum in Russia. And, in addition, he can be read in the West the same way that we read Holocaust literature. We of course hope that something like that never happens again, what happened to Jews under Nazi rule. But yet, we still read the Holocaust literature and it still speaks to us, because it's about who we are and what we value and the kinds of moral choices in difficult moments under authoritarian or totalitarian regimes. Solzhenitsyn speaks to that in the West, even as he speaks to a Russian version of modernity, a Russian version of national traditions, inside that country, too. Not everybody is going to share Solzhenitsyn's views inside Russia today. And we wouldn't expect that. Nor am I suggesting we accept them all uncritically. I'm merely suggesting that it's an important part of the conversation. And he's a major figure, even 10 years dead now, on the 100th anniversary of his birth. And he's a major figure for us. We don't live in Russia. We have different traditions here. But he's a major figure for us because we're struggling with this globalization, cultural divide, cultural identity, attempt to understand people who are left out, left behind, have a different point of view; get rid of the condescension toward them. Why was Brexit important? What did the Trump Presidency--his election and the electoral college--what did it reveal? It revealed that a large part of the country was unheard. That their voices weren't being heard. That's what Trump revealed. And that's what Brexit revealed. And that's, to an extent, what Solzhenitsyn foretold. Once again: We're not necessarily solving those issues that were revealed. The politics may be fake. But what I'm suggesting is the sentiments are real. And those sentiments are a worthy debate for us to have. And Solzhenitsyn fits into that debate here in the United States, just as he fits in in Russia.

46:18

Russ Roberts: I encourage listeners to go back to the, if you haven't heard it, the episode we did with Yoram Hazony and his book, The Virtue of Nationalism, which, you know, is kind of shocking. You kind of--it's easy as a Westerner, certainly as an American, to think that the trample[?], march of democracy and capitalism is going to sweep the world. And there are some signs that that is a long-term trend. But now there are some signs that maybe not so much. And, as you point out, Solzhenitsyn took a lot of criticism in the 1980s for being a reactionary. For being a Christian. For being a nationalist, in particular, which is what we are really talking about--this tension between nationalism and universalism, whether you call it globalization or universalism.

Stephen Kotkin: Hmmm.

Russ Roberts: And he's also been accused--I'm curious: Do you think he was an anti-Semite? I've heard that claim.

Stephen Kotkin: No. He was not. That's a really spurious charge. Solzhenitsyn believed that religion was the primary determinant of a civilization. Why did he think that Russia had a separate identity? Because of Eastern Orthodox Christianity. He wrote a book about the Jews in Russia called 200 Years Together. And it was about how Jews and Russians were different civilizations, once again because of religion. Now, we can argue that he's wrong: that religion is not the primary determinant of a civilization. I'm not suggesting that we accept that argument. I'm only suggesting that that was the argument he made; and that was the reason he differentiated between Russians and Jews, even though they had lived 200 years together because Russians joined--uh, Jews joined the Empire, after or as a result of the partitions of Poland. When Poland was swallowed up at the end of the 18th century, that's when Russia--the Russian Empire, the Czarist Empire--acquired a large Jewish population. Which it did not have before the late 18th century. And so, the idea that they are separate civilizations because of religion does not constitute anti-Semitism.

Russ Roberts: Well, I agree with you, but, you know, when I say we are going to do a Book Club on In the First Circle some of my readers on Twitter, and listeners, knowing I'm Jewish, said, 'How can you do this? He's an anti-Semite.' My view is: I don't particularly think he is an anti-Semite. I'm glad to hear you agree. But I still could enjoy In the First Circle, just like I could enjoy The Brothers Karamazov as a magnificent book. I don't think Dostoevsky was so friendly to Jews. But that's not really the--I still can learn a lot from him. It's okay.

49:05

Russ Roberts: Let's turn toward--let's close with talking about Stalin, a little bit. It's my impression that his reputation on the streets of Moscow and elsewhere in Russia is on the rise. That's what we hear in the media. Is that true? Is he having something of a comeback, reputationally?

Stephen Kotkin: Stalin will always be a major figure with positive, high positive, as well as negative views in Russia. The reason is pretty simple, Russ. He won the war. Stalin was in power during World War II, the greatest war in recorded history, against that Hitler regime; and he was on the winning side. You can argue that they won despite Stalin, not because of Stalin. You can argue that he contributed nearly to defeat, and that if it hadn't have been for Stalin maybe they wouldn't have had to fight the war in the first place, or certainly they wouldn't have suffered that level of casualties. You can make all sorts of arguments and qualifications about Stalin's role in that war. But you cannot take away the coincidence, the fact that he was in power during the war. And so therefore, being on the winning side of the greatest war in history will always make Stalin a figure to be at least partially admired in that culture. In addition, he's seen as someone who stood up to the West, who created a nuclear arms super power, who helped divide the world with Churchill and Roosevelt, and then with other leaders who succeeded Churchill, and Roosevelt in the United States. However, the same people who have this partial or more than partial admiration for Stalin, many of them know the crimes he committed, the monstrosity of his rule; and they still, nonetheless have these feelings of admiration for him. We shouldn't assume that it's because they are ignorant--that they don't know the truth, that if we could just tell them how many people perished in the famines, that they would back off of their positive views about Stalin. Stalin was, for better or for worse, a very major historical figure, perhaps the greatest historical figure in historical terms--not in moral terms--in that culture. And so it's impossible to do away with him. In fact, after Stalin died in 1953, he was still the most significant personality in that culture. And part of Khrushchev's failure upon attempting to succeed Stalin as the ruler of the Soviet Union, was that he couldn't. He couldn't fill Stalin's shoes. He couldn't be Stalin. Now, Khrushchev and Stalin were patron and client. Right? They were teacher and disciple. And so, we shouldn't expect that Khrushchev would be on that same level. But that's kind of the same point I'm making: Stalin was on a very--Stalin was on a level different from most politicians. For better or for worse. Now, there are many people who detest Stalin alive in Russia today. There are many people who cannot stand the name, who, when they see someone wearing a Stalin shirt or see Stalin memorabilia, it's revolting to them. Their stomach turns. I'm not suggesting that the whole culture there is enamored of Stalin. But I'm also not surprised that a significant plurality still find some reasons to admire him through all that bloodshed.

Russ Roberts: Now, you are writing a biography of Stalin that you've issued--you've published the first two volumes. Is that correct--two, to date?

Stephen Kotkin: Yes.

Russ Roberts: And they come to 2000 pages, although I'm sure that includes a lot of footnotes and references. Is there one more volume planned? Or, more than one? And, what's it like to spend that much time and that many pages with a person you view as a monster?

Stephen Kotkin: Yeah. I do have one more volume scheduled which I'm working on now, which covers the period of World War II, the Cold War, Stalin's death, and the aftermath. And I'm hoping that in the next several years I can bring that volume to conclusion, and therefore the whole series to conclusion. I've spent now, as you say, a lot of time with Stalin. And it is very troubling. You see the evil on the pages, on those documents you read with his pencil marks, his checkmarks in pencil, his underlinings. You see the orders to kill this person and that person. Deport this whole nation. It's hard to describe in words that experience. And, as you say, over a number of years it's cumulative. At the same time, Russ, if you are interested in power--interested in how power works, how it's accumulated, how it's exercised, and what the consequences of exercising power are--Stalin really is the gold standard. He's the gold standard of dictatorship. No dictator has amassed more power than Stalin, exercised it with greater consequence. Mao didn't have a military industrial complex. And, of course, the Hitler regime went up in flames after only 12--horrible, yes, but only 12 years, while Stalin lasted 3 decades. So, if you are interested in power, it's endlessly fascinating. But of course it is difficult on a day-to-day basis to continue to--I now am inside of his head in ways that I wasn't before I started this project. I understand him, his way of thinking. I see why he made decisions he made. And I see the consequences of those decisions in the lives of people. And it hurts to see that. And it hurts to understand that he didn't have to make those decisions. He could have been more magnanimous. He didn't have to kill the people he killed. His regime would have survived. It wasn't under threat. And so, my job, in a way, was to convey--from the inside, from the original documents, from a sense of deep empathy, not sympathy but deep empathy or understanding as we historians call it, empathy, of how that regime worked and why it happened the way it did. But, no: We're not writing this biography because we have an exemplary figure. We're not teaching courage, valor, perspicacity, magnanimity. We're not teaching those values for which biography was originally invented. We're teaching the opposite of those things with this biography. But, those are important lessons, too.

58:39

Russ Roberts: So, let's close with how you close your essay on Solzhenitsyn. You mention that many people complained about his personality, about Solzhenitsyn, the man. He was bitter, immature, arrogant, etc. And my reaction to that is: He was in the camps. He's entitled to all the bitterness and all the arrogance. You've got to cut him some slack. And, he wasn't just a prisoner who was good at writing. It wasn't that, 'Wasn't that lovely that he was able to use his prison experience to craft some novels and unique historical documentation in the Gulag.' He was a genius. He had an incredible vision. He pumped out an unimaginable number of words, under circumstances that human beings should not have to be in to start with. And they are unbelievably entertaining--like you said, he wrote a history of the Gulag that's a page-turner.

Stephen Kotkin: Hmmm.

Russ Roberts: So, I don't really care if he's even vaguely normal. I expect him to be a troubled and complicated person. What are your thoughts on that, and that sort of way of dismissing him, it seems to me?

Stephen Kotkin: The essay I wrote for the TLS [Times Literary Supplement,], to which you are referring which was published this week--um, my goal in that was, first of all, to make sure people understood that he was a great writer and that he will endure because he was a great writer. Not just because he had a political point of view or was a political figure or was caught up in battling the Soviet regime. He's a great writer. And that's very important to acknowledge. The second thing is that, our heroes, Russ, they are also complex people. And the complexities are fine. And we shouldn't be afraid of the complexities. And, as you say, they don't diminish the achievements. Just like I do with our anti-heroes--with Stalin--show the complexity. Show the multiple dimensions. Show that he had charm. Show that people loved him because he was a people-person and focused on their lives even as he was ordering the executions of others. That complexity is really important. And, for Solzhenitsyn, on the other side--a hero, not an anti-hero. We also owe him. We owe him the respect of showing him in his full complexity. And I think his achievement only grows when we do that.

(7 COMMENTS)

EconTalk January 7, 2019

Ed Dolan on Employer-Sponsored Health Insurance

health-insurance.jpg 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:

This week's focus:

Additional ideas and people mentioned in this podcast episode:

A few more readings and background resources:

A few more EconTalk podcast episodes:

Time Podcast Episode Highlights


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.

(33 COMMENTS)

EconTalk December 31, 2018

Sebastian Junger on Tribe

Tribe-1.jpg 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:

This week's focus:

Additional ideas and people mentioned in this podcast episode:

A few more readings and background resources:

A few more EconTalk podcast episodes:

Time Podcast Episode Highlights


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.

(35 COMMENTS)

EconTalk December 24, 2018

Mariana Mazzucato on the Value of Everything

Value-of-Everything-198x300.jpg 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:

This week's focus:

Additional ideas and people mentioned in this podcast episode:

A few more readings and background resources:

A few more EconTalk podcast episodes:

| 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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(59 COMMENTS)

EconTalk December 17, 2018

John Horgan on Mind-Body Problems

Mind-Body-Problems-259x300.jpg 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:

This week's focus:

Additional ideas and people mentioned in this podcast episode:

A few more readings and background resources:

A few more EconTalk podcast episodes:

| 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.

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(23 COMMENTS)

Here are the 10 latest posts from CEE.

CEE November 30, 2018

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.


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.


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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CEE September 18, 2018

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.


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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CEE June 28, 2018

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.


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.

 


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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CEE February 4, 2018

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.


About the Author

Michael Munger is the Director of the PPE Program at Duke University.


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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CEE February 4, 2018

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.”


Figure 1


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:

The Reconstruction Finance Corporation to lend tax dollars to banks, firms and others institutions in need.

A Home Loan Bank to provide government help to the construction sector.

Congressional legalization of Hoover’s executive order that had blocked immigration.

Direct loans to state governments for spending on relief for the unemployed.

More aid to Federal Land Banks.

Creating a Public Works Administration that would both better coordinate Federal public works and expand them.

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.


About the Author

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University


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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CEE February 4, 2018

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.


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.


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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CEE February 4, 2018

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.


About the Author

Rob Norton is an author and consultant and was previously the economics editor of Fortune magazine.


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.


Footnotes

Online at: http://www.econlib.org/library/Bastiat/basEss1.html.

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CEE February 4, 2018

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.


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.


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.


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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CEE February 4, 2018

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.


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.


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


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



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

!----

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.


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.


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.


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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CEE February 4, 2018

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.


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.


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.


Footnotes

Finis Welch, “In Defense of Inequality,” American Economic Review 89, no. 2 (1999): 1–17.

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Here are the 10 latest posts from Econlib.

Econlib February 4, 2019

DNA Determinism

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"DNA is the only thing that makes a substantial difference, accounting for 50 per cent of the variance in psychological traits. The rest comes down to chance environmental experiences that do not have long-term effects."—Robert Plomin, Blueprint: How DNA Makes Us Who We Are

After decades of studying the heritability of psychological traits, Robert Plomin argues that analysis of DNA can help predict individual characteristics. By the same token, interventions in our environment, including parenting styles and variations in education, have little or no long-term effect.

Plomin’s ideas have the potential to disturb many standard political views. For example, conservatives argue that poverty can be cured by encouraging people to finish high school and get married before having children. Progressives argue that poverty can be alleviated by spending more on education. But if Plomin is correct, then attempts to use environmental interventions to influence behavior or ability are equally unlikely to prove successful.

Econlib February 4, 2019

Economists Know: Ask What Changed

changce

When you try to understand change, whether in economics or in the rest of life, one good rule is to ask what other factor or factors changed. To explain a change in one variable, we have to point to another variable that changed, not to one that stayed the same.1

Asking what changed can lead us to reject some explanations and embrace others. Consider three examples: the recent California fires; cable television’s sudden decision to drop C-SPAN in the early 1990s; and the dramatic increase in heroin-related deaths.

California Fires

In 2017 and 2018, Californians experienced devastating forest fires. The 2018 Camp Fire alone—officially the most destructive in the state’s history—burned 240 square miles, destroyed 18,804 buildings, and killed 86 people in and around Paradise, California.

What caused these fires to be so extreme? Let’s look for what changed.

Econlib February 4, 2019

Can Capitalism Survive? Ben Rogge on Capitalism’s Future

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How can someone publish a book asking if capitalism can survive, offer no hope that it can, and still become widely applauded as a strong advocate of capitalism? The most obvious way is to be a world-class economist named Joseph Alois Schumpeter. The next notable way is to be Benjamin Rogge (1920-1980), not a world-class economist, but a very good economist and a world-class communicator.1 In a landmark book, Schumpeter (1975 [1942]) introduced the term “creative destruction” by way of improving economists’ appreciation of entrepreneurs and their understanding of the dynamism of markets.2 In Part II of this book Schumpeter considers the question: Can capitalism survive? And concludes “No, I do not think it can.” (page 61) Ben Rogge was strongly influenced by Schumpeter and used Schumpeter’s provocative question as the title of his own book.3 Rogge’s book consists of a selection of his publications and speeches covering a wide range of economic issues, including Schumpeter’s question in his opening chapter.

Unlike the authors discussed in previous Liberty Classics, Rogge’s work did not break new theoretical ground or provide the basis for new and related research agendas. His contribution was communicating to non-specialists the scholarly work of others in interesting and accessible ways, which is what good teachers do. Few economists perform this function effectively enough, however, to become, solely on the basis of that performance, highly regarded by many of the most prestigious economic scholars of their day. Ben Rogge did. He knew that sharing with the general public existing economic knowledge, much of it going back to Adam Smith, is a more productive activity for most economists than trying to impress other economists with esoteric analysis to develop “new” economic knowledge.4

Many people have heard the term “creative destruction” and a few will know it was coined by Schumpeter to explain the productivity created by profit-seeking entrepreneurs and businessmen. But unless they are professional economists it is doubtful they will ever read Capitalism, Socialism and Democracy or know that Schumpeter thought businessmen were more likely to compromise with bureaucrats and politicians in support of anti-capitalist policies than to resist such policies.5 Indeed, it is unlikely that many economics professors today have read Schumpeter, and even less likely that their students will be exposed to his contributions or to those of other giants in the history of economic thought. Thank goodness there are still important exceptions to this statement!

More troubling is that few academics in the social sciences and humanities today are willing to defend capitalism, and too many of them are hostile to it. Rogge quotes Schumpeter suggesting one reason an academic is likely to be antagonistic to capitalism arises “from the fact that his main chance of asserting himself lies in his actual or potential nuisance value.” (page 28) This is not as flippant as some might think, given the spitefulness of many academics. This spite is likely the result of the aggravation of academics to the “widening gap between their own incomes and those of the businessmen,” (page 29) which they seem to believe is the result of the inherent fraud and unfairness of capitalism.6

Why is this opposition of any consequence given Rogge’s discussion of Schumpeter’s resounding ‘yes’ to the question of whether capitalism can survive? Hasn’t capitalism been successful at “producing over time continued improvement in the economic wellbeing of the masses?” That answer is illustrated with Schumpeter’s observation, quoted in Rogge that, “Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist of providing more silk stockings for queens but in bringing them in reach of factory girls in return for steadily decreasing amounts of effort.” (page 17)

If indeed the masses benefit so much from capitalism, the casual reader of Rogge’s book might conclude that the political influence of those masses in favor of capitalism would cancel out the antagonism of the relatively few businessmen, academics, and bureaucrats. If they keep reading, however, Rogge explains that “the masses of the people [lack] any real understanding of the system that has heaped riches upon them or any instinct to defend from attack the central figure in that system, the businessman.”7 Rogge also believed that the biggest problem in making the case for capitalism is not convincing the masses of the “efficiency of the free-market system in promoting economic growth, in raising levels of living… but rather [convincing them of] its consistency with certain fundamental moral principles of life itself.” (page 40; emphasis in original)

Further, as Rogge also points out, “the profit-directed activities of the businessman are [considered] antisocial” and probably immoral, by many. Yet, a complete case for capitalism cannot be made without explaining the importance of businessmen maximizing their profits within the law. So, as important as Rogge thought making a moral case for markets and business is, he spent little time attempting to do so. He does make a humorous, but modest, effort, however, with this statement (page154):

  • I make no claims for the superior moral fiber of the businessman, but I will say this: A basically dishonest man can survive longer in the church or the classroom than he can in the grain exchange or the furniture business. The penalty system in the business world operates with some real precision and certainty, largely unencumbered by a mystique of occupational sanctification.

Making the case for capitalism on the ability of markets to promote economic growth and increased living standards may not be as important as making the moral case, but it is easier for economists to do, which is what Rogge did in his chapters on profits and labor markets.

“As Rogge puts it, ‘capitalism created the organization man—and the organization man is indifferent to capitalism.'”

But I want to return to the hostility to capitalism we can expect from businessmen and academics, respectively. Rogge tells us he takes no pleasure in reporting “that the course of events is lending ever greater credibility to the Schumpeter thesis.” (page 31) Following Schumpeter, Rogge argued that as firms became larger in response to efficiencies of scale, the importance of individual entrepreneurs is diminished relative to that of teams. Entrepreneurs become less heroic and more obscure figures, widely thought of, when thought of at all, as more interested in profits than people. Rogge asks, “when did you last see a businessman treated sympathetically in a novel or a play? Whose name is better known to the American people: Ralph Nader or the president of General Motors or General Electric?” (page 32) As Rogge puts it, “capitalism created the organization man—and the organization man is indifferent to capitalism.” (page 27) As government regulations and subsidies increase, the profitability (and possibly the survival) of large corporations becomes less dependent on satisfying the preferences of consumers and more on capturing the government benefits that undermine capitalism.

Regarding academics (or intellectuals8), Rogge asks:

  • Do we, or do we not have a surplus9 of intellectuals? Are they or are they not, by and large, critical of the American businessman and of the system of which he is a part? Do they or do they not ‘nurse left wing and scowling minorities, sponsor doubtful or submarginal cases’ (such as the lettuce boycott)? Do not these critics of capitalism control the world of the academy? (pages 31-32)

To ask these questions was to answer them. Many of the problems Rogge saw with higher education were caused, or at least aggravated, by “below-cost pricing”. Briefly stated, he argued that increased reliance on tuition, along with private-sector loans, to finance colleges and universities would better ration admission to those most capable of benefiting from higher education and motivate them to take advantage of their capability once admitted. Related, by tying professors’ incomes closer to students’ fees, Rogge asserted their incentive to take their teaching seriously would increase, and they would spend less class time expounding ideological views unrelated to the subject matter being taught.10

Economic productivity has clearly increased since Rogge died in 1980, with consumers of American businesses and students in higher education benefiting from some of the resulting changes in these institutions. Unfortunately, not all those changes have benefited consumers and students, and many of them have further reduced the prospects of free-market capitalism. The business climate has become increasingly less favorable to maintaining capitalism because of the threats and opportunities businessmen face from an increasingly intrusive government. A clear threat comes from a minefield of uncertainty resulting from a host of complex, inconsistent, and arbitrarily enforced regulations (federal, state and local) that do even more today to distort and undermine market decisions than when Rogge was writing. Admittedly, many regulations are sought by businesses, particularly large businesses, which serve to protect them against the competition of smaller businesses, which reduces “creative destruction” and therefore the dynamic efficiency of capitalism. Tax breaks, import restrictions, export subsidies, and certain environmental regulations are examples of political opportunities for businesses to profit from rent-seeking activities that destroy wealth instead of engaging in capitalistic activities that increase wealth.

But it would be changes in higher education that would really give Rogge the educator a nasty jolt if he returned to a university campus today. He would be encouraged and pleasantly surprised when he saw how much tuition had increased. He would be even more surprised, but hardly encouraged, when he found out how much government is subsidizing colleges and universities despite the higher tuitions. Rogge’s enthusiasm would lift when told that most universities, including the most prestigious, are emphasizing the importance of diversity and the basic humanity of people from all over the world in an effort to reduce prejudice and promote international peace. He would assume that such a curriculum included the study of markets and capitalism as the most effective way of achieving those noble objectives. As Rogge, in another collection of his articles, wrote:

  • The process of voluntary exchange tends to be “civilizing” in its social impact on the parties involved, including a greater awareness of each other’s basic humanity and a reduction in sheer uninformed prejudice. This civilizing influence, combined with economic interdependence created by trade, tends to reduce conflict between the parties involved and to make for more peaceful relationships, both within a country and between countries. (A Maverick’s Defense of Freedom, pages 373-374)

But again, he would be disappointed upon discovering that the dominant view of market capitalism by campus diversity advocates and many students is that it allows the powerful and privileged to maintain their underserved wealth and status by exploiting underprivileged minorities. Indeed, favorable statements about capitalism and the importance of bourgeois values are considered hate speech (or even acts of violence) by those dedicated to creating welcoming campus environments so underrepresented minorities will no longer have to live in fear on such threatening campuses as the University of Pennsylvania, Berkeley, UCLA, Yale, and many more.11

Rogge’s disappointment would be further deepened by finding out that recent polls show that more millennials, those born between 1982 and 2002, would prefer living in a socialist or communist country than in a capitalist one.12 But he might receive a slight lift when he visits an economics principles course and finds out that economists are not responsible for the poor understanding of economics by today’s students. This comfort is minimal though, since it is based on seeing that economics isn’t being taught any better than it was forty years ago when he wrote, “College Economics: Is it Subversive of Capitalism?” (page 130) At that time, Rogge answered no it wasn’t, because the level of teaching in the introductory course “is generally of such poor quality that the students are neither subverted nor enlightened—primarily they are bored.”

For more on Benjamin Rogge, see Reminiscences of Rogge, by David R. Henderson, EconLog, March 2014.

This represents a tremendous opportunity wasted during Rogge’s day, and still today. Over one million American college students take an introductory economics course each year, which is the best opportunity most will ever have to understand how market capitalism makes it possible for billions of strangers to help each other obtain two essential ingredients to human flourishing—prosperity and freedom—by engaging in a mutually beneficial process of productive cooperation.13 This doesn’t mean college students aren’t hearing some interesting lectures on economics and capitalism. They are just not hearing them in economics courses. As Rogge points out, the student receives “the true economic nonsense of the left in his courses in literature, history, political science, social psychology, sociology (one of the worst offenders), and philosophy.” (page 131)

From all accounts, Rogge was a cheerful man, willing to enter the arena of intellectual combat even when the prospects for victory were bleak. He continued making his case for capitalism with a smile on his face and lots of humor until the very end, even though he agreed with Schumpeter that making the case for capitalism was an uphill, and likely futile, fight. It should be no surprise that Rogge quoted Schumpeter’s famous statement that “[t]he report that a given ship is sinking is not defeatist. Only the spirit in which this report is received can be defeatist: The crew can sit down and drink. But it can also rush to the pumps.” There is still a lot of pumping to do.


References

Lee, Dwight R. (2016). “Teaching the first economics course as if it is the last,” Journal of Business and Management, Vol. 22, No. 2 (2016): 101-113. A Festschrift Volume on the Economics of Education in honor of James L. Doti and Lynne P. Doti.

Mac Donald, Heather (2018). The Diversity Delusion (New York: St. Martin’s Press).

Rogge, Benjamin A. (1979). Can Capitalism Survive. (Indianapolis: Liberty Fund, Inc.). Rogge, Benjamin A. (2010). A Maverick’s Defense of Freedom (ed.) Dwight R. Lee. (Indianapolis: Liberty Fund, Inc.).

Schumpeter, Joseph (1975 [1942]). Capitalism, Socialism and Democracy (New York: Harper Colophon).


Footnotes

[1] Obviously, people can be recognized as strong advocates of something while explaining that it is subject to grave threats. But when they are, they typically suggest steps than can be taken to moderate the threats, if not eliminate them entirely. Neither Schumpeter nor Rogge provide such hope. Schumpeter (pages 424-425) states “Marx was wrong in his diagnosis of the manner in which capitalist society would break down; he was not wrong in the prediction that it would break down eventually.” Rogge (1979, page 40) admits “I do not expect to see such an economy [a market economy with a minimum government] in my lifetime or in anyone’s lifetime in the infinity of years ahead of us.” He does offer very cautious hope for limited progress from education in his last chapter.

[2] Joseph Alois Schumpeter. Capitalism, Socialism, and Democracy. Harper & Brothers, 1942.

[3] Benjamin A. Rogge. Can Capitalism Survive? Liberty Fund, Inc., 1979. Available online at: https://www.econlib.org/library/LFBooks/Rogge/rggCCS.html.

[4] I understand that these two activities can complement each other, but for most economists they don’t.

[5] Businessmen frequently seek such policies as a way to restrict the entry of competitors into their industry. Rogge (1979, page 32) hints at this by paraphrasing, without elaboration, Adam Smith’s comment about never knowing much good done by a businessman who affected to trade for the public good.

[6] From Rogge (1979, page 29) paraphrasing Schumpeter.

[7] This is consistent with a public choice explanation, but Rogge doesn’t expand the explanation by considering the lack of motivation for an individual consumer to exert political influence to protect widely dispersed benefits.

[8] Rogge points out that he uses the term intellectuals as defined by Schumpeter, which is broader than academics. But I am using it to refer to academics.

[9] Meaning, as you would expect of an economist, more than can get the jobs they were trained for and want at prevailing wages. While not true for all academic majors, this is clearly true for many social science and humanity majors.

[10] See Rogge (1979, Part VIII, Chapter 1) on “Financing Higher Education in the United States.

[11] If this sounds too bizarre to be true, see Mac Donald (2018, Chapter 12).

[12] See Bradford Richardson, “Millennials would rather live in a socialist or communist nation than under capitalism: Poll,” The Washington Times: November 4, 2017.

[13] For a detailed discussion of this wasted opportunity see Lee (2016).


*Dwight R. Lee is the Emeritus Ramsey Chair of Private Enterprise in the University of Georgia’s economics department. He is a coauthor of Common Sense Economics: What Everyone Should Know about Wealth and Prosperity, 3rd edition (St. Martin’s Press, 2016), with James Gwartney, Richard Stroup, Tawni Ferrarini and Joseph Calhoun.

For more articles by Dwight R. Lee, see the Archive.


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Econlib February 4, 2019

Lord Robbins the Lion

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When Lord Lionel Robbins accepted to become the supervisor of my Ph.D. thesis I felt lucky, but did not know how lucky I was. I had been studying for a degree in Political Science at the London School of Economics. I wanted to go further and dig under politics to uncover the economic strands of the social fabric. When Karl Popper had suggested that I write on John Stuart Mill, I immediately agreed, for Mill was not only a political philosopher but also and fundamentally an economist. The School then saw I needed much help to tackle the economic side of my chosen topic. So, here I was, in some trepidation, in Robbins’s small room (Baron Robbins, of Clare Market in the City of Westminster, to give him his full title). At this our very first meeting my supervisor told me to start by reading Alfred Marshall‘s Principles and Joseph Schumpeter’s History of Economic Analysis, from beginning to end, a fortnight for each! Each took me a month and I only scratched the surface. I remember his remark when I expressed my despair at not having read all the books that were awaiting my study: “Pedro that is a feeling you will never get rid of in your life”.

This was characteristic of the great teacher that he was. He stretched you to the limit. He demanded analytical precision and at the same time broad historical perspective. Another trait was his exquisite but firm courtesy. When I produced a draft of my first chapter, which was on Mill’s methodology of the social sciences, he said: “Pedro, I found your paper very interesting. But why don’t you put it in an inaccessible cupboard?”

Econlib January 7, 2019

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, 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.

Econlib January 7, 2019

Vera Smith: The Contrarian View

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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.

Econlib January 7, 2019

Costs, Cancer, and Making Better Choices

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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.


*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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Econlib December 3, 2018

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.

Econlib December 3, 2018

A Century of Risk, Uncertainty, and Profit

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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?

Econlib December 3, 2018

Culture Matters

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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.


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.


*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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