Regulation watch, by Scott Sumner

One often hears about the Trump administration’s deregulation push. But how real is it? Is the number of regulations rising or falling?  One Mercatus Center study found that growth in federal regulations slowed during 2017:

As the saying goes, talk is cheap. What do the numbers—the numerous metrics of the stock and flow of regulation—tell us about the Trump administration’s first year of regulatory reform? For one, the growth of regulation has clearly slowed. During President Trump’s first year, federal regulations grew by about 0.65 percent, less than the growth rate of any other president’s first year in office since our data begin in 1970. This rate of growth is also less than one-third of the long-term annual growth rate for federal regulations, which, from 1970 to 2016, was about 2.1 percent.

Slower growth is a good thing, but it doesn’t represent “deregulation”.

There are many areas where regulation is still increasing:

Under new regulations the Treasury Department put in place Wednesday, foreign investments that result in a non-controlling equity stake in U.S. biotechs would be subject to review by the Committee on Foreign Investment into the United States, or CFIUS. The expanded rules also cover 26 other critical fields, including guided missile technology and nuclear electric power generation. . . .

Broadening CFIUS’ scope could have serious implications for early-stage U.S. biotechs, which have seen an influx of venture money from abroad.

Through the first eight months of 2018, cash from Chinese and other Asian investors made up nearly half of venture capital investments flowing into U.S. biotechs, according to data from Pitchbook cited by Reuters. That figure is up sharply from just two years ago, when Chinese and Asian investment made up a little more than a tenth of deal flow into U.S. biotechs.

Here’s another example:

The Trump administration is using the country’s vast and nearly opaque immigration bureaucracy to constrict the flow of foreign workers into the United States by throwing up new roadblocks to limit legal arrivals.

The government is denying more work visas, asking applicants to provide additional information and delaying approvals more frequently than just a year earlier. Hospitals, hotels, technology companies and other businesses say they are now struggling to fill jobs with the foreign workers they need.

And another:

The bill includes a provision to help stop the flow of illicit opioids into the country by mail, especially synthetic fentanyl and its analogs, which are fueling the rise in overdose deaths. The provision was pushed by Senator Rob Portman, Republican of Ohio, whose state has been especially hammered by the opioid epidemic. 

It will require the United States Postal Service to start collecting information on international mail shipments, just as private carriers like Fed Ex and DHL already have to do. By the end of this year, the Postal Service will need to provide the name and address of the sender and the contents of the package, as described by the sender, for at least 70 percent of all international packages, including all of those from China. It will have to provide the information on all such shipments by the end of 2020.  

The Postal Service could block or destroy shipments for which the information is not provided.

Foreign investment, immigration paperwork and mail delivery.  Three very different types of regulation, with one thing in common.  The US government seems increasingly suspicious of the rest of the world.  Look for the US to continue taking regulatory steps to close itself off from the rest of the world.  I expect us to remain much more open than places like Cuba and North Korea, but less so than places like Canada and Australia.

Meanwhile, I’m increasingly suspicious of claims that we are in a deregulatory environment.  Environmental regulations have recently been pulled back, but many other types of regulations are clearly increasing.

Slightly off topic. David Henderson has a recent post that quotes Larry Summers as follows:

Suppose China had been fully compliant with every trade and investment rule and had been as open to the world as the most open countries at its income level. China might have grown faster because it reformed more rapidly, or it might have grown more slowly because of reduced subsidies or more foreign competition.

David makes a number of excellent points in response to Summers, but I’d like to add one more.  When large, mainstream international organizations try to help struggling developing countries with economic reforms, they generally encourage those countries to reduce subsidies and open their economies to trade.  So Summers has it backwards; fewer Chinese subsidies and more openness would have led to faster growth, not slower.

(5 COMMENTS)

Is the “Culture of Poverty” Functional?, by Bryan Caplan

At last, I’m starting my next major project: Poverty: Who To Blame.  As usual, I’m starting with several tall stacks of reading.

One of these stacks is the “cultural of poverty” literature, and one of the classics of this literature is Hyman Rodman’s Lower-Class Families: The Culture of Poverty in Negro Trinidad (Oxford University Press, 1971).  Rodman provides a detailed ethnography of impoverished Coconut Village (location name changed to protect subjects’ anonymity).  While Rodman runs through numerous social angles, the most glaring feature of this subculture is extremely short-sighted sexual behavior.  Courtships are brief, marriage is rare, breakups are common, cheating is common, and contraception almost unknown.  As a result, few children grow up in homes with a reliable provider and a reliable caretaker.  Kids can really only count on their mother’s support – if that.

One way a mother has of signifying paternity is through the assignment of the father’s title, or surname, to the child…

Henderson versus Leon Panetta on the Long War, by David Henderson

I posted in 2011 about my question to Defense Secretary Leon Panetta in a public forum and his response.

I was telling Bob Murphy, who interviewed me for his podcast, about it  and found, with a few keystrokes, the audio/video. For my question and his response, go to 43:41.

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What is the United States?, by David Henderson

In “Can anything hold back China’s economy?” Larry Summers makes a number of good points. By the way, his implicit answer to the question he raises in the title seems to be “No.”

Along the way, though, he writes as if the United States has one mind rather than over 300 million minds.

Good point #1:

At the heart of the problem in defining an economic strategy toward China is the following awkward fact: Suppose China had been fully compliant with every trade and investment rule and had been as open to the world as the most open countries at its income level. China might have grown faster because it reformed more rapidly, or it might have grown more slowly because of reduced subsidies or more foreign competition. But it is highly unlikely that its growth rate would have been altered by as much as 1 percent.

By the way, when he writes 1 percent, he clearly means 1 percentage point. It is very easy to imagine China’s growth rate being altered by 1 percent, which is trivial.

Bitcoin is not a bubble, by Scott Sumner

Over the past few years, I’ve noticed that people tend to predict that Bitcoin is a bubble, and then later suggest that a subsequent price drop shows that it was a bubble. Thus lots of pundits said Bitcoin was a bubble when its price was at 30. Then when it was at 300, even more suggested that it was a bubble. Each time the price plunges they say “I told you so.”  Now the price of Bitcoin is over 3300, and even more people are saying it was a bubble.  Noah Smith has a new piece in Bloomberg:

# Yep, Bitcoin Was a Bubble. And It Popped.

His main piece of evidence is that the price rose sharply and then fell sharply.  But that sort of price pattern also occurs in 100% efficient markets that are highly volatile because the fundamental value of the asset is hard to ascertain.  And if there ever was an asset with a value that is difficult to ascertain, it’s Bitcoin.  I have no clue as to what Bitcoin should be worth, and I doubt anyone else does either.

Bubble theories are only true if they are useful, and they are not useful.  The people who said it was a bubble at 30 were implicitly giving you advice not to buy.  Ditto for those who said it was a bubble at 300.  This advice was exceedingly non-useful; in fact if you followed the advice of bubble proponents you missed out on the opportunity to earn a massive profit investing in Bitcoin.  That’s why I don’t follow the advice of bubble theorists; it’s not useful.  BTW, I don’t own Bitcoin for unrelated reason; I prefer index stock (or bond) funds.

In any efficient asset market with an extremely volatile price, the current value of the asset will usually be far below the historical maximum price.  That’s equally true if bubbles don’t exist.  BTW, I define a bubble as a price that is clearly too high relative to fundamentals, and thus an asset with a poor expected return, based on rational analysis.  In fairness, Noah Smith defines it differently:

Formally, an asset bubble is just a rapid rise and abrupt crash in prices.

In the real world, the vast majority of times where people speak of bubbles they are using my definition, assuming market irrationality.  And it’s clear that while Smith’s definition of bubbles does not explicitly endorse market irrationality, he thinks they provide pretty strong evidence for that hypothesis:

Defenders of the efficient-market theory argue that these price movements are based on changes in investor’s beliefs about an asset’s true value. But it’s hard to identify a reason why any rational investor would have so abruptly revised her assessment of the long-term earnings power of companies in 1929, or the long-term viability of dot-com startups in 2000, or the long-term value of housing in 2007.

Actually there is very good reason why investors might have revised their expectations for future earnings in late 1929, we were entering the Great Depression.  But his point is valid for the 1987 stock crash.

Speaking of efficient markets, there’s another nail in the coffin of anti-EMH theories.  When I started blogging in early 2009, people pointed me to all sorts “anomalies”, which they believed show that markets are not efficient.  I’ve done many posts explaining how those theories have failed to do well in the period since I became aware of them.  Recently I learned of the failure of another anti-EMH theory that was provided to me back in early 2009—value stocks as a good investment:

Just to be clear, I understand that value stocks had an amazing run for quite a long while.  So did Bitcoin.  My point is that anti-EMH theories are not useful, because by the time you start trying to take advantage of them they are likely to stop working.  If that were not true then mutual funds based on highly robust anti-EMH theories would outperform index funds.

Market’s are amazingly efficient, and you’d be wise to base your life decisions on that assumption.  For instance, if someone insists that his investment fund consistently offers really high returns, year after year, and the returns seem uncorrelated with the broader market, that should raise a red flag. Otherwise you might find that the investment manager _ made off _ with your money.

In contrast, the SEC does not believe in the EMH, and ignored warnings about a fund with implausible returns, year after year.

(13 COMMENTS)

A Conservative Confession, by Bryan Caplan

Few psychological results are as well-grounded as hedonic adaptation.  Human beings often have strong short-run reactions to even mild stimuli.  An ice cream cone can put a huge grin on our faces.  Missing a red light can make us scream with rage.  In the long-run, however, human beings’ emotional reactions to even extreme stimuli soften to a shocking degree.  If you won millions in the lottery, the thrill would soon fade.  If your girlfriend dumped you, the pain of that would soon fade, too.  Hedonic adaptation isn’t perfect, but it is a mighty psychological force.

I’m weird in many ways, but as far as I can tell, my hedonic adaptation is quite normal.  Indeed, my only visible abnormality is self-awareness.  I know that I’m going to hedonically adapt to most good and bad life events, so I place little stock in life events.  And I get impatient with people who refuse to do the same.

So what?  Well, all this leads to an uncomfortable epiphany.  Intellectually, I’m convinced that even liberal, democratic societies are deeply unjust.  Logically, for example, the analogy between Jim Crow and immigration restrictions seems apt.  But psychologically speaking, I can still get used to this injustice.  Indeed, I’ve long since done so.

So what politically aggravates me?  Change in the wrong direction.  Though I do my best to regulate my own emotions, I fall short of perfect Stoicism.

The upshot: Even though my political views are deeply unconservative, the honest truth is that if existing justices and injustices were locked in place for ever, I would personally be happier.  When the world stops changing, it’s easy to accept the world as it is.

What does this justify?  Nothing, of course.  But don’t say that I only feel this way because my life is fine.  Plenty of people with far more than me are filled with rage.  Plenty of people with vastly less than me live relaxed, care-free lives.  Why?  Epicurus elegantly explained it millennia ago: What inspires positive and negative emotion is not so much our situation, as the gap between our situation and our expectations.  The lower your standards, the better you’ll feel.

And that is my conservative confession.

(11 COMMENTS)

Brits Could Have a Brexit Cake and Eat It Too, by Pierre Lemieux

In an essay on “The Great Brexit Breakdown” (Wall Street Journal, December 7, 2018), Gerard Baker quotes the director of a London-based think-tank:

“You can have national sovereignty—and that’s fine. Or you can have economic integration—and that’s fine. But you can’t have both,” says Mr. Grant.

This is true if “national sovereignty” means that the national government has the right to control its subjects’ decisions to become integrated to the world economy, that is, to import to from or exporting to other countries. In other words, the dilemma is true if “you” refers to a very controlling national ruler. Otherwise, it is not.

To see this, imagine that “national sovereignty” means something completely different from its accepted definition, something closer to Anthony’s de Jasay’s “capitalist state” than to the authoritarian state. De Jasay’s capitalist state is a state whose only function is to prevent other states from taking over the country and oppressing its customers (citizens or residents). Perhaps such a state could even assume the quasi-contractual production of other public goods and services, as in James Buchanan’s contractarian theory, but it would need to be strictly limited. For our purpose, it suffices to imagine that Britain’s post-Brexit state does not claim to determine how its citizens will “integrate” or not, and with whom. (My formulation assumes that Scotland and Northern Ireland would secede following Brexit; if you don’t agree, just substitute “Britain” with “the United Kingdom.”) Then “you,” British citizen, could have both national sovereignty and economic integration—if you individually want that.

What I have described is as simple as it is ignored in the generally collectivist perspective of public debates. It is called unilateral free trade. (I have blogged a number of times on this topic here.) Under this regime, any British resident would have the right, as recognized by his own government, to establish (nearly) any relation he wants with a resident of the European Union (or other countries), whether it is import, export, marriage, investment, etc., provided that his  counterparty is willing and allowed to conclude the agreement.

The term “allowed” must be emphasized. A British resident might want, for example, to export something to a E.U. resident who is prohibited by the E.U. government from importing it—or from importing it without paying a tax (a tariff) that ruins the deal. This would be most unfortunate, but it is more a problem for the E.U. resident, whose liberty is infringed, than for the British resident, who could try to export elsewhere. Moreover, since the European Union’s imports must be equal to its exports—or else E.U. residents will be flooded by pounds sterling that they will want to invest in Britain—British residents will be able to export much more than stiff-lip continental mercantilists would like.

It is true that this argument does not solve the problem of the free movement of people, which many Brits and Europeans value in the current European Union. But perhaps the British government could also give the example in this area, by allowing reasonable movement of foreigners on British soil. “Reasonable” means that the declaration of freedom to import goods, services, and capital–which is the definition of unilateral free trade–could include some liberal restrictions on immigration. As in the case of unilateral free trade, liberty would arguably be more contagious than tyranny. At least we have some reasons to hope so.

So the Brits could have Brexit and eat it too, in the sense that a non-authoritarian “national sovereignty” would be maintained and they would be free to individually integrate with Europeans. There is no such thing as a free lunch, so what would be the price? The price of this sort of Brexit cake would be a decrease in state power: the European Union’s government would lose power and the British government would not fill the vacuum. This price would be paid those who like to rule and those who count on the rulers to exploit others on their behalf.

Although British libertarians would like this solution, many others, probably most others, would not. There is some evidence that individuals with authoritarian values were much more likely to vote Leave than Remain. An interesting report by Kirby Swales of NatCen, Understanding the Leave Vote, concludes:

People identified as ‘authoritarian’ were significantly more likely to vote Leave than those identified as ‘libertarian’, 66% compared with 18% respectively (see Figure 9).

I am grateful to Mark Brady for reminding me that one may disagree with the way “authoritarian” and “libertarian” are defined (see p. 28). Yet, it seems to me that many if not most of the questions (from the standard British Social Attitudes survey) that served to define the two terms “authoritarian” and “libertarian” are indicative of what we usually mean by them. It also seems to me that much anecdotical evidence suggests that, if many libertarians favor Brexit, authoritarian bigots outnumber them by far. Many Brexiters hope that European regulations and controls, currently integrated into U.K. law, will be maintained, with a nativist vengeance. Stephen Filder of the Wall Street Journal (“Brexit Upends British Political System,” December 10, 2018) observes:

[Brexit] also attracts people on the left of the main opposition Labour Party, who see the EU as shoring up corporate capitalism and constraining nationalization.

Most Brexiters certainly have no clue about unilateral free trade, which they would probably instinctively abhor. They don’t want to have their cake and eat it too, or have no idea how to do that.

(10 COMMENTS)

What should be regarded as property?, by Scott Sumner

I was originally going to entitle this post “What is property?” But that’s not really the question, is it?

Tangible products such as bicycles and haircuts and food are considered by economists to be rival goods, consumption of the good by one person prevents its use by another.  Non-rival goods include things like broadcast TV.  If I tune in to Seinfeld, it doesn’t prevent another person from tuning in to the same show.  For that reasons, private broadcast TV companies were not able to charge money for their service, and instead relied on advertising revenue. (The publicly-owned BBC was a different story.)

Most intellectual property has a non-rival characteristic.  Use of an idea by one person doesn’t prevent the use of the idea by another.  So should ideas be regarded as private property?  In other words, should inventions be granted intellectual property rights? And if so, to what degree?

Our intuition about these issues is not very helpful, as concepts such as “property” and “theft” were formed in a period when there were mostly rival goods.  Stealing meant depriving the other person of the thing you stole.  But stealing IP means not rewarding the other person for the thing you stole.  That’s not the same.

Think about “small p” progressivism.  I don’t mean left-wing progressivism; I mean the general notion that it would be a good thing to bring the fruits of the modern world to the billions that still live in poverty in places such as Africa, South Asia and elsewhere.  As far as I know, every single development economist favors some sort of economic development.  As far as I know, every single development expert believes that development involves, among other things, educating poor areas with ideas mostly created in the West.  As far as I know, there has never been a single instance of people shouting “IP theft” when textbooks were donated for free to a poor country.  Most well-meaning people think it’s a really good thing if poor uneducated peasants can learn what is already being taught in rich country schools: chemistry, accounting, math, etc.  No one thinks poor countries should have to pay the original creators of the fruits of Western civilization.

At the same time, most people have an intuition that there is some value (perhaps even “fairness”) in certain forms of IP rights.  How can companies be expected to invent new drugs if the recipe cannot be patented?

Commenter mbka provided an example that gets right at the heart of this dilemma.  The two short quotes are mine, and then he responds:

“I’d add that Americans might still be concerned about the practice, but in my view there’s really not much that can be done about it.”

It’s common practice within and between countries. Example, ten years back or so I once talked to a German engineer / businessman who was in Asia trying to sell knowledge of the exact proportions for mixing the components of epoxy in the production of fiberglass hulls. Apparently that’s still a kind of an art, even when the basic component chemistry is known for many decades. I was taken aback, it’s clearly a morally ambiguous thing to try and sell out hard-won experience from his current or former company, but very likely, not even a patentable thing to begin with.

“I recall reading that 200 years ago the British were worried that Americans would steal their manufacturing techniques and bring them to America.”

De Tocqueville at the time commented how American industry practices were fast and loose as compared to the European stalwarts, how the quality was low and ships sank more often in the quest for a quick buck. Anyhow, the reputation of Japan, then Taiwan, then Korea, and now China, goes through the same cycle, from “low quality copycat” to “unfair price undercutting” to “we can’t match their quality”. Come to think of, that’s half the theory of Jane Jacobs’ “The economy of cities”, https://www.amazon.com/Economy-Cities-Jane-Jacobs/dp/039470584X

The German case is really interesting, because it crosses over the two categories I mentioned.  It’s kind of like some basic idea in chemistry, which ought to be freely available to everyone in the world.  Something out of a chemistry textbook.  But it’s also sort of like the output of pharma research, which deserves patent protection.

I don’t have strong views on “where to draw the line”, and indeed would defer to people who know much more about this than I do.  (Alex Tabarrok often does excellent posts on this topic.)  But I do have strong views that no one else knows exactly where society should draw the line.

Some libertarians believe that property rights are a “natural right”. But I doubt that there’s a single person who believes that “nature” tells us that patents should last for 17 years, not 16 or 18 years.  Property rights are clearly a concept that is at least to some extent created by humans for utilitarian reasons, not simply a natural right to be discovered by thinking about the world.

If you believe in “free markets”, then you believe people should be able to produce and sell anything they wish, without government interference.  If you believe in IP rights, then you don’t believe that people should be able to produce and sell anything they wish without government interference.  Both free markets and property rights are key principles of classical liberalism, and they are in conflict.

If we leave the realm of IP rights and look at regulation more broadly, what do we see?  We see a political process that is too pro-business, and not enough pro-consumer.  We see all sorts of regulations protecting business from competition, at the expense of consumers. (Think auto dealers, health care, occupational licensing, taxis, sugar quotas, steel tariffs, etc., etc.) Given that obvious public policy bias, if I knew absolutely nothing about IP law, I’d guess that these laws are also too pro-business and too anti-consumer.  That is, I’d assume that the laws provide too much IP protection.  Even in a closed economy.  If we go to an open economy, I’d expect the “mercantilist bias” to be even worse, in order to exploit foreigners.  Think about the example of Parmesan cheese in my previous post.  The EU obviously cares much more about protecting cheese makers than providing cheap cheese to consumers.

That doesn’t mean that all IP protection is bad; I believe some is appropriate.  Rather, at the margin, any reduction in IP protection is likely to be slightly beneficial.  That needs to be taken into account when evaluating the cost of IP theft.

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David Warsh on Selling Expenses versus Invisible Hand, by David Henderson

The invisible hand is robust.

In his book Knowledge and the Wealth of Nations, David Warsh claims that there is a conflict between the fact of “selling expenses” (for example, advertising) and Adam Smith‘s Invisible Hand. He writes:

There could be no “selling expenses” of pins if the Invisible Hand was truly at work?

Is Warsh right? In a word, no.

If what he really meant was that there is a conflict between “monopolistic competition” and “perfect competition,” then of course he’s right. Under perfect completion, advertising is not required because everyone in a well-defined industry is selling the same identical good as everyone else in the industry, at an identical price. Under monopolistic competition, sellers differentiate their products and have some market power. They typically don’t sell identical products. They could, unlike in the case of perfect competition, raise their price one percent and not have their sales fall to zero.

But what Warsh is doing is what many modern economists do: interpreting Smith to be saying that the Invisible Hand is his version of perfect competition, even though Smith never said that or even hinted at it. Indeed, the concept of perfect competition came along well over a century after The Wealth of Nations.

Here are the two passages in Smith’s work where he discusses the Invisible Hand:

By preferring the support of domestick to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. (The Wealth of Nations, 1776.)

and:

The rich … consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. (The Theory of Moral Sentiments, 1759.)

Notice that nowhere in either passage does Smith say that producers or “the rich” are charging the same price as everyone else in an industry, the sine qua non of perfect competition.

There is in fact no contradiction between the invisible hand and selling expenses. I gain when Amazon, say, advertises its products, that is, spends money to sell, on its web site. The invisible hand is robust.

(4 COMMENTS)

John Stossel Returns to His Roots, by David Henderson

Long before he became a libertarian, John Stossel was a consumer reporter on the ABC News. His specialty was reporting on seedy companies. That’s what won him a lot of Emmies.

Now John has returned to his roots, reporting on a seedy company or, more correctly, a company that occasionally engages in seedy behavior, named Google. The difference this time: he doesn’t advocate regulating the firm to change its bad behavior. Instead, he reports on its bad behavior and calls it creepy. And guess what? It has already worked. John had a YouTube video showing that socialism is violent. Google, which owns YouTube, judged that it was a bad idea to show young people that socialism is violent and so Google restricted it to adults. After John reported on it, Google relented.

One caveat: John refers to what Google did as censorship. It’s not censorship. It may be creepy, as John claims, but its actions are not censorship.

 

 

(6 COMMENTS)

Peter Berkowitz on Locke, Liberty, and Liberalism

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

Maeve Cohen on Rethinking Economics

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

This week's guest:

• Maeve Cohen's Home page

This week's focus:

• Rethinking Economics.

Additional ideas and people mentioned in this podcast episode:

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

A few more readings and background resources:

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

A few more EconTalk podcast episodes:

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

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

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

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

| | 1:28 |

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

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

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

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

| | 6:01 |

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

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

Russ Roberts: or vote--

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

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

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

| | 10:12 |

Russ Roberts:

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

Maeve Cohen: Yeah.

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

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

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

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

| | 15:05 |

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

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

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

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

Russ Roberts: It's not--

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

Russ Roberts: Yeah--

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

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

Maeve Cohen: --yeah. Yeah.

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

Maeve Cohen: Mmmhmm--

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

| | 19:24 |

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

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

| | 23:17 |

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

Maeve Cohen: yeah--

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

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

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

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

Russ Roberts: [?]dmahhhom[?]

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

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

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

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

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

Russ Roberts: Yep--

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

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

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

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

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

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

Maeve Cohen: oh, no--

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

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

Russ Roberts: Yeah. Exactly. Terrible--

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

Russ Roberts:'An economist'--

Maeve Cohen: Yeah.

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

Maeve Cohen: Yeah.

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

| | 31:31 |

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

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

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

Maeve Cohen: Exactly.

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

| | 32:56 |

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

Maeve Cohen: The Economic Society.

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

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

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

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

Russ Roberts: I did. With John.

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

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

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

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

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

| | 38:07 |

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

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

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

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

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

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

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

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

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

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

| | 44:24 |

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

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

| | 48:38 |

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

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

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

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

| | 52:26 |

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

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

Russ Roberts: Did you say 'tat'?

Maeve Cohen: Tat.

Russ Roberts: How do you spell that?

Maeve Cohen: T-a-t.

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

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

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

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

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

| | 55:53 |

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

Maeve Cohen: Yes--

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

Maeve Cohen: I've got a guess.

Russ Roberts: Go ahead.

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

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

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

|

(30 COMMENTS)

Anat Admati on the Financial Crisis of 2008

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

This week's guest:

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

This week's focus:

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

Additional ideas and people mentioned in this podcast episode:

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

A few more readings and background resources:

• Milton Friedman. Biography. Concise Encyclopedia of Economics
• Junk Bonds, by Glenn Yago. Concise Encyclopedia of Economics
• Savings and Loan Crisis, by Bert Ely. Concise Encyclopedia of Economics. Origins of the FDIC.
• "The Regulator's Calculation Problem," by Arnold Kling. Library of Economics and Liberty, April 6, 2015. Includes discussion of Basel agreements and their consequences.
• Lombard Street: A Description of the Money Market, by Walter Bagehot. Origins of Central Banking and the Fed.

A few more EconTalk podcast episodes:

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

Time Podcast Episode Highlights

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0:33

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

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

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

Russ Roberts: What was that?

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

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

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

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

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

8:10

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

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

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

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

Russ Roberts: Yours and mine--

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

Russ Roberts: Correct.

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

Russ Roberts: Nobody knows--

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

18:32

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

Anat Admati: yep--

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

Anat Admati: exactly--

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

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

19:34

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

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

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

Anat Admati: Yep, economists--

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

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

25:52

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

Anat Admati: Stuff happens--

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

Anat Admati: Yep. Risk points--

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

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

31:15

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

Anat Admati: Right. Not credible--

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

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

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

Anat Admati: Yeah--

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

Anat Admati: from corrective action--

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

Anat Admati: Yep.

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

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

Russ Roberts: Sure--

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

Russ Roberts: Exactly--

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

Russ Roberts: Sexual abuse--

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

41:53

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

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

Then you write,

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

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

Anat Admati: Nobody spoke--

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

Anat Admati: yep--

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

Anat Admati: yep, not a word--

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

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

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

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

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

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

Russ Roberts: So--

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

Russ Roberts: A hedge fund manager--

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

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

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

46:01

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

Anat Admati: Oh, well, his--

Russ Roberts: his, or is it--

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

Russ Roberts: or is it his consulting?

Anat Admati: I tell you--

Russ Roberts: Is it consulting?

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

Russ Roberts: Please don't--

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

Russ Roberts: Yeah.

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

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

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

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

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

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

Anat Admati: Yeah. Yeah.

49:37

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

Anat Admati: ah, heh, heh--

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

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

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

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

52:51

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

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

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

Anat Admati: CLO is Collateralized Loan Obligations. Which is a close [?] of CDO, Collateralized Debt Obligation. In Finance, you often just change the names. [More to come, 56:02]

(28 COMMENTS)

A.J. Jacobs on Thanks a Thousand

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

This week's guest:

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

This week's focus:

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

Additional ideas and people mentioned in this podcast episode:

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

A few more readings and background resources:

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

A few more EconTalk podcast episodes:

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

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

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

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

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

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

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

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

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

| | 7:00 |

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

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

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

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

| | 11:06 |

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

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

Russ Roberts: Thank you--

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

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

A. J. Jacobs: Mmm.

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

A. J. Jacobs: Yeah.

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

| | 12:56 |

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

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

Russ Roberts: Sure.

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

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

A. J. Jacobs: Mmm--

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

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

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

A. J. Jacobs: Absolutely.

| | 17:18 |

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

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

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

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

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

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

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

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

Russ Roberts: Beans.

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

Russ Roberts: It's incredible.

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

| | 22:16 |

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

A. J. Jacobs: Mmm.

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

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

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

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

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

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

Russ Roberts: There you go.

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

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

A. J. Jacobs: Take everything for granted.

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

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

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

A. J. Jacobs: Yeah.

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

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

Russ Roberts: yeah--

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

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

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

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

| | 30:18 |

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

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

Russ Roberts: That's a great idea.

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

| | 31:37 |

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

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

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

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

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

Russ Roberts: Oh, yeah. I loved that.

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

Russ Roberts: suffering--

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

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

| | 34:40 |

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

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

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

A. J. Jacobs: Yeah. And--

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

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

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

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

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

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

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

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

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

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

Russ Roberts: It's hard.

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

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

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

| | 42:01 |

Russ Roberts: Is the book out?

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

Russ Roberts: Okay.

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

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

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

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

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

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

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

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

| | 46:07 |

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

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

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

A. J. Jacobs: I, Pencil?

Russ Roberts: Yeah, I, Pencil.

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

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

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

Russ Roberts: Well, talk about water.

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

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

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

Russ Roberts: Literally.

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

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

A. J. Jacobs: Mmmhmm--

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

| | 51:50 |

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

A. J. Jacobs: Right--

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

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

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

A. J. Jacobs: Mmm--

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

A. J. Jacobs: Mmm--

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

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

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

A. J. Jacobs: Mmmhmm--

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

A. J. Jacobs: Agreed.

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

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

| | 56:36 |

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

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

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

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

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

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

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

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

|

(13 COMMENTS)

Julia Belluz on Epidemiology, Nutrition, and Metabolism

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

This week's guest:

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

This week's focus:

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

Additional ideas and people mentioned in this podcast episode:

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

A few more readings and background resources:

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

A few more EconTalk podcast episodes:

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

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

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

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

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

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

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

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

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

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

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

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

| | 7:38 |

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

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

Russ Roberts: Yeah. Not the same.

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

Russ Roberts: Weight.

Julia Belluz: Exactly. And poverty.

Russ Roberts: Age. Everything. Gender.

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

| | 9:34 |

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

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

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

Julia Belluz: Yeah--

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

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

Russ Roberts: Yeah.

Julia Belluz: And, yeah.

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

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

Russ Roberts: Not surprised.

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

Russ Roberts: A lot of money at stake.

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

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

Julia Belluz: Right. Big Cannabis. Yeah.

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

Julia Belluz: Right.

| | 13:15 |

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

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

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

Julia Belluz: Yes--

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

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

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

Julia Belluz: Right.

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

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

Russ Roberts: It's fabulous. Fabulous--

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

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

| | 18:39 |

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

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

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

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

Russ Roberts: No. The researchers--

Julia Belluz: It was just really bad--

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

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

Russ Roberts: Give some examples.

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

Russ Roberts: No.

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

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

| | 25:04 |

Russ Roberts: You wrote an essay for Vox--I think it was in the last 5 years--but it's one of my favorite pieces of journalism, partly because of the visual representation that you give in there. You looked at--I think it was your chart; I don't know, maybe you created it, but maybe you got it from somewhere else, but it's basically--you took a whole bunch of pieces of our diet--caffeine, broccoli, meat, carbs, etc., and you showed which studies, how many studies showed that they increased the risk of cancer and which studies showed that the decreased the risk. And basically for every single item in the list--and there were probably 15 or 20--there were lots of studies that showed, 'Oh, my gosh: this causes cancer,' and then there were also lots of studies that showed that they reduced cancer. And I think that's a very sobering and thoughtful finding that should create skepticism among thoughtful readers of the media, in terms of what you think about one's own diet.

Julia Belluz: Totally. And I wish we could take credit for that, but that was also John Ioannidis. We did reproduce it in that story, but it was another John Ioannidis came up with this idea of, I think it's the one where he flips through the Boston cooking school cookbook and randomly selects foods and then looked at what's been published showing that that food causes or protects cancer; and then they had this amazing chart in that study. Really, really fun idea.

Russ Roberts: We'll put up a link to your version of it, which is extremely accessible, which is probably less accessible; but he's pretty accessible.

| | 26:43 |

Russ Roberts: Before we move on--we're going to move on in a minute to metabolism and diet, which you've got some really interesting personal and I think scientific insights into, but I want to ask before we do that: What's the single biggest fallacy about health, or nutrition? If you could just clear this up--you think this is--everybody should know this, but they don't. Is there anything that jumps out at you from your reading of the nutrition space or the health space more generally?

Julia Belluz: I think one--this maybe isn't--I don't know if this is what you're thinking of, but I think we make things way too complicated, especially in this country--like, there are so many vested interests, and people who are trying to profit off making certain diet claims or exercise claims, and what we actually know and research to be like, what does it mean to live a healthy life? It's, like, don't smoke, don't drink too much; eat a diet that's pretty rich in fruits and vegetables; make sure you get an adequate amount of sleep; make sure you have a strong social network, and people that love you and that you can depend on. And, am I forgetting one? So, smoking--

Russ Roberts: That's pretty good--

Julia Belluz: drinking--

Russ Roberts: Stay active: be a little active. You don't have to be a marathoner.

Julia Belluz: Yeah. And I guess that's another one, actually, that--I think this idea that if you want to lose weight you have to join a gym and start to exercise like a fiend--

Russ Roberts: Well, that's a belief that's held by people who have never visited a gym. When I started going to a gym a couple of years ago and I saw the people there, I thought, 'I hope they're new like me.'

Julia Belluz: Right. Okay. There we go. But, what we know--so, exercise is the closest thing we have to a magic pill, I think. Like, it does so many incredible things for us. And it helps people maintain their body weight. But it's actually not that effective for weight loss. And that's because people--researchers have found that when people ramp up the amount of exercise they do, they tend to think, 'Now I can go home and have a big slice of pizza,' when really you don't actually burn off, unless you are doing hours and hours of exercise, you don't burn that much, as much as you think you do, as much as exercise machines say. And, it's really easy to undo that calorie deficit you've created with a single slice of pizza or a Frappuccino at Starbucks or whatever it is that people are eating these days. So, I think that makes it like over-complication and then relying on this one silver bullet for health, be it exercise or a certain food or a certain diet I think is where we're often going wrong.

Russ Roberts: Yeah, we have such a--you said, I think, it doesn't burn as many calories as we think it does. I would just put a slight amendment to that: I'd say it doesn't burn as many calories as we'd like to think it does.

Julia Belluz: Totally. Yeah.

Russ Roberts: So, the ability to self-deceive there, honestly, just thinking you've actually earned a lot when you just really want that Frappuccino, is a huge problem. As is the quest for the magic solution. My favorite of this example is the 7-minute workout, you know: I don't really have to exercise. I just work for 7 minutes. And there's an app on my phone I can get. We're always looking for the shortcut, the magic food that will solve our problems. And, like most things in life it's mainly hard work and sacrifice which leads to lower weight and health; and that's not as much fun as believing that this new book with this new diet is going to take care of me.

Julia Belluz: Totally. And that's sustained work. It's like something you kind of have to think about, even if--like, I am someone who did lose weight over--I was chubbier as a teenager, and slowly lost weight. And it's been a sustained effort, and something that I still think about every day. And I think that's true for a lot of people who lose weight and keep it off. It's not like suddenly you discover this magic solution and you never need to think about it again. It's something that lingers there. And I think on the flip side, it's like, if you have one day or even two days in a week where maybe you eat a little bit too much or, yeah, an extra slice of cake that you shouldn't have, or whatever it is, it's not the end of the world. Like, what really matters is how you are eating over many months in a year, and how does that look on balance, not, you know, like obsessing about every little micro-decision that you make about what you are putting in your body.

| | 31:41 |

Russ Roberts: Yeah. Mark Twain said, 'It's easy to stop smoking. I've done it a score of times.' I feel that way about losing weight. It's easy to lose weight: I've done it--I'm really good at it. And I forget that I'm really good at putting it back on, too. And, they say that's not good for you either. I've always been attracted to the Kingsley Amos line, 'Inside every fat person is a fatter person trying to get out.' I sometimes think of myself that way. It's like, 'Let's just go to my natural weight.' You know--that's probably about 20 or 30 pounds above what I'm already way above right now. So, it does take some discipline. It takes long-term discipline. And I think the behavioral insight, which I've talked about before on the program, is, sometimes you need very black-and-white rules that are very different from, 'I just won't have too many potato chips.'

Julia Belluz: Right.

Russ Roberts: I can't keep that rule, unfortunately: 'I'm just going to only have a little bit of the ice cream.'

Julia Belluz: I guess, I should say, and I hope I'm not contradicting what I said earlier, but I do think that, after writing about this for so many years, like where I am really coming out is, our food environment here is a nightmare. And it does make it really hard for people to make, you know, the correct, maybe choices that are the best choice for themselves. So, I think--yeah. I guess, yeah, it is discipline; it is sustained effort. On the other side, we are living in a food environment where obesity does have a chance to express itself on a much more frequent level than it did a hundred years ago, say. And, you know, our genes--there's a researcher on this at NIH [National Institutes of Health] called Kevin Hall, and he always talks about how our genes haven't changed in the last, you know, half century; but what has changed is the Frappuccinos and the pizzas and the sheer ubiquity of these things. And the fact that you almost have to--I personally feel like I have to think, be quite judicious and think very deliberately about where I buy my food, and, yeah, exposing myself to these things, you have to make a really conscious effort not to. And so, it is on the individual. But I think it's also very much a massive environmental problem.

Russ Roberts: Well, we're really good at food. We're really good at making inexpensive, really yummy food. It's a triumph of human creativity and ingenuity; but it's not necessarily what we want in the long run. We very much want it in the short run. I have a thing with my wife--I think this is an example of what you're talking about--where she will sometimes say to me after a meal, 'Would you like a little ice cream for dessert?' And the answer is, 'Well, of course, I do! What kind of a question is that?' And, the second point being, 'Don't ask. Please don't ask.' Because it's so hard to say no. Even though I don't want it--I mean, even though I don't think I should eat it, it's very hard to say no to that. And part of it, by the way, I think is just human interaction. My wife offers it with a full heart. She doesn't offer it because, 'Oh, you want some ice cream?' Correctly, it's a festive moment. It's dessert. It's part of the joy of being human is to--

Julia Belluz: Human ritual--

Russ Roberts: eat good things. Yeah, and human ritual. And, I want to, we want to do this together: 'Let's have some ice cream. 'So. Anyway.

Julia Belluz: Totally. We could talk about Brian Wansink, too, who had, who just his old research program--I don't know if you followed this--

Russ Roberts: Oh, yeah. You can mention that. Go ahead.

Julia Belluz: Brian Wansink is an eating behavior researcher at Cornell. And he published these really interesting studies showing how these little nudges and environment cues cause us--they shape our food choices and they cause us to eat less or a little bit more in certain circumstances. And he had just really creative studies to demonstrate that. And, of course, when some other researchers looked into the data and the methods that he was using, they found a lot of problems. And now he's stepped down from his position; and he's being investigated, and all of that. But I think--yeah, he's not the only researcher to show that, yeah, that the things that were offered and the things that we have in our environment shape the choices we make. And, like, you know, if you have ice cream at home, if it's there it's on you, then, to say no to the ice cream. And the ice cream is designed, meant to be over-eaten--

Russ Roberts: It's the Alice-in-Wonderland dessert. 'Eat Me,' it's yelling.

Julia Belluz: Exactly. And it's so hard to say no. And I think, yeah, as much as Brian Wansink's research might be hugely problematic statistically and methodologically, but--

Russ Roberts: He's onto something--

Julia Belluz: Yeah. The ideas--he's not the only one who is talking about these subtle environmental cues, and like how important it is to think about them, even in our own homes and in our workplaces. And yeah.

Russ Roberts: So, we keep our ice cream with a neighbor. Who we don't like. And so, when my wife says, 'Do you want some ice cream?' and I say, 'Sure,' she's, 'Well, we've got to go over to the Johnsons, and they don't, they're not really happy to see us, so maybe we'll just skip it tonight?' No. I'm kidding. But it is important to not buy something that should not be bought. Because, they've got, like a--I remember when I was learning time management--which I couldn't implement, but it was fun to study it anyway. I couldn't keep any of the rules. But I loved learning about them. I even taught them for a while until I realized I couldn't keep them: I thought, 'This is probably inappropriate.' But someone classic insight in the Franklin Time management--the teacher would say, 'Do you wish you read more books?' And everyone's hand goes up. 'Yes, of course, I wish I read more books.' And the teacher would say, 'Well, why don't you?' And probably we all looked kind of down at our shoes. And his answer was, 'Books don't ring.' When the phone rings, it grabs your attention, and you answer it even though it's not--of course we've gotten better at not answering our phones in America--but, yeah, it's an old seminar. But, the things that grab our attention because they stimulate our appetites or our juices or whatever it is, they grab us. And sometimes the healthier things are just sitting there quietly, [?] ignored, 'What about me?'

Julia Belluz: Absolutely. Yeah. And people--I always think about this how--and maybe it's helpful to other people to think about this--like, the bag of chips and the ice cream: It was designed by incredible scientists at these big food companies to like--they tested it on different people to see which formulation would cause people to not be able to stop themselves, and to want to--what was the most pleasing to our brains and reward systems. It's a pretty tough thing, individuals to be up against.

Russ Roberts:'You can do it, out there! Come on.' But on the other hand, we don't want to be saying you shouldn't have any fun in your life.

Julia Belluz: Right. Of course.

| | 39:23 |

Russ Roberts: Let's shift gears. I want to talk about something you wrote about that really fascinated me. It's related to what we're talking about now, so it's an easy segue. Which is: You spent 23 hours in a metabolic chamber. So, explain what a metabolic chamber is, and what that was like, and what you learned from it.

Julia Belluz: My husband thought I was crazy. So, that's the first thing. But, no--so, the National Institutes of Health, they have these rooms here on the outskirts of Washington, D.C., and they are designed to measure these chemical processes we call 'metabolism' second by second. So, essentially, the food we eat and the amount of work we are doing, the amount of physical activity we are doing, corresponds to how quickly our body is breaking down the food that we're eating to use for energy to power ourselves. And, the way that's measured is by, in these air-tight rooms, researchers track how quickly you are respiring CO2. So, how much oxygen you are consuming and how much carbon dioxide you are letting out. It gives a measure for how quickly you are burning energy. So, they have an ongoing study where they take people who have a normal body weight and people who are overweight and obese, and they put them through different types of measurements to better understand the characteristics of their condition, their body size. And one of those is this, what's called the metabolic chamber. And that's where--yeah, it's this airtight room that measures your gas exchange, second-to-second. And so, I went in thinking one of the reasons, you know, again, like I struggled with my weight, especially when I was a teenager. And I really thought I could forgive my brothers--they were both skinny and they seemed to be able to eat whatever they wanted, and same with my friends. And I thought, 'There's something going on in me.' And I thought it was a slow metabolism. I thought, like, there was this sluggish--like I wasn't converting the food I was eating or using it very quickly, and it was being stored as fat, and therefore I could gain weight more easily than they could. And so, I went into the chamber to both better understand this hugely important scientific tool that has led to some of the discoveries we've been talking about today, like the relative importance of physical activity for weight loss; and many, many other things. And also to get a better read on my own body and whether I had this slow metabolism I thought I was cursed with.

Russ Roberts: And? And, by the way--you only were in--'only'--for 23 hours. Did other people go for longer?

Julia Belluz: I think they don't keep people longer than 2 days, if I'm remembering correctly, in the chamber.

Russ Roberts: Because, they don't know what you ate before you got in there, or how much exercise you did. It's like the guy who told me that--I think it was a doctor who told me--that somebody came in for cholesterol measurement, and it was a horrible, frighteningly, like a record; and then he found out the guy had been eating French fries beforehand, and [?]. So it was a bad read. But you'd think there would be things you could do before that test that would kind of mess it up.

Julia Belluz: Before the metabolic chamber?

Russ Roberts: Yeah.

Julia Belluz: So, one of the big, fascinating takeaways of spending this time researching the metabolism and with these researchers at NIH, was that many of the things we do that we think--you know, there's this whole, like, popular mythology, discourse--yeah, it is mythology around metabolism boosters and doing certain things to speed up your metabolic processes. And you know, you burn off food faster and make sure you are, you know, like I think the underlying thread is that we can exert some degree of control over our metabolism. But what they see in the chamber, and what they've shown through these different fascinating studies, is that we actually--there's very little we can do to control it. And these metabolic processes are adapting second to second to our environment in ways over which we have little control. So, for example, they put people inside the chamber in very cold temperatures. And they found that--and then they also--sorry--and then they tracked them, and then they put them back in the chamber in normal temperatures. And I think they--so they slept in the chamber in cold temperatures for a significant period of time: I can't remember how long it was. But it was enough time to show that our bodies build up brown fat in response to that cold. So, brown fat is the type of fat that helps us stay warm. And, so, you know, this is a metabolic process. Your body is taking the food that you're eating and converting it into brown fat to keep you warm because you are exposed to cold temperatures. And so this is something you are not thinking about, and you have no, like absolutely no control over it. And then in the study--

Russ Roberts: You can think about it as much as you want, but you're not going to change it.

Julia Belluz: Right. And then you're, then in this study they were allowing people, the same people, to sleep in normal, like, warmer temperatures and the brown fat--their brown fat reserves--went down again. And so there's all these things happening in our bodies, at any given moment. Sorry, just to be clear now: Don't go and sleep in very cold temperatures and think you are going to lose a lot of weight. It was a very, like, insignificant amount of change in their energy burn. But it is something now they are trying to see if they can try to create a drug that has a more dramatic effect to similar pathways. But, sorry. The main message was that there really wasn't much I could do before going into the chamber that would have, like, a big effect, a significant effect, on my metabolism--you know, that I could deliberately do--

Russ Roberts: And what--

Julia Belluz: So, they've shown that, like, eating dark chocolate or caffeine or chili peppers, these don't speed up people's metabolisms in ways that lead to weight loss. It's just like what Dr. Oz says every day.

Russ Roberts: I like--I just try to read about thin people. That's what works for me. And my body thinks, 'Oh. I could do that. Let me try.' So all of this stuff is, again, more hope than reality. But, what did you find out about yourself?

Julia Belluz: So I found out I'm a very boring research subject. I had a very, like, perfectly normal--I did the exact--my metabolic rate was exactly what they'd have predicted for someone my height, my size, and my age and sex. So, I was boring. And, I was surprised by this. I really thought--like, I definitely, you know, exercise, and I'm careful about my diet and all these things. I don't just play my metabolism for when I gain weight. But I did think it was this contributor--that I really thought I had this sluggish metabolism and that explained, like, why it's a little bit harder for me. And so, I debunked that. And, yeah, it caused me to think about where we get these narratives from and this messaging. And, how much how they affect how we think about ourselves, and how sometimes I can be completely wrong.

| | 47:13 |

Russ Roberts: So, you've lost this crutch. Are you less happy now?

Julia Belluz: Am I less happy? Um, I would say I'm happier. I think there's some liberty in knowing the truth, right?

Russ Roberts: Sure. I like what you wrote. You said--going back to our gym discussion. And of course, in the gym, you do have people slowly peddling an exercise bike with not much resistance. And I'm always thinking, 'I wonder what they think they are doing here.' But, you write--because there was an exercise bike in the little room, because they want you to exercise. So, you say,

What's more, the 405 calories I burned during 90 minutes on the exercise bike was both less than is advertised in spinning classes and just 17 percent of the total calories I had used, validating once again that workouts typically account for a relatively minor part of total energy expenditure.

Well, that's true. But you could--one could up in theory, one could up one's exercise and over a long period of time, make a big dent. But--it's just hard to do.

Julia Belluz: Yep. And it--I think you can absolutely do that. I think the question is, is that a sustainable method of weight loss relative to thinking a little more about the food you put in your body, which we know has much more of an impact on how--yeah--how much weight you gain or lose. So, prefer--like, I have a friend here who, he had a period of kind of between jobs and had a lot of free time, and he was exercising like crazy. And he lost a pretty good amount of weight. But now he started to work again, and he doesn't have time to do, you know, one hour of running and then an hour of weightlifting every day. And I think most people don't. So, like using that as your exclusive way to control your weight isn't really a reasonable approach for people who have normal lives, jobs, and families, etc.

Russ Roberts: We've had Gary Taubes on this program. And he's--I'd say, known for two things, among others. But the two that come to mind that he's talked about on the program: He's not a big fan on the program: He's not a big fan of sugar. Which you probably could add, join your list of things we know: probably excessive amounts of sugar are not particularly good for you. Maybe no amount is particularly good for you. And he's also known for advocating a low-carb diet as potentially at least a way to reduce weight. You wrote, I think in this article on the metabolic chamber,

When it comes to diets, the researchers have also debunked the notion that bodies burn more body fat while on a high-fat and low-carb ketogenic diet, compared to a higher-carb diet , despite all the hype. [boldface per original--Econlib Ed.]

Do you think that's a pretty iron-clad conclusion?

Julia Belluz: So, I think that's--I don't know if it's ironclad. Like anything in science, it's a measurative[?] process, and maybe I know these researchers are also working on comparative studies where they look at low-carb--they look at more head-to-head outcomes. Sorry. People following different diets. Compare them and look at their different outcomes. I think where I diverge from Gary--I think he's absolutely right that when we talk about the changing food environment, the big thing that has changed is this--we're inundated with processed, cheap calories. And many of them are taking the form of sugary, you know, carbohydrate--

Russ Roberts: Carbs--

Julia Belluz: Yeah. However, at the same time, people have been eating a lot more of other things, too. So, our fat consumption has gone up. We are eating more calories generally. I think it's simplistic to say it's only, like sugar is the only problem; and I think it's reductionist. I think there are many other things that have changed about our diets. And, people are consuming more of--and we're also consuming more protein, for example. So, meat consumption continues to go up. Cheese--we eat a ton of cheese. I don't think it's just the sugar. I would love if there was just one simple thing that we could say is the problem, but I don't think it's just not.

Russ Roberts: But that's a stronger claim, that the low--many listeners who have written me after the Gary Taubes episodes said they cut down carbs. Many, I'm sure, listening right now. And they write me and say, 'I lost 40 pounds and I've kept it off for 3 years.' Which blows me away. Because, for me, when I reduce my carb consumption, it does--I do tend to lose weight. I just, my body, it gets so unhappy with me that it says, 'Give me back that first potato chip.' It goes crazy for it. And responds, of course, very strongly by adding a lot of fat. And I--I'm curious whether you think that that's open and shut about just low carbs in general.

Julia Belluz: Okay. So, yeah. Where you are asking about that specific study, as well. So, what they were testing was this claim that some people who, yeah, proponents of the ketogenic diet make, which is that once you go keto, you can kind of eat whatever you--sorry--whatever you want of certain food types. And your fat burn will accelerate. You don't need to worry too much about the calories. There was a recent diet book by a doctor at Harvard who, I think he said, 'You can retrain your fat cells and stop worrying about calories forever, if you just follow the ketogenic diet.'

Russ Roberts: And what is--explain what the ketogenic diet is?

Julia Belluz: It's a very--so, you are eating, oh God, I'm going to mess this up. But it's a very low-carb, high-fat diet. So, you are eating, you are staying away from, definitely, like processed carbs, processed breads, sugary foods. And even fruits, by the way. And you are subsisting mainly on protein-rich foods and fats.

Russ Roberts: It's a paleo-like diet.

Julia Belluz: Exactly. Absolutely. And so, what they are testing in the study at NIH was fat burn and whether your calorie and fat burn really accelerate when you are following a ketogenic diet. And they found that wasn't the case. And so, I think--I think, for some people it's absolutely a wonderful way to live. Like, some people do need these--and Gary is one of them--like, he's talked to me about needing these strict parameters. You know, like he can't[?] have just a little bit of chocolate. He has to just like--I don't know if the chocolate completely--and so for some people I think it can absolutely work. And it sounds like it's worked for some of your listeners. I think for the majority of people, or many other people, it's very hard to live that way. And it's very hard to live that way in our current food environment--

Russ Roberts: Of course, I have friends who believe the China study--which I don't; I think it's really bad science. But they tell me that they believe the China study. They've cut out blah, blah, blah from their diet--they would say they are vegetarian now. And they've lost all this weight, and they've kept it off. So--

Julia Belluz: All the more power to them.

Russ Roberts: Yeah. One of my theories is: If you believe the diet, it might work. But otherwise, the average person, it doesn't. I don't know.

Julia Belluz: Yeah. And that is the difference. So, in every diet study, they find this massive individual variation. So, like every time--there was a recent study at Stanford called the DietFits Study, and they compared people following a low carb versus like just a regular, like a higher-carb diet. And the results were virtually superimposable. And what they looked like was that on average people didn't lose that much weight, but in both groups there were people who lost a lot, and gained some. And so there was this variation. And I think that's true for every diet. And I think for many people, it's like a matter, it's experimenting with different things, finding out what works for you. But I think the bottom line is that you need to eat fewer calories. Like, you can just eat what, you know, like on a ketogenic diet, you can eat, as the NIH studies showed, as much as you want and be able to magically accelerate your fat burn, and lose weight. So, that's where I come out. But I think the science is still evolving, and maybe we'll find out that ketogenic diets are what we should all be eating. I don't know. But for now I'm not convinced.

| | 55:41 |

Russ Roberts: It's not surprising that your response to carbs might be different from mine; your response to fat might be different from mine. And one of the lessons, I think of nutrition and diet and metabolism--very similar to the lessons in economics--you have complex systems. Policy intervention that might work in one town might not work in another. It might work for one group but not for another. It might not work at all: It's an illusion based on reverse causation and the problem of confounding variables that you talked about. And it's a complex system. Which means, also, that the body--which means that changing one thing can lead to changes in the other thing that you don't control. And you have a beautiful example of this in your summary of what we know about metabolism--another piece you wrote--where you say, "Dieting can slow down your metabolism." It's like--Whaat?

Julia Belluz: Yeah. That one we have to be careful with, because that's also another study that came out of this group at NIH; but they found that--so, your diet, your metabolism does slow down a little bit. It recalibrates when you are losing weight. But it normalizes again. So, if you don't have as many fat cells in your body, you don't have--if you are shrinking, you don't require as much energy to sustain, to, you know, require as much energy to live. And your metabolism will slow down a little bit. But, where that claim came out of: There was a big study of The Biggest Loser, TV [television] show participants at NIH, of all places. And they found that these people who--they went on crash diets. So, they vastly cut their calorie intake and ramped up like to hours' of exercise a day. And they destroyed their metabolisms in the process. So, they saw what looked like a permanent decrease in their metabolic rate. And so their body was like fighting to hang on to every calorie they were eating. And it made their weight--it made maintaining their weight loss almost impossible. And over the long term, when these TV show contestants were followed up by the NIH, researchers, many of them had regained their weight, and some of them even gained more weight than they went in to the TV show with. So, and I think the big message there was: That might have been more of a response to the extreme intervention that they put themselves through, than what everyone might experience by just trying to eat a little bit less each day. You know what I mean?

Russ Roberts: Sure. But it wouldn't be surprising if you when you were losing weight, your body were thinking, 'Uh oh. Famine. Uh oh. Food supply not available'--

Julia Belluz: Right.

Russ Roberts:'Conserve. Take it easy. Take care.' So, my point is that, you know, there are these unintended consequences in our bodies that are not that different from the unintended consequences of public policy that don't turn out the way we expect because things change that we don't expect to change. It's a complex system.

Julia Belluz: Absolutely. Yeah.

| | 58:50 |

Russ Roberts: So, we're almost out of time. I just--I want to close with--you can talk a little bit more about exercise and what you learned from--you know, I think we do have a romance about the opportunity of exercise. And, in your time in the chamber you learned some things about that. When you were riding that exercise bike, I'm curious how hard you were pedaling. That's number one. But, more generally: Is there anything we've talked--we've gone all over the place; it's all been interesting. But, are there any lessons for losing weight other than eating a little bit less every day?

Julia Belluz: From--okay. Hmmm. I think the one other thing I did in the study was I had to estimate my calorie consumption. And, I thought I was being so thorough and generous; and, again, I'm quite careful about what I am eating or aware of what I am putting in my body, I think. And yet, I had massively underestimated--I think by the percentages in the story, but it was like 30% or something? Like, I really underestimated my calorie consumption. Because, based on, basically what I reported, it would be impossible for me to maintain my current body size if that's really what I was eating.

Russ Roberts: That's fascinating.

Julia Belluz: And so I think the lesson there is like--yeah. Exercise: Fantastic for health. Exercise as much as your time allows. And you'll reap so many rewards. Including, potentially, even a longer life. Like, it basically doesn't get any better than that. But I think sometimes in our quest for this, like, magic solution or this one simple answer, we overlook, you know, the salad dressing we put on our salad at lunch. And, you know, all these little things that add up in a day to many, many calories that, yeah, we're not even aware we're eating that might be making losing weight or maintaining our weight much harder than we'd like.

Russ Roberts: Because, when you were in that chamber, you were able to find out basically how many calories you were burning through just sitting, resting, your normal sleep patterns, working on a computer, etc. Which we all have a fantasy about, I think inaccurately as you say--and similarly we have a fantasy about how many calories we take in to offset all those changes.

Julia Belluz: Right. Exactly. And yeah. So, they were able to measure that. And it looked like--yeah, I got this very precise reading on how much I'm burning. And they also feed you three meals while you are in the chamber, and they know exactly--

Russ Roberts: Darn--

Julia Belluz: Yeah. They measure down to the gram. And then you have to send through the chamber wall anything you don't eat. Which they then record, to get this precise measurement of your calorie consumption. So, I had a pretty good sense; and I was surprised by, yeah, how much we sometimes, we might underestimate or we are putting in our bodies.

Russ Roberts: Did you smuggle anything in? Just in case?

Julia Belluz: You know, I was surprised I could have. I realized they don't bring any food in. And actually I should say they also watch you through--so there's like a Plexiglas window in the chamber. And they watch you through that and check in on you. And there's also a video camera in a corner of the chamber. So, they are watching you through that, as well. And I'm sure if I was, like, eating chocolate bars, they would have discounted me as research--

Russ Roberts: Enng--enng--enng.

Julia Belluz: I got in trouble when I wasn't resting enough. Like, you have these rest periods where they want to see what's happening with your metabolism at rest; and I definitely--sometimes I was too jittery. I wasn't resting enough. And I got scolded.

Russ Roberts: Last question: How did that experience--and, like you discovered you were eating more, probably, than you thought you were. Did it change you in any way? In terms of your behavior? Did you find yourself--how long ago was it, and what's happened since then? Besides you got a very nice article about it. Which we'll link to.

Julia Belluz: Yeah. I don't know if I changed my behavior. I think like that now my health routines are pretty set in. But again, it did make me think about how--there was a big gap between the reports I was getting about my health and sometimes how I feel about, you know, my health. And it did make me think about all this messaging in our society from like, yeah, the Dr. Ozes and the Gwyneth Paltrows, and the gym conglomerants, and the healthy food purveyors--

Russ Roberts: and the water industry--

Julia Belluz: The water--yes. Big Water. And Big Blueberry. And all these--yeah--we are constantly bombarded with messages about how we could be a little bit healthier. And how we should be doing x or y. And I guess, yeah--it made me a little more aware of how those messages might affect you. And even if you are a critical thinking, you know, informed person about these issues, somehow, yeah--they can affect you and shape how you think about yourself. And so, I guess that's the one thing that--that and thinking a little more about maybe some times that I'm underestimating my calorie consumption. So, what I'm eating, a little bit more that sometimes I'm underestimating it. And it also gave me a whole new appreciation for the research they are doing at NIH and how difficult it is--going back to our first conversation--how difficult it is to do this kind of research.

|

(9 COMMENTS)

Alan Lightman on Science, Spirituality, and Searching for Stars on an Island in Maine

Author and Physicist Alan Lightman talks about his book Searching for Stars on an Island in Maine with EconTalk host Russ Roberts. This is a wide-ranging conversation on religion, science, transcendence, consciousness, impermanence, and whether matter is all that matters.

This week's guest:

• Alan Lightman's Home page

This week's focus:

• Searching for Stars on an Island in Maine, by Alan Lightman on Amazon.com.

Additional ideas and people mentioned in this podcast episode:

• Einstein's Dreams, by Alan Lightman on Amazon.com.
• Lucretius, Epicurian poet. Stanford Encyclopedia of Philosophy.
• Artificial intelligence, consciousness
• Rodney Brooks on Artificial Intelligence. EconTalk, September 2018.
• Harry Frankfurt. Wikipedia.
• "Wanting to Want What We Want," by Russ Roberts. Medium.com. October 13, 2016.
• "The Turing Test, 1950." The Alan Turing Internet Scrapbook.
• Ex Machina (2014) Trailer. YouTube.
• Rene Descartes. The Internet Encyclopedia of Philosophy.
• David Chalmers, Thomas Nagel
• "How do you explain consciousness?" David Chalmers, TED talk.
• David Chalmers' Website.
• "The Core of 'Mind and Cosmos'," by Thomas Nagel. New York Times, Opinionator, August 18, 2013.
• Thomas Nagel's Page at New York University.
• John Gray on the Seven Kinds of Atheism. EconTalk.
• Steven Pinker, Nassim Nicholas Taleb
• Enlightenment Now: The Case for Reason, Science, Humanism, and Progress, by Steven Pinker on Amazon.com.
• "Fooled by Belligerence: Comments on Nassim Taleb's 'The Long Peace is a Statistical Illusion,'" by Steven Pinker. StevenPinker.com, PDF file.
• "The Decline of Violent Conflicts: What Do The Data Really Say?" by Pasquale Cirillo and Nassim Nicholas Taleb. Nobel Foundation Symposium 161: The Causes of Peace. FooledbyRandomness.com, PDF file.

A few more readings and background resources:

• The Matrix (1999) Trailer. YouTube.
• Max Planck
• Max Planck. NobelPrize.org.
• "The Planck Epoch." The Universe Adventure Blog, University of Berkeley Physics.
• "Max Planck: The Tragic Choices," by Freeman Dyson in The New York Review of Books, October 22, 2016.
• C.S. Peirce (philosopher). The Internet Encyclopedia of Philosophy.
• "Fermat's last theorem earns Andrew Wiles the Abel Prize," by Davide Castelvecchi. Nature, March 15, 2016.
• Hebrew Word for Passion. Meanings of word "to cleave." Passion of Heart blog.
• Albert Einstein. NobelPrize.org.
• Zen Mind, Beginner's Mind: Informal Talks on Zen Meditation and Practice, by Shunryu Suzuki on Amazon.com.
• "Dan Brown Can't Cite Me to Disprove God," by Jeremy England, Wall Street Journal Opinion, October 12, 2017.
• Various favorite novelists
• Virginia Woolf. The Encyclopedia Britannica.
• Virginia Woolf's works on Amazon.com.
• Fyodor Dostoyevsky. The Encyclopedia Britannica.
• Fyodor Dostoevsky's works on Amazon.com.
• Franz Kafka. Biography.com.
• Franz Kafka's works on Amazon.com.
• Michael Ondaatje's works on Amazon.com.
• Annie Proulx's works on Amazon.com.
• Arcadia (Play)) by Tom Stoppard. Wikipedia.

A few more EconTalk podcast episodes:

• Chuck Klosterman on But What If We're Wrong. EconTalk, August 2016.
• Deborah Gordon on Ants, Humans, the Division of Labor and Emergent Order. EconTalk, August 2007.
• Robert Wright on Meditation, Mindfulness, and Why Buddhism is True. EconTalk, October 2017.
• Michael Pollan on Psychedelic Drugs and How to Change Your Mind. EconTalk, June 2018.
• Freeman Dyson on Heresy, Climate Change, and Science. EconTalk, May 2011.

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

Intro. [Recording date: October 11, 2018.]

Russ Roberts: My guest is author and physicist Alan Lightman. I first encountered his writing years ago with his extraordinary novel, Einstein's Dreams, which I recommend highly. His latest book is Searching for Stars on an Island in Maine, which is our topic for today.... This is a short book that bristles with ideas and some beautiful poetic writing. It's a book about being a thinking human being. It's about the relationship between religion and science. I enjoyed it very much. I want to start with our desire as human beings for absolutes that you write about, and how science has systematically dismantled many of those absolutes, if not all of them, and made them harder to believe in. What do you mean by that idea of an absolute and how science has affected it?

Alan Lightman: By 'absolute,' I mean belief in qualities that cannot be proven but seem to be anchors for our existence, like permanence, immortality, eternity, certainty, unity. These are some of the qualities that I mean. Indivisibility. And, although those qualities, those concepts, most of them, are abstract, they have sometimes been associated with physical objects. For example, the idea of unity and indivisibility, indestructibility--that idea--I should just go back and mention of course that the immortal soul and God are some of the absolutes. But the physical atom has been associated with the idea of unity and indestructibility and indivisibility. And stars have been associated with the idea of eternity, divinity, indestructibility, permanence, for example. And modern science has shown that most of the absolutes that are associated with physical ideas, physical objects, that is--at least the physical object has been shown not to embody the absolute. So, for example, stars have been shown to be finite, to eventually burn up their nuclear fuel and die. So, stars are not permanent; they are not indestructible. They are not divine, because we've shown that stars are made out of material stuff like we have on earth. In the late 1800s and early 1900s, atoms were split; and we continue to find smaller and smaller parts of the atom. The atom is not permanent, either; it is not indestructible; it is not indivisible. Probably the greatest absolute for unity is the universe as a whole. You can't get a bigger unity than the universe as a whole. Uni-verse, and in the last 20 years or so, there's been evidence--both theoretical and experimental--that there are, that there may be a large number of universes in addition to ours. So, even in our universe, we find that there's a multiplicity rather than a unity. And, these scientific discoveries don't disprove the absolutes; but they bring them into question, since their physical counterparts do not embody the qualities of the absolute.

Russ Roberts: One of the poignant and powerful parts of this book is that, as you write those things--in different ways and different examples--the book remains an incredible testament to awe, and the awesomeness, in the old sense of the word, of the physical world, and the world we live in that we have to confront as thinking human beings. So, as you describe, the loss of these absolutes from the scientific perspective, you concede at various places the natural yearnings that we have to hold onto them. So, talk about that. Because I think you describe in very powerful ways the tension that a thinking person has to have, I think religious or not, about this reality that--we understand more and more about the world; the more we understand, the less it seems to be permanent, reliable, and spiritual. It seems to be mainly physical. So, talk about that tension.

Alan Lightman: Well, I think that for thousands of years there has been a tension between the material and the immaterial. That is, on the one hand, the desire to understand the universe as made out of material--as a physical thing--and all of our science is based upon that: the reduction of phenomena to, by rationality, by method, by quantifying. And all of those deductions lead us to believe that nothing is permanent. That everything passes away. Nothing is unified. But, I think at the same time, for thousands of years, we have had a yearning for permanence. For something that outlasts our brief human life. And you can go all the way back to the Cro Magnon caves, where you can see burial sites near the caves where the Cro Magnon people prepared their dead for the next life. I think that our own impending death, our own mortality, is one of the greatest drivers of our longing for immortality. That longing for the soul, for God, for something, this permanence that outlives our fleeting lives. And so, that's where the tension comes about: Our observation and our experience with the physical world that seems to be material and impermanent, and yet, and our own impending deaths; and yet our desire to live forever--at least to have some part of us that lives forever. Or even if it's not part of us--if it's not our immortal souls--that there be something in the universe, or even maybe perhaps beyond the universe, that is eternal. And that thought brings us comfort in the face of our own impending death.

| | 8:49 |

Russ Roberts: Why do you think we care? Obviously, our impending death is a fact. Our awareness of our impending death is somewhat--maybe totally, almost unique. Maybe there are some animals that are aware of death. They watch their fellow creatures die. I don't know whether they can look forward, if they can expect their own deaths. But, we have that awareness. We also are, of course, a brain inside a physical body, a physical body that's very appetite-driven--like all animals. And yet we find some conflict between an urge to satisfy those appetites, in all kinds of different ways, and at the same time desire that there's more to life than just the satisfying of those appetites. Why would that be?

Alan Lightman: Well, I think there are two factors there. It's a wonderful question. And I imagine that some animals with higher levels of consciousness must be aware of their own deaths. But one factor, I think, is our fear of nothingness. And you can read this all the way back in the writings of Lucretius, and the Nature of Things. One of the reasons why Lucretius invoked atoms and materiality is because he wanted to assuage the fears of people about nothingness. The void--nothingness--is a very fearsome prospect. And the other, I think, is our search for meaning. And, I think that the desire to find meaning in the world, meaning for both yourself and meaning for the cosmos, require a very high level of intelligence and brain development and consciousness. I know that dolphins and chimpanzees are very smart animals; but I don't know whether they have a quest for meaning the way that human beings do; and it would be hard to document that. But, I know that homo sapiens, at least, want to find meaning in their lives. Whether you are consciously searching for meaning or whether you are unconsciously searching for meaning. And many of us do that by making friends, by devoting ourselves to our family; by trying to write books. And so on. But, I think--and I'm speaking now personally of me, but I think it's true of other people as well, that I think that in our search for meaning, that permanence is a quality that we associate with meaning. If something lasts a very long time, that has a possibility of more meaning than something that's very fleeting. If you have a good meal at a Shoney's Restaurant, you feel happy and satisfied and content for a few hours. And then it passes away. It's a fleeting experience. But if you think that your children and your grandchildren and your great-grandchildren are going to remember you and fondly look at photographs of you and be proud of you if you'd done good deeds in the world, that seems to have more meaning. And so, we associate meaning with permanence. Whether that's valid or not, we do that. And I think that's one of the reasons why we have a yearning for something that's permanent.

| | 12:50 |

Russ Roberts: So, I want to take a depressing but fascinating example from the book. You talk about an ant colony that somehow develops art and music under the ground, and somehow lasts for a hundred years--just an incredibly long time for an ant colony. It speculates--the ants speculate about their role in the cosmos. But then, a flood comes along and wipes them out. Even though it lasted a hundred years--does it have any?--there's nothing left. And you raise the specter--and I found this deeply haunting--and actually, I don't find it as depressing as I might, but, maybe that's because I have some religious faith--the specter that the universe's life is finite. As you said: All the stars with burn out. King Lear will be forgotten. Even Lady Gaga will be forgotten. Even if we go to a different--I know, it's hard to believe. But even if we go to a different galaxy, but if we develop the ability to get off this planet when our star burns out: They are all going to burn out. Slowly, inexorably. And then they'll be gone. And this thing, whatever it is--and I guess--in a way there's something deeply depressing about that, just like death is challenging to confront. But, at the same time, it forces you to realize that there's a deeper mystery at the heart of that, that can't be avoided or ignored. It can't be the whole thing. Something else is there. [?] what it is.

Alan Lightman: Well, yeah. Well, I mean, that's one view: that there must be something more than that. And there are other people who say, 'No. That's the whole ball of wax. That's all there is.' So, I think many of us would like to believe that there's something more than that. But, we don't know.

Russ Roberts: Well, I would say it differently, then, maybe. I would say--clearly; and I think you hint at this in the book, and maybe say it in a different way--our minds--well, I guess Einstein's. I'm going to read the quote from Einstein. Einstein clearly suggests that our brains can't wrap themselves around the idea, just like the ant--you don't say it this way, but the ant in that colony that's about to get swept away, you know, they are talking and someone hears thunder and thinks, 'Well, this could be the Big One'; or, 'Let's all huddle together and enjoy these last few seconds,'--there's something else going on, whether it's the storm or whatever it is. I'm not suggesting it's--you know, by definition, God, or a personal God. That's a huge leap, obviously. But, the idea that the universe comes into being and dies out, can't--I don't know. I'm having trouble thinking of that as "the whole thing." I know that you're right: I understand there are people much smarter than I am who feel that way. But I say that, not: 'Oh, it's therefore God.' I say that because it seems deeply, intellectually unsatisfying.

Alan Lightman: Oh, it's very unsatisfying. And it's unsatisfying for me, as well, that that would be the whole thing. I mean, even if you take the point of view that there are other universes out there--and many physicists now have this view--and that universes are constantly coming into being by fluctuations in the quantum foam which we--you know, we can't prove that, but that's what a lot of physicists believe. Even if you take that view, that there's been an infinite number of universes and ours is just one, that still doesn't answer the question: Why is there something rather than nothing?

Russ Roberts: That's a simpler way to ask my question.

Alan Lightman: And that's a--if you ponder that for a few minutes, it starts to get--it stretches your mind. You start going around in circles, and you start getting upset. At least, I do. And I think one of the deep reasons why people believe in God or a spiritual world is they want to answer the question: Why is there something rather than nothing?

Russ Roberts: Here's a quote from the book that I love. You write:

The most profound question seem to have this fascinating aspect: Either they have no answer at all, or all possible answers seem impossible.

And that kind of captures it beautifully.

Alan Lightman: Yeah. Yeah. Yeah.

| | 17:34 |

Russ Roberts: Well, let's--I mentioned I was going to read an Einstein quote. I'm going to read it; and then we'll shift gears after this. But I'll let you respond to the Einstein quote. But, it's a quote you bring into the book. It goes like this:

I'm not an atheist. The problem involved is too vast for our limited minds. We are in the position of a little child entering a huge library filled with books in many languages. The child knows someone must have written those books. It does not know how. It does not understand the languages in which they are written. The child dimly suspects a mysterious order in the arrangement of the books, but doesn't know what it is. That, it seems to me is the attitude of even the most intelligent human being toward God, to see the universe marvelously arranged and obeying certain laws but only dimly understand these laws.

And, you know, to some extent this is the Watchmaker argument. It's a more poetic version of it, that there is order in the universe. But I think the more interesting--that's not a very compelling argument to somebody today. But I think that the poetry of that insight is captured, I think, in what you call the Central Theorem of Science, which is that we can fundamentally understand the laws of nature, and that they happen to be written in mathematics--that also boggles my mind. Mathematics seems to be something we made up. And yet, it is how we understand the reality that we find ourselves in.

Alan Lightman: Yeah. Well, first of all, if I may, I call it the Central Doctrine of Science--

Russ Roberts: Sorry--

Alan Lightman: not the--but that's very close to what you called it. I don't think that mathematics is made up. Because, we find a lot of surprises in mathematics. I don't think that we make it up, that the ratio of the circumference of a circle to its diameter is the same number for all circles. That's a truth about the nature of geometry. And so I think there's--and I don't think that physicists make up the laws of nature, either. Because we sometimes discover things in physics that surprise us. In fact, that contradict previous beliefs--

Russ Roberts: Yeah. That's not what I mean by 'made up.' I meant they are--we perceive the world through our consciousness. And we see that as reality. And that's not obviously the case--

Alan Lightman: Yeah. Yeah. Right. Yeah. Of course, a lot of philosophers, like George Barkley have claimed that we have no evidence that there is an external reality outside of our minds. That everything that we believe is a human construction. But I think that all scientists have to believe in order to set pen to paper, or set the first ball swinging in motion for the experiment: that, all scientists have to believe that there is an external reality out there, that's independent of our minds, that exists whether or not we see it or hear it. It's certainly true that we are limited and stuck within the three pounds of gray matter in our skulls: that we see and think everything through our own consciousness and sensory apparatus. But I think that we have been able to probe a world that is external to our own consciousness.

Russ Roberts: Well, it certainly feels that way. We get empirical confirmation of that all the time. Of course, that may be deceptive. But, it feels that way. You write: "Is it not a testament to our minds that we little human beings with our limited sensory apparatus and brief life spans, stuck on our planet in space, have been able to uncover so much of the workings of nature?" Extraordinary.

Alan Lightman: Well, if I could just interject one thing: One of my favorite movies is The Matrix. I don't know whether you saw it.

Russ Roberts: Yep. Sure.

Alan Lightman: And what I found so profound about the movie, [?] the imagination that went into it, is the suggestion that everything that we see is an illusion. That we're sort of being manipulated by some giant computer somewhere. And it's very hard to disprove that hypothesis.

Russ Roberts: Yes, it is. And it's of course been the basis for mysticism as well, in religious life--that there is a reality that this is masking; that we are living in the dream of God. That we're--I find it fascinating, and this is not a very novel observation, but certainly the willingness of extremely smart people to suggest the possibility that we are actually living in a giant computer simulation, to me is an example of the--I would call it the dogmatic nature of human beings. We've replaced the belief in God--many of us have--with a view that's a lot like it. Just without the obligations or many of the things that are difficult to rationally accept. And yet, that vision--that techno-vision--is analogous to a divine vision.

Alan Lightman: Yeah. It is. And also, like a divine vision it's impossible to prove or disprove. It's just one of those sort of recreational musings that comes along with high intelligence.

Russ Roberts: Ah, it's a great line.

| | 24:09 |

Russ Roberts: Well, let's shift gears. I want to talk about consciousness more explicitly. You write:

For me, the human body is the most amazing and baffling phenomenon of the material world. How could it be that the exquisite and indescribable experience of consciousness, of thought and emotion, of the overpowering sense of an "I," is simply the result of so many electrical and chemical flows between neurons which are themselves nothing but atoms and molecules? I am constantly struck dumb by this mystery. Surely, the first single-celled creatures moving about in the primeval seas did not have consciousness or thoughts. Evidently, those qualities emerged with increasing complexity and natural selection.

I want to start with this question of whether you think advancing artificial intelligence will simulate, replicate a brain. Will we be able to build a brain in a box that will have--

Alan Lightman: Self-awareness.

Russ Roberts: Yeah. And the key I like is from Harry Frankfurt. He applied it to animals, but I mentioned it in a previous episode with Rodney Brooks; and I should have attributed it to a teacher of mine, James Jacobsen-Maisels, who says that the desire about our desires might be the real test of consciousness. Will a robot built as a smart vacuum cleaner yearn to be a driverless car in 50 years? I have trouble imagining that, but that just could be my challenge. What are your thoughts on that?

Alan Lightman: Well, I don't think that we know whether we can build a brain--a brain made out of silicon. We don't know. The experience of consciousness is so unusual, it is so unique--I mean, you really can't even talk about the world except through your consciousness. It seems impossible that you could build an artificial consciousness. But, if the brain is nothing but material, and consciousness is just the sensation of all of the electrical and chemical flows between material neurons, then it seems in principle that it would be possible to build a machine that has consciousness. Now, I don't know how we would, could prove for certain that a particular computer was conscious in the same way that I can't prove for certain that there are other minds besides mine. There's no way that I can prove--I can design certain benchmarks that I will say something and you will respond to it. Or you will do something that surprises me. But, I can't prove that there is any other thinking mind in the universe besides my own. And, in the same way, we could design certain benchmarks for a computer, analogous to the Turing Test or the various tests to say whether a machine is intelligent or not. But any such set of benchmarks that we design would be finite, would be limited. We could have 10,000 or a million different steps in it, but we couldn't do an infinite number of steps. And so, we're never going to know for sure whether we have created a computer that fully matches human consciousness. But on any limited task, like the ability to drive a car, or the ability to give interesting answers as a psychologist would on the other side of a curtain--any limited task, I am sure--

Russ Roberts: Write a song--

Alan Lightman: Write a song. Right. Write a novel. I am sure that any finite task, we will eventually be able to build a computer that can do that. And whether that computer has self-awareness and consciousness is something else.

Russ Roberts: I just mention to listeners, if you haven't seen the movie Ex Machina, it's a somewhat--it's the beginning of a thoughtful look at some of these issues, and I enjoyed it.

Alan Lightman: I liked it also.

Russ Roberts: You know, you mentioned something I've never thought about--which disturbs me a lot--but it's a beautiful and incredibly provocative--[?] you said that you can never be sure that there are other minds besides your own. And you also can't be sure that the world didn't come into existence a second ago, with all the memories that we have of the past. And that's sort of irrelevant except for justice and punishment: it would be a weird, horrible thing to punish somebody for something that was actually only a memory. So, that's one place where it matters. But in general, it doesn't matter. But I guess you'd also have to ask how you could know. You said, 'other than my own.' You also really don't know--I'll speak for myself. I don't really know that I'm thinking. I have the illusion, perhaps, of consciousness. I certainly have the feeling of free will, which we know could be and illusion. So, the fact that I feel as if I'm a thinking being may simply be a deception I'm perpetrating on myself or that has been perpetrated on me. Right?

Alan Lightman: Right. Well, people have been worrying about this problem since Descartes, cogito, ergo sum; before Descartes as well. It's one of those questions where you go round and round in a circle, and maybe in the end you come to the conclusion that it doesn't matter.

Russ Roberts: Well, yeah. It's always--that's one of my views on--I mean, there are a lot of things you can think about on these questions; you can't really articulate or, as you say, you are in the circle and you struggle to have a coherent description of it. But it's certainly--we act as if we have free will and that the people around us do. I treat you as if you have free will, and you treat me that way. That's a fascinating thing, also, in and of itself.

| | 31:03 |

Russ Roberts: But let me move on to--the philosophers David Chalmers and Thomas Nagel have been deeply troubled by, what they claim--and others take the other view--but they claim that our current scientific structure, particularly the biology and nature of evolution, natural selection, cannot explain what they call Qualia--the texture of daily life, the joy of a blue sky and the poignancy of the ending of a movie, the look in a loved one's eyes across a table. These don't seem to be related to fitness--would be one way to think about this. What are your thoughts on that?

Alan Lightman: Well, I think it's--I don't think that's a very good argument, or question, because I think that it's very plausible that some of our aesthetic sense, our moral sense, our creative imagination is a by-product of qualities that do have selective value. And, I mean, you can think of many other things that are by-products. I'll come up with an example in a minute. But, once you develop the brain to have a certain level of intelligence, which we do think has selective value--you might not be able to outrun a sabre tooth tiger, but you can outsmart it--once you have a brain of sufficient level of intelligence, then many of these other things, these Qualia, like the joy of looking at a sunset and so on, the pleasure in creating art--those are by-products of the high intelligence. So, I think that you don't need a direct selective mechanism in order to explain some of the pleasures of daily life. They are just by-products.

Russ Roberts: Gravy.

Alan Lightman: They are gravy. Yeah.

Russ Roberts: But Chalmers doesn't seem to think so. I don't know why--I've read a variety, a little of his work, some of his work; I've seen him lecture. He claims we are going to need a "different biology." He's not a religious person. He's an atheist. But he claims that we're going to need a biology that--here's the way I would say it that I think is the most provocative version of it. It's a little bizarre that the thing that we use to understand the cosmos is the only thing that we struggle to fully understand scientifically; and that's troubling--is the way I would say his challenge to the current level of understanding of consciousness. Do you think that's a good description, and if so, do you agree?

Alan Lightman: The thing that we use to understand the cosmos is he's speaking about the human brain?

Russ Roberts: Yeah. Well--yeah, that's the question. Consciousness, our minds.

Alan Lightman: Consciousness.

Russ Roberts: He says--I think his claim--I don't know if I'm being fair to him. I think his claim is that it seems to reside--it's hard for us to get outside ourselves. All this weird conversation we're having right now, or the last 5 minutes, is the fact that we're stuck with the 3 pounds of gray matter. And it's a little strange that that's the only thing we struggle to fully comprehend. That's the way I understand his criticism of the state of science about consciousness. And it raised the possibility that we won't ever--some people claim that, also. Which is--that's a disturbing aspect of the theory: We can understand everything about the evolution of the Big Bang except for the Planck--is that epoch? 'Ee-poch'--is extraordinary; but we can't understand why we have this urge to, all the things we've been talking about, the [?] of meaning, the connections we have across the dinner table, all the longings we have to survive. All this seemingly unnecessary stuff for survival, even if it's just a by-product, it's a little strange. It's kind of, for us it's the whole show. Or 90% of it, 80%.

Alan Lightman: Well, I understand it--I do understand it as the byproduct. That's the way that I understand it. And that does not seem to be mysterious to me. It seems perfectly logical that you design a tool to do one thing, and then you find out that it can do some other things as well. That--you might design a hammer to hammer a nail, but you find that you can also use it as a paperweight and other uses as well. And, of course, when we talk about design here, I'm speaking about natural selections--emergence--or you could say design by God, or you could--whatever your preference is. But, it doesn't seem unusual to me at all that an organ--in this case, the human brain--that evolved to solve immediate life-or-death problems by a certain strategy that in this case is very high intelligence, that that high intelligence would also lead that brain to ask questions about what is the meaning of the cosmos, and so on. That doesn't seem surprising to me, and I don't think that we need a new biology to explain that. So, I'm afraid that, although I'll respect Mr. Chalmers very much, I disagree with him on this. I don't think that we need a new biology. There's a lot that we don't understand about biology. We still don't understand exactly how memory is stored and the neurons; we don't understand completely how cells learn how to specialize in the embryo. But, there's no evidence, yet, that we need a new biology to understand those, or a non-material aspect of our biology. It's just that, you know, we have a--science is constantly progressing and revising its theories and learning more with new data. And that's the way science works. Even when physics was overthrown, the ideas of physics in the 20th century with quantum physics and relativity, those new conceptions still fit within a basic understanding of cause-and-effect relationships, forces, and so on.

Russ Roberts: I've invited both Chalmers and Nagel to be on EconTalk. I don't fully--I may not be representing Chalmers's view as eloquently or accurately--I know I'm not--as he would. So, maybe that's something that could change down the road. I don't know--I can't defend his argument against your challenge.

Alan Lightman: Well, it's interesting, and I think it's very important that people like Chalmers are constantly thinking and questioning what we know and how we know it. And I hope that we always have intellectuals and thinkers like that.

| | 39:21 |

Russ Roberts: One of the beautiful ideas in the book that this is related to, as you just described the scientific method, essentially, is the belief that scientists have in what I think you call a final theory, a full, unified everything. And yet you say that when we have it, we won't know for sure. Talk about that.

Alan Lightman: Well, it's a wonderful irony: Science is--everything that we believe in science is provisional, that we consider all of the equations that we write down and the laws for electricity, magnetism, and so on to be approximations to deeper laws. So, science is a process, a provision and ever-better approximations. There are some physicists who believe that there is an ultimate set of laws which are not approximations, which need no further revision. And Steve Weinberg, who is a Nobel Prize winning physicist, calls that 'the final theory,' and in fact wrote a whole book called Dreams of a Final Theory. And there are a number of physicists, but not all physicists, who believe that such a set of laws exists. The delicious irony of that, is that even if there is a final set of laws that require no further approximation, that are exact, we would never know for sure if we had found them, because you can never be certain that tomorrow you might not find, might have found some physical phenomena that disagrees with your theory. You can never be sure of that. And so, even if we were in possession of Weinberg's final theory, we would never be certain that we had it. So, we'd never be able to sort of break out the champagne and pop the cork.

Russ Roberts: I think I've mentioned this example before--mentioned it on EconTalk--but, Charles Peirce, the philosopher, built a house; and I think it was described as the--he left the second floor empty for a ball. It was a ballroom. And the ball was going to be held when he, the celebration would be held when he discovered the secret of the universe, the meaning of the universe. And in the description of this in the essay I was reading, the next sentence was very nice. It starts off, "While the ball was never held, [comma]"--so we won't always know when we get there. And yet, my impression, and I'd love your reaction to this, is that we might feel we were close or at least have a candidate for a final theory if we found it aesthetically pleasing, and not a wild agglomeration of add-ons and additions and caveats and footnotes.

Alan Lightman: Right.

Russ Roberts: And I find that really, both beautiful and strange.

Alan Lightman: Yeah. Well, one of the beauties of modern science, and especially modern physics, is that, because we are constantly searching for theories to explain gravity and electricity and magnetism and so on, is that aesthetics, our own human sense of aesthetics, has been a very good guide to finding the best--the most correct--theory. When I say 'most correct' I mean the one that agrees with experiment the best. That theories or laws, equations that appear to be a jumble of add-ons and ad hoc propositions don't agree with nature as well as theories that are built on a single unifying and simple idea, like Einstein's theory of gravity. Now, aesthetics has not always 100% guided us the right way. Back in the 1920s and 1930s, we thought we believed in something called 'parity conservation,' which basically says that for everything that you see in nature, the mirror image of that also exists in nature. So, nature is symmetrical under reflection in a mirror. And that seems like a very beautiful, simple idea.

Russ Roberts: And there are examples of it. So, it seems--

Alan Lightman: Yeah. There are plenty of examples. But, I think in the 1960s that we found certain experiments that showed that that's not true--that the mirror image of nature is not precisely like the first image. Then another example of that is the belief for centuries and centuries that the orbits of planets were perfect circles--

Russ Roberts: Yeah. Just thinking about it. So much more satisfying than an ellipse.

Alan Lightman: It is.

Russ Roberts: It's illusory[?].

Alan Lightman: So, sometimes our sense of aesthetics leads us astray. But, most of the time it's been a very accurate guide to the more correct laws.

Russ Roberts: We recently had John Gray on the program, the British philosopher; and he's a big opponent of this idea of progress that many of us hold as, he claims, and I think often correctly, as dogmatic. You have a thought on that? Do we make any progress? We certainly make scientific and technological progress: we know more about many things. We also know less about many things, because we know more about what we don't know. But I'm curious if you think in terms of human existence, whether it's made--maybe it's not even a meaningful question, given the impermanence issue you raised earlier.

Alan Lightman: And the question is whether we're making progress--

Russ Roberts: Yeah, as a species--

Alan Lightman: as a civilization--

Russ Roberts: as a species, as a civilization. He claims that this is a leftover from our religious heritage that we should reject. It's a fascinating point. And I think many of do, without thinking, dogmatically assume that life is getting better. And, of course, in many dimensions, it is. Of course, in some dimensions it's not. So, it's a little--

Alan Lightman: Well, it makes me think of Steve Pinker's book--

Russ Roberts: Yes, it does.

Alan Lightman: and I think that he and his assistants have compiled a fair amount of evidence that show that in some ways life has gotten better on the planet: That there are fewer wars, fewer deaths due to starvation; people live longer. So, clearly there's some measures which things have gotten better. But I imagine that there are other measures in which they have not. I'm not sure that our moral life is better than it was a thousand years ago--

Russ Roberts: That's Gray's point, mostly.

Alan Lightman: And I'm not sure that we are happier than we were a thousand years ago.

Russ Roberts: That's Gray's point.

Alan Lightman: So, it depends on how you define progress.

Russ Roberts: Yeah. There's been a critique of Pinker's work on death and war by Nassim Taleb. We'll put a link up to it for those who want to read it. It's quite provocative, as listeners will not be surprised to hear.

| | 47:55 |

Russ Roberts: Before we move on to some physics issues, I want us to [?] one more idea from the book, which is the idea of transcendence. And, I often think that people who--people's ability to experience transcendence is something akin to their musical ear. There may be people who are tone deaf, who can't find it; and there may be people who swim in it all day long. I think you give, in fact you mention it in an example of someone in the book who is just--his life is brimming with a feeling of transcendence. Talk about your own, if you can, your own personal encounters with that, and how it relates to the issues we've been talking about.

Alan Lightman: I've had many, what I call transcendent experiences, and I define that sort of loosely as feeling a connection to something much larger than yourself. It may or may not involve God. An experience that I mention in the book, although I've had many, is lying in a boat on the ocean at night, lying on my back looking up at the stars and feeling like I'm connected to the stars, and I'm falling into infinity, and I'm part of the stars and part of the cosmos. And I would imagine that many people have had experiences like that. That feeling of being connected to something larger than yourself is not a feeling that can be analyzed scientifically. Even though ultimately it might be reducible and rooted in the atoms and molecules in your neurons, you could hook a giant computer up to my brain and read out the electrical output of every one of my hundred billion neurons when I was lying in that boat looking up at the stars and it would not have conveyed the experience, or not have described[?] it. And, that kind of experience, which is very personal, it's very vital, it's immediate; it cannot be invalidated by anybody else--that, for me is part of my spiritual universe. And what I did in that book and what it sort of represents the tension I have in my entire life is reconciling my life as a scientist with my life as a human being who has these transcendent experiences and feels that there is a spiritual world in addition to the physical world.

Russ Roberts: Even though, of course, we have no evidence for it. Except--

Alan Lightman: We have no evidence for it--

Russ Roberts: Except for that personal--could just be the neurons firing, as you say. I've talked about it before on here, on the show. It's one of my favorite things in the world, which is when Andrew Wiles, having discovered that his proof of Fermat's Last Theorem had actually been flawed, spent a year trying to reconstruct it; and then one day it just came to him. The right answer, the correct proof. He didn't work on it intensely. He did; but that didn't work. It's just, one day, he saw it. It is--you know, I think the closest thing that a person--it doesn't make sense, but it's a transcendent experience, certainly. It is something akin to a spiritual/religious experience. It's certainly part--you know, I'm a mere economist, but my creative work as a writer and other areas, I experience that at times. And I think--nothing like that--but that extraordinary--it's a physical feeling. It's not just relief. It is an explosion of, an expansion of awareness of your place in the world, that your boat experience [?]. I have those, too, in the natural world. And the stars do a lot for me. But, certainly, intellectual activity has that character. And you mention that in the book, as well.

Alan Lightman: Yeah. I've had that, with intellectual activity. I've experienced similar to what Andrew Wiles described, although not as monumental as his discovery, of course. But it is a beautiful, beautiful experience. It's a majestic experience. And, the--I'm trying--Hinduism--I think that Hinduism has a concept called 'dakshan[?]'--an experience they call 'dak shan[?]'--which is sort of opening yourself up to the divine. Being open to the divine. And recognizing it and being open to it. And I think that these transcendent experiences that we're talking about, you've had, that Andrew Wiles had, that I've had, and many people have had, is really opening yourself up to the sublime. 'Sublime' might be a better word than 'divine.' But, being open to that.

Russ Roberts: In Judaism, the word, I think, would be duvakut[?], which is a cleaving. Strange and interesting word, because 'cleave' is to both separate from and attach to. Which is permanent for all the paradoxes, intentions that we're talking about.

| | 54:18 |

Russ Roberts: I want to turn toward just some general issues in physics that I've love to hear your thoughts on. We had Chuck Klosterman on, a long, a while back. He wrote a book called, But What If We're Wrong? where he speculates--you know, it's very hard for us to imagine that we are wrong about all the things we know are true. But we know that in the past, things that people thought were true weren't true any more. After a while. And one of the ones, the examples he gives in there, if I remember correctly, is gravity. What do you think of our current understanding of gravity? And, do you think it has any possibility of having to be revised?

Alan Lightman: Well, I'd like to slightly revise that word 'Wrong.'

Russ Roberts: Yeah. Sorry. That--well, he's selling books. Gotta--

Alan Lightman: Yeah. Right. No, that's--that's a good word for 'selling books.' And maybe my books haven't sold as well because I haven't come up with words like that. But, it's--what I like to--the way I like to think about our endeavor in science is that we are finding better and better approximations to the way that nature behaves. And getting back to gravity--that, Newton's theory was very accurate for its time. And very successfully predicted the orbits of planets and many other phenomena. And then, in the 19th century, with better telescopes, we were able to show that the orbit of Mercury did not quite fit Newton's theory. And then--

Russ Roberts: Describe the magnitude of that inaccuracy, because it blew me away.

Alan Lightman: Yeah. Well, it was--the displacement of the orbit of Mercury from where it was supposed to be, the displacement in the sky was about 1/100th of one degree every century.

Russ Roberts: It's amazing.

Alan Lightman: Yeah. It is amazing. But, and it is amazing that we had telescopes--

Russ Roberts: Exactly. Of that precision--

Alan Lightman: that were precise enough, precise enough to be able to find that minute discrepancy. But anyway, in 1950, Einstein proposed a new theory of gravity that was a better approximation to nature than Newton's theory. And, so, rather than saying that Newton's theory was wrong, I would say that Einstein's theory was a better approximation to whatever the underlying truth is in nature. And we do believe that there is any underlying truth. But we know that Einstein's theory also will be replaced by an even more accurate theory. We know that Einstein's theory of gravity, called general relativity, does not include quantum. And, we think that all--we think that nature is quantum and must be described by quantum theories; and so Einstein's theory will ultimately be replaced. There are a number of candidates for replacing it, but we don't know now which one is the best candidate. And that's sort of the way that science proceeds, with better and better approximations.

Russ Roberts: But do you think there are things about gravity in the non-quantum area that we don't understand or that we'll improve our understanding of?

Alan Lightman: Well, of course, you can have--you can't be sure. But, we think that Einstein's theory is a very, very accurate theory for all gravitational physics phenomena that doesn't involve quantum. It's made many predictions: black holes, gravitational waves, the very precise orbit of the planet Mercury and other planets. So, of course, we can never be sure that there might not be some phenomena that don't fit into Einstein's theory. But, I can just say that physicists are very, very happy with Einstein's theory--except for quantum phenomena.

| | 59:13 |

Russ Roberts: So, I'm going to get the details wrong, but when--but the point is pretty clear--when there was the test of whether the gravitational force of the sun was bending the light coming from--I forget which planet or star--

Alan Lightman: It was a star. Yeah--

Russ Roberts: there is some question as to whether those data were accurate. And that, Einstein, when asked, 'What would you have done if the results had contradicted your theory?' he said, 'Well, I wouldn't have believed them, because I know my theory is right.' Which is not a very scientific attitude.

Alan Lightman: No, it wasn't. And I think that that was tongue in cheek. I mean, Einstein was known to have been very witty and display some things tongue in cheek. And I think that that was one of them. Einstein was, you know, ultimately, a scientist: Which means that he was ultimately swayded[sic], persuaded by experimental data. And so, if the experiment come out to disagree with his theory and the experiment was repeated many times and always disagreed with his theory, he would have given up his theory. But we know that Einstein was able to revise his theories when faced with persuasive experimental evidence contradicting the theory. Einstein's theory of cosmology was that we had a static universe that was not changing. And, when Edwin Hubbel, in 1929 discovered evidence that the universe is not static, but expanding--all the galaxies are moving away from each other--Einstein was willing to revise his cosmological model. So, I think that ultimately--although Einstein was an artist, he was a philosopher, he was a person of certain moral standards--he was most important a scientist. And I think most scientists are, eventually bow down to experimental evidence, no matter how fond they are of their theories.

Russ Roberts: Well, my favorite--you've said--one of your beautiful things in this conversation--but, one of my favorites as long-time listeners will not be surprised to hear, is, I think you've said the phrase, 'You can't be sure' more than once. And certainly that is part of the scientific mindset. In response to your book, by the way, I was googling around about Planck. Because I was just shocked by how many things are named after him. And, I saw--I don't know if this is true, but it was alleged to be a quote from Freeman Dyson, who has been a guest on this program, saying that Einstein, who was at the time a "mere patent clerk," a patent office clerk, sent 5 papers to Planck, who was the editor of a journal, and Planck published them all without getting referee reports. Which, if true, I love that, because it means they weren't peer reviewed. I mean, how would we know they're true? Do you have a favorite physicist or two, not living, who inspired you, who continue to inspire you?

Alan Lightman: Who are not living?

Russ Roberts: Yeah. I'm not talking about your thesis advisers--not a--I'm sure influential person in your [?].

Alan Lightman: Yeah. I would have to say Isaac Newton and Albert Einstein. I think those are the two greatest physicists who have ever lived. And both of them completely overthrew contemporary thinking--at a young age, I should add. Which, I think took tremendous courage but is also one of the reasons why we celebrate youth. And we celebrate youth not only in science and mathematics: we celebrate it in sports, we celebrate it in Hollywood. And youth is capable of wonderful things. So, Einstein and Newton were my two greatest heroes.

Russ Roberts: Well, youth is ignorant. That's one of the great disadvantages and advantages, right?

Alan Lightman: Right.

Russ Roberts: Which is amazing.

Alan Lightman: Yeah. It is. One of my favorite books on Buddhism is called the Beginner's Mind. It's that notion of having a mind that is willing to be a beginner, to question authority, and to start from scratch.

Russ Roberts: Yeah. Huge part of, I think, being a successful human being is to keep that naivete, that aliveness, that ecstasy at new experiences that after a while become less ecstatic, and we need to try to capture that.

Alan Lightman: Yeah.

Russ Roberts: Now, you've spent--you've dabbled in multiple worlds. You're a world-class physicist, on the faculty of Harvard and MIT [Massachusetts Institute of Technology]; but you are also a great writer. Do you have fiction writers--authors who have inspired you, who you think particularly fondly of?

Alan Lightman: Well, Virginia Woolf would be one. I think that she introduced, sort of, stream of consciousness writing in which we feel like we are literally in the mind of a character. Dostoyevsky is another hero of mine of France. Kafka, is a hero of mine. These are writers who are no longer living--I'm assuming that you are talking about that.

Russ Roberts: Well, in this case you can say whoever you like. Do you like some living writers, particularly?

Alan Lightman: Oh, I love many. Many living writers. I would mention Michael Ondaatje, Annie Proulx. Those are just a couple of my favorite writers.

Russ Roberts: Are you a Faulkner fan?

Alan Lightman: Faulkner?

Russ Roberts: Yeah.

Alan Lightman: Yes. He's one of my favorite writers, too. And, of course, he's from the South, as you and I are--

Russ Roberts: A near neighbor.

Alan Lightman: A near neighbor. That's right, in Oxford, Mississippi.

Russ Roberts: But he also, I was thinking when you mentioned Virginia Woolf--because if you pick up The Sound and the Fury, you will not understand it at first, until you understand the project. That's true of a number of his books. And he was also young and taking a leap there that was brave.

| | 1:06:33 |

Russ Roberts: So, I want to close with a quote from a play that I asked you, before we started recording, that you are familiar with, which is Arcadia, by Tom Stoppard. It's my favorite play, I'd say. Period. I've seen it three times. I encourage listeners to check it out. You can read it. It's not the same. But, try to see it if you can. And, this quote has--it's from a character, Bernard, who is the humanities defender at various times. He's not a very likeable character through much of the show. But, Stoppard puts in his mouth a defense of the humanities in the face of science. And, I want to read it and then get your reaction. Bernard, he's talking about science versus the humanities; he says,

BERNARD: Oh, you're going to zap me with penicillin and pesticides. Spare me that and I'll spare you the bomb and aerosols. But don't confuse progress with perfectibility. A great poet is always timely. A great philosopher is an urgent need. There's no rush for Isaac Newton. We were quite happy with Aristotle's cosmos. Personally, I preferred it. Fifty five crystal spheres geared towards God's crankshaft is my idea of a satisfying universe. I can't think of anything more trivial than the speed of light. Quarks, quasars--big bangs--black holes--who gives a shit? How did you people con us out of all that status? And why are you so pleased with yourselves?... If knowledge isn't self knowledge it isn't doing much, mate. Is the universe expanding? Is it contracting? Is it standing on one leg singing 'When father painted the parlour'? Leave me out. I can expand my universe without you. 'She walks in beauty, like the night of cloudless climes and starry skies, and all that's best of dark and bright meet in her aspect and her eyes'.

And that's a quote from Shelley [should be Byron, 'She walks in beauty...'--corrected per commenter alert.--Econlib Ed.] who has a role in the show, in the play. But, it's an attack on, to some extent, your worldview. But--not really, in my take on it. But I'm curious how you'd react to it.

Alan Lightman: Well, I think it's extremely hypocritical. Because I think Bernard probably profits a lot from science and technology. I mean, he--when was the time period of this?

Russ Roberts: This is in the modern era of the play. The play takes place in two time periods. I'm pretty sure this is, would be in like the 1970s.

Alan Lightman: Yeah. Well, but, well yeah, okay. I know that there are two times--[?]--I'd like to see--[?]

Russ Roberts: [?]

Alan Lightman: what Bernard would say if he got pneumonia or something and resisted medical treatment, what he would say about. So, I think it's an incredibly hypocritical quote. I agree with the general sentiment that the humanities are a vital part of human life. But I think that his dismissiveness of science and technology is completely off base and hypocritical. And I think that Stoppard wrote that just to be provocative. I can't believe that Stoppard really has that view, himself. He was trying to provoke the audience and the--the comment by Bernard is so blunt and direct that you wouldn't really hear those words come out of a real human being's mouth, I don't think.

Russ Roberts: I think the issue he's trying to get at there--which I take, a different take, on it. I think the issue he's trying to get at is the transformation of what is prestigious in our lives. Which used to be more the humanities. And as science advanced from bloodletting to penicillin, we, as you point out, are desperately eager to have it, and have more of it. And we've somehow lost--I think, two things. I think we've lost some of the value of the humanities. And, at the same time, we've failed to appreciate the poetry of science, and the aesthetics that are there. So, if I may pay you a compliment, I think your work unites both of those things in very elegant and life-enhancing ways.

Alan Lightman: Well, thank you.

|

(20 COMMENTS)

Michael Munger on Sharing, Transaction Costs, and Tomorrow 3.0

Economist and author Michael Munger of Duke University talks about his book, Tomorrow 3.0, with EconTalk host Russ Roberts. Munger analyzes the rise of companies like Uber and AirBnB as an example of how technology lowers transactions costs. Users and providers can find each other more easily through their smartphones, increasing opportunity. Munger expects these costs to fall elsewhere and predicts an expansion of the sharing economy to a wide array of items in our daily lives.

This week's guest:

• Michael Munger's Home page
• Kids Prefer Cheese. Michael Munger's Blog
• Michael Munger on Twitter.
• Michael Munger Podcast Episode Archives and Michael Munger (more): Additional Podcast Episode Archives). EconTalk.

This week's focus:

• Tomorrow 3.0: Transaction Costs and the Sharing Economy, by Michael Munger on Amazon.com.

Additional ideas and people mentioned in this podcast episode:

• Michael Munger on the Sharing Economy. EconTalk, July 2014.
• Michael Munger on Permissionless Innovation. EconTalk, April 2018. Transactions costs and more.
• Douglass North. Biography. Concise Encyclopedia of Economics.
• Chris Anderson and The Long Tail. EconTalk.
• Jennifer Pahlka on Code for America. EconTalk.
• Externalities, Ronald Coase
• Ronald Coase. Biography. Concise Encyclopedia of Economics.
• Ron Coase on Externalities, the Firm, and the State of Economics. EconTalk, May 2012. Interview with Nobel Laureate Ronald Coase.
• Don Boudreaux on Coase. EconTalk, October 2013. Transactions costs, externalities, and more.
• Externalities, by Bryan Caplan. Concise Encyclopedia of Economics.
• Eugene Fama
• Eugene Fama on Finance. EconTalk, January 2012.
• Eugene Fama. Biography. Concise Encyclopedia of Economics.

A few more readings and background resources:

• Austrian School of Economics, by Peter Boettke. Concise Encyclopedia of Economics.
• Division of labor, Adam Smith
• Adam Smith. Biography. Concise Encyclopedia of Economics.
• Michael Munger on the Division of Labor. EconTalk, April 2007.
• "The Use of Knowledge in Society," by Friedrich Hayek. Library of Economics and Liberty. 1945 essay with tin example.
• BlaBlaCar.
• George Stigler. Biography. Concise Encyclopedia of Economics.

A few more EconTalk podcast episodes:

• Some speculations on the future
• Kelly Weinersmith and Zach Weinersmith on Soonish. EconTalk, January 2018.
• Tim O'Reilly on What's the Future. EconTalk, October 2017.
• Benedict Evans on the Future of Cars. EconTalk, August 2017.
• Kevin Kelly on the Future of the Web and Everything Else. EconTalk, March 2007.
• Nathan Blecharczyk on Airbnb and the Sharing Economy. EconTalk, September 2014.
• Jimmy Wales on Wikipedia. EconTalk, March 2009.
• Jim Epstein on Bitcoin, the Blockchain, and Freedom in Latin America. EconTalk, February 2017.

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

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

Russ Roberts: My guest is political economist and author Michael Munger of Duke University. This is his 35th--count 'em, 35--appearance on EconTalk, which represents about 5% of all EconTalk episodes. We last heard from him in April of 2018 discussing the economics of traffic. His latest book is Tomorrow 3.0: Transaction Costs and the Sharing Economy, which is our subject for today.... Tomorrow 3.0 is a short book, which is a plus in my mind; but despite its length, its shortness, it packs a lot of intuitive economics into its pages. In a way, while I was reading, I felt like I was reading Munger and EconTalk's greatest hits. There's stuff on middlemen, transactions costs, the sharing economy, property rights, price gouging, universal basic income, division of labor, and more. So, if you are a fan of Mike's from this podcast, I think you'll like the book a lot. And you'll learn a lot, even if you're not a fan. But who isn't a fan of Mike Munger?

Michael Munger: [*crickets*--Econlib Ed.]

Russ Roberts: You want to try to answer that? That's our first question, Mike.

Michael Munger: I got nothin'. [*laughter*--Econlib Ed.]

Russ Roberts: I know. I know.

Michael Munger: I hear from a lot of people.

Russ Roberts: What got you to write this book?

Michael Munger: You're being sort of snidely modest by saying it sounds like EconTalk's greatest hits--at least greatest Munger hits. You're absolutely right. EconTalk caused this book. I started thinking about writing it when I did a podcast with you on the sharing economy, and realized that I understood almost none of it. And then it turns out that much of what this book tries to weave together is my attempt over a period of years to try to understand that. And, in some ways, it comes from talks that I've given that try to understand different parts of it. And, I appreciate the fact that you recognize that it's a relatively short book. It's a book, after all, in some ways about transactions costs. And after I was finished with the book, I thought, 'You know, I bet I can shorten this by 40%.' So I went back through it and spent three months doing nothing but trying to shorten every sentence, every paragraph--because I'm reducing the transactions costs of conveying these ideas to the reader.

Russ Roberts: There you go. That's right.

Michael Munger: So it really was my objective, was to try to make it short, and yet still when you read it you think, 'Hah: that's interesting.'

Russ Roberts: Yeah; it's only 153 pages. And, I love when people say, 'Oh, this book's overpriced. It's only--'. It's like: Wisdom? You are complaining about the price of wisdom? Seriously, Mike--

Michael Munger: I've literally had people complain about the dollars per page. Too many dollars per page.

Russ Roberts: Yeah. I don't understand that exactly, but okay.

| | 3:17 |

Russ Roberts: Let's start with an example you use which I think has a lot of value, which is: I'm standing in front of a wall in my house; I need to make a hole. I need to drill something. And I actually--I have owned a drill in the past; I can't say I own one now. But, of course, everyone out there listening--some of them have drills, some of them don't. And, if you're in that situation, what do you do now?

Michael Munger: So many of the things that are important consumer durables we own because we want to have immediate low-cost access to their services. So, that's true of most tools. Most of the time, most of us--if we're professors or work in some white-collar job--most jobs, you don't constantly use your tools unless you are a contractor. And yet, somewhere in your garage or in your storage, you have quite a few tools. So, I'm standing in front of a wall. My wife has said, 'We're going to put up some pictures.' I want to drill a hole in the drywall so I can put an anchor in so it won't tear within a couple of weeks. And I could go and buy a drill. I could rent a drill. But what I is go to my garage and get one of the 4 power drills that I'm embarrassed to admit that I have. And, then drill a hole. And then she looks at it and says, 'No, not that wall. That's not the right one.' So I fill in that one and then I go and I drill a different hole. But still, I used the drill for maybe 30 seconds and then I put it back up. The question is: Why is it that we own so many things? And the Austrian economics' insight is that almost any consumer durable--your car, a suit that you have in the closet--what those actually are is not something you are going to use like an apple where you eat it and it's gone. It is a stream of services that extend out into the future. So, you have to think about the value of time; and you have to think about the value of uncertainty. Now, it turns out that power tools are particularly interesting because they've become a kind of trope of this sharing economy literature. There are 110 million power drills in the United States. If you--

Russ Roberts: Seems like plenty.

Michael Munger: Yep. There are 330 million people, but there's a bunch of idiots like me that have four. And there's quite a few people that have none; but there are a lot of people who have at least one power drill. If you take the 110 million and rank them from the most used to the least used, and then look at the median, it has been estimated that the 55th-millionth power drill ranked by lifetime--lifetime--use is between 30 and 40 minutes. Because, using the power drill for 30 minutes if you are a contractor isn't much. But if I'm drilling two holes to put up a picture in the house, I use it for 30 or 40 seconds, and then I put it away. So, why is that we store these things that we only use for 30 minutes over their entire lifetime? And, I claim that it's at least possible to think of an alternative, where, instead of owning it, I share it; and I share it in a particular kind of way that economists call renting. Because, renting is just a way of sharing things with people that you don't know with one residual claimant that takes care of all of the transactions costs. So, there's one person at the middle that owns the drill; and that's the nexus of all contracts. And they oversee the sharing process and make sure that it's returned in good order and that its delivered and its available and that people actually pay for it. And for that service they take a profit that is the excess of the price that they get over the cost of providing that rental service. So, I pull out my cellphone and I go to Uber and I scroll down to power tools and I scroll down to drills; and then I just press Order. And the software knows which drill I want, because--

Russ Roberts: This is the future you are talking about now.

Michael Munger: This is the future. Now, some people say I'm going a bit too far, that [?].

Russ Roberts: [?]

Michael Munger: [?] Well, I'm picking something that's literally a bit too far because it is in the future. It's a bit implausible. So, I press Order. And somewhere--I don't know where--an Uber autonomous car, with no driver, picks up a power drill from--maybe it's an owner. Maybe it's a contractor who is not using it who has put it outside in a smart pod. Maybe it's a rental company that does this for a living. But the Uber car picks up the drill. It has a bunch of deliveries to make, so it solves--the software solves the travelling salesman problem: that is, making the set of deliveries in the minimum total distance and time. And, in a few minutes, my phone buzzes, because I have a smart pod in front of my house: The drill has been delivered. I go and I open up the smart pod with the security code that's in my phone; it takes no time; I just open it up. I make the holes in the wall. My wife says, 'No, no, not that wall,' and I think, 'Yeeaeey. Okay, I'll do it in a different wall.' And then I put the drill back. I've had it for about 5 minutes. It cost me a total of $2--almost no cost. The pod is smart; it knows the drill has been put back in it. It--the software--calls another Uber car that picks up that drill and then takes it to its next use. No human beings are involved in the allocation or transfer of this rental product among all of the different users. And, it's a commercial quality power drill that's better than I would have purchased. So, it's a better drill than I would have had access to. The result is that instead of having 110 million, eeehhh, adequate power drills, we have something like 10 or 12 million power drills at any given time. They are high quality, commercial power drills. They are extremely intensively used. And, maybe they get used up in a year or two, but then we make some more. The point is that the prices for being able to rent instead of own means that we are saving on the opportunity cost of the money that's tied up in the drill; and in the storage cost. Because when it comes to consumer durables, you pay for them twice. First you pay for the cost of the thing; and then you pay for the safe and secure storage of the thing so that it's available. Your closets are full of stuff. Your kitchen cabinets are full of stuff. I have, I'm embarrassed to admit, a sausage maker. I've used it twice. It's huge, and heavy. Why in the world do I have those things? Well, it's because the software world that I just talked about hasn't yet solved the transaction cost problem in a way that makes it possible.

| | 10:02 |

Russ Roberts: I want to mention a couple of other factors which that story neglects. One is, in my case, I have a couple of friends who own every tool--every single one. They have every tool. For reasons that are somewhat inexplicable; but they tend to do more home improvement than I do. So, I can borrow tools from them at no charge other than that I owe them emotionally. That's--

Michael Munger: Why is that?

Russ Roberts: Why do I owe them emotionally? Or why do they own so many tools?

Michael Munger: Why do they let you borrow it at zero cost?

Russ Roberts: Because we're friends.

Michael Munger: Oh. But they could be renting it out. Suppose that there's a platform--

Russ Roberts: They could be. No, I agree. I'm just mentioning: There is a fourth possibility here, or a third possibility of literally sharing.

Michael Munger: As long as there's no rental market.

Russ Roberts: Correct. But even if there was, they might decide to let me use it without paying for it. They might give me a bargain. But the other--and actually, that market--the true sharing--a lot of people don't like the phrase 'sharing economy' to describe Uber or Airbnb, is because they don't really share. They charge. But, put that to the side; I'll come back to it. But, the other thing is that some people do enjoy having the physical tools. They like looking at them. They like--you know: it's just a thing. I just mention that as an aside--

Michael Munger: I was going to come back to that at the very end. Let's do it now for just 30 seconds or so.

Russ Roberts: Go ahead. Or a minute.

Michael Munger: I think the most interesting kind of sharing is the kind that doesn't involve markets at all. So, I started out with this very pedestrian rental transaction. I think one of the things--and we'll talk about this in a minute--that platforms make possible: Platforms are an integrated software/hardware package that facilitate these things. Platforms make true sharing possible. And so, there's this turnkey, open source software called a tool library; and you can borrow from your friends because they know you and trust you. But suppose that entrance to a tool library was just you own one or two tools that you agree to make available to other people when you're not using them. Well, that means that in effect all the 30 people in the tool library have a whole bunch of tools at their access. So, Adam Smith said that markets are limited by the extent--forgive me--division of labor is limited by the extent of the market. Well, this kind of sharing is only limited by the size of the cooperation horizon that's defined by the platform. And so, you can borrow from your friends, but you might be able to borrow from your neighbor that you don't know very well. In order to borrow tools, they need to be pretty close together. Software can handle this sharing problem in a way that opens a whole new world of actual sharing. So, the point that you just made--I sort of tried to push it away--I think that's actually the place that we should end up. And maybe we'll talk about it more, then. But, as usual you have anticipated what I think is really the most interesting question; and that is: Is true sharing possible? We needn't fetishize markets and these complicated rental agreements. True sharing is possible. So, it could be a whole new world.

Russ Roberts: Yeah. And obviously the cost of acquiring the object is part of this question on whether you should share or charge, share or rent.

Michael Munger: But, suppose I really like tools, but I have software that makes me pretty sure that it'll be returned if I loan it out or rent it out. Then there will be even more people who have a bunch of tools, because they like them, because they can rent them out and share them out, reducing the cost to them of possessing it. So, people are going to specialize. Some people are going to be owners. Some people are going to be borrowers and sharers. And it doesn't even--it doesn't have to follow the contours of what we now think of as market exchanges. So, way to go.

Russ Roberts: Well, when I was younger, I had a rule, which was to never lend out any of my books. And the reason I never lent them out was I noticed how often they didn't come back. And, even with good friends. And it wasn't--it was just an empirical observation that I made: That, when I tended to lend out a book, two things happened. I forgot who I lent it to; and they forgot that they had borrowed it. So, I never saw them again. And so, I'd think about a book I wanted to read, or look at, or leaf through; and I'd get really frustrated because I couldn't find it. And then I was, 'Oh, yeah; I probably lent it to somebody.' And, one way people solve that is they put their names in their books and they treat it like--they put a little card in there or they create some system. That's a big transactions cost, by the way, which I never got to. And eventually I changed my--I did a 180. I lend out all my books now. And I assume I'm not getting them back. And when I lend out a book, I just go buy it again. If I care about it. There are a few books I've lent out and don't care about, and I'm happy to see them reduce my storage costs. But, often I love them, and so I am lending them. I'm telling someone, 'This is a great book. You should read it.' Now I just say that's a wonderful thing that I can give that away and I can get a book--get a used copy for under $10, often, of any, almost any book. And so, now to me--I love that gift aspect of book lending. And that decision has really helped me. But, with a power tool, it's not such an easy thing. And, by the way, I have tools in my house, right now, that I'm pretty sure came from handymen and contractors who just left them here. Like, I have a really nice drill. I don't know whose it is. That person left it. It's a shame. I feel embarrassed about it. I didn't notice it for three years. All of a sudden I'm in my basement and I see, 'Oh, I wonder what that is. It's not mine.' I wonder what to do about it. Occasionally--I have a fairly regular handyman--I'll say, 'Is this yours?' Sometimes he takes it; sometimes he says, 'No, it's not mine.' Anyway.

| | 15:52 |

Russ Roberts: So, of course: you asked about anticipating questions. My question about the drill is: Why don't we have that already? And, I want you to talk about the different kinds of transactions costs and how that creates a set of limits on, potentially on what can be shared, what is unlikely to be shared because it doesn't work economically.

Michael Munger: It'll take a little while to kind of get to the basics of the answer, and then we can circle back. So, I think you've probably heard this story, but it is worth repeating, because it was a big event in my life. When I was in graduate school, one of my dissertation advisers was Douglass North. And at my dissertation defense, in 1984, Doug asked a question--and your dissertation defense is pretty scary, because if you don't pass, that would be terrible. So, I was worried. And I did what economists do when they have a question the answer to which they don't know: I went to the board and started drawing equations. Finally, after about 2 excruciating minutes of silence, Doug North raised his hand and he said, in a voice that you might you use to address a not-very-bright but well-loved child, 'Michael, the answer is transactions costs. The only answer I was looking for was transactions costs.' And I later realized that it didn't matter what the question was for Doug North: The answer was transactions costs. It's the answer to every question. But then it took more years after that for me to realize that he was absolutely right. If you start out by thinking, 'What are the transactions costs here?' you'll make a--it's a good way to start to break down what the answer should be. So, one of the people who first started working on the economics of transactions costs was Ronald Coase. And, it's interesting: Coase was really careful never really to give a clear definition of transactions costs. Because, he thought that transactions costs are conditional on the particular kinds of institutions' liability arrangements and legal process in which it's embedded. So, you can talk about transactions costs, but specifically defining them with a bunch of different categories, he thought wasn't a very good idea. I think it's useful because it's a way of breaking down the problem a little bit. So, I think the three categories of transactions costs are: First, triangulation--the people who want to cooperate or buy and sell have to be able to find each other. And they have to be able to identify each other as possessing something that the other wants. Usually in economics we start with this idea that A has a widget; B has some money and wants a widget; and then they negotiate on price. Well, how did they meet? How did they know that they have a widget? Do they speak the same language? Do they have a currency that they can use to consummate the exchange? There's a bunch of things that have to happen before you get to the 'And then there's a price' part. So, triangulation involves that. The second is transfer. Transfer is: We actually deliver the product. We actually make the payment. We clear the transaction in a way that both parties agree with. And that's a big part of any transaction. Third is trust. That is: I know that you are not going to rob me. I'm not going to rob you. And we recognize that the thing that's being sold and the thing that's being used to purchase it actually are those things: There's no fraud. So, anything that solves all three of those problems, I want to call a Platform. And Platforms date way back in history. One of the first Platforms was what we now call the souk [also spelled souq--Econlib Ed.]--the bazaar. And when you think about it, it's kind of odd that these very large markets grew up. Why would it be--suppose you have worked for a year; you have three bags of wheat. That is the product of your farm. You don't have much of a farm, because it's not automated; this is 4000 B.C. and you are thinking of going to the souk in Ur [spoken as "er", short u or short e sound-Econlib Ed.].

Russ Roberts: I think it's Ur [long u sound--Econlib Ed.] For listeners who don't speak Middle Eastern. You are talking about U-r, right?

Michael Munger: I am talking about U-r. It was a decent-sized city in Sumeria. It was between the Tigris and the Euphrates, and it's one of the oldest cities on earth; and that's why--I'll pronounce it right this time--if something is a very old book, we call it an Ur text: that is, it is something that is very old. So, suppose I have three bags of grain, in Ur. Well, but I'm 10 miles outside of town. Why don't I just go to the middle of a field and sell it? Why would I transport it all the way to a place where a bunch of other people are trying to sell their grain? That seems like--

Russ Roberts: [?]

Michael Munger: I'm going to lose because of the competition. So, I have to transport it. And then there's all these competitors. Why don't I go to the middle of a field and sell it there? And the answer is: I'm going to be in that field a while. Nobody knows that I'm there with my three bags of grain. And, what they're trying to do is put together a caravan to go north: Nobody is going to pay the transport costs. So, I pay the transport costs, and I go to a place where there's a settled price. So, at the souk--souk, souq, depending on how--it's transliteration from Arabic meaning a place for a market. So, at the souk, there is a Platform. It hints[?] that we can find each other; we can agree on a price, because there's many buyers and many sellers. There's a way to deliver, because I know to bring it there--it reduces the transactions costs of knowing where to take it. There's a bunch of camels waiting to move it somewhere else. And we trust each other, because we're providing security just along the roads and in this concentrated area. So, we have those three things all at once; and that's why people would go to a souk and not to somewhere else. So, those kind of market arrangements, those existed for thousands of years. One of the next examples of platform that's really still quite old but interesting comes from what I think is the single best podcast that you have done on all of EconTalk, and it was the 13th one that you did, in August of 2006, with a guy named Chris Anderson of Wired and were talking about a book of his called The Long Tail. And in that podcast he talks about the Sears catalog. And I listened to the podcast again yesterday just by accident, and I realized that the Sears catalog is a platform. Sears was not selling stuff. Their job was not to sell stuff. What they were selling is reductions in transactions costs. So, some of the stuff in the Sears catalog--so, you live in a little town in Southern Illinois; there's a railroad that goes by now and then but it doesn't stop. And the only place you can buy stuff is you can go to the dry goods store, or maybe there's kind of a hardware store and they have a couple dozen items. That's the extent of the market. That's the cooperation horizon in your world. Not much specialization is possible. Not much division of labor is possible. Is there a way to deliver access that's your discretion to the wide world of labor? Well, yes, because twice a year this enormous 600-page book arrives in your mailbox--from Sears. And the print is really small. There's thousands and thousands of products that are available. Some of them are made by Sears. A few more are purchased under contract by Sears. But a lot of them are just third-party items that Sears gives space to in its paper souk. So, I can solve the triangulation problem because I can find stuff that's available--I didn't even know it existed, but I want it, I need that for my farm. I need that because that clothing is much more beautiful than anything that a local seamstress or tailor can provide me. Well, what about transfer? Sears specialized in reducing the costs of delivery and payment. Much of what Sears did was provide credit to people that had problems annually of coming up with enough money at the right time, so they would, Sears would loan out money and then they would process the payments. So, the seller gets paid; Sears would wait until the buyer could make the payments. So they were the intermediary on all these payments. And, for trust, they would give an implicit guarantee. So, if the product didn't work, they would refund it; if it arrived broken, Sears would take care of it. What that meant was that the Sears catalog and the services behind it were a self-contained platform. Now, a number of other of those have happened since, and we maybe can talk about some other examples; but let's get to the drill. You may remember that there was a company called 'Amazon'--

Russ Roberts: I've heard of 'em--

Michael Munger: that sold pretty much one product: books. Amazon sold books. And it's actually pretty remarkable, now, because you can still buy books from Amazon, but Amazon is the Sears catalog of the 21st century. Because almost everything that Amazon sells is manufactured by someone else. Amazon makes most of its money from the software called Amazon Web Services, which is a platform. I can find the product. I can identify price. I can search across different sellers very easily because Amazon is set up for these searches. I can arrange the payments, because I'm actually paying Amazon and then Amazon pays the seller. So, Amazon as an intermediary is protecting me from credit card fraud--

Russ Roberts: Takes the risk--

Michael Munger: and Amazon has a truly remarkable delivery system. And, in fact, I got an Amazon delivery. It wasn't an Amazon truck: it was a rental U-Haul truck that pulled up in front of my house and brought me a box which I had ordered on Saturday. I ordered something on Saturday; it was delivered to me today. It was a big, heavy box of dog food. And this was in a rental truck. Amazon doesn't actually own this. They are renting all of the things that they need to provide this delivery service. But Amazon's ability to deliver is remarkable. It's really unbelievable. So, the three things that come together there--triangulation, transfer, and trust--make Amazon a platform. On that platform you can buy an amazing, different array of stuff. Why not drills? Well, the answer is that Amazon is set up for ownership. It's not really set up for sharing or rental--

Russ Roberts: You can buy a drill. The question is: Why can't you rent one?

Michael Munger: Right. And have it delivered. The question is: Why not? You asked about my scenario: Why isn't that possible? My scenario is something more like renting. And then you suggested, rightly, that there's other kinds of sharing; and those things, also, are not really possible yet. So, why not? Well, the answer, I think, is that we are on the verge of a new platform that's going to solve a lot of those problems. So, Amazon used to sell books; we've forgotten about that. Ten years from now, we're going to say, 'Uber used to be a taxi company.' We will have forgotten about that. Because Uber is a platform. Uber can solve the problem of triangulation, transfer, and trust for almost any product. The thing that's great is that Uber is actually set up for delivery of people. Maybe they are going to provide some kind of service. Maybe it's food. Maybe it's a drill that I then want to take back. Now, Uber at this point is still what Amazon was when they were just selling books. But, Uber soon will be able to start delivering all sorts of other things that are not just human beings: they'll be able to deliver products, services. What that means that is the big battle is not really between Uber and the taxi companies. The big battle is between something like Uber and something like Amazon for primacy. Now, why would you say--why would I say--that this primacy is important? And part of the reason is that trust is a network economy. One of the things that Amazon has that gives it a big lead is an inventory of reviews. So, when I go on Amazon, I can find hundreds of reviews of almost every product I want to look at. Anybody else who wants to enter this market somehow has to make up the shortfall that you have: at the beginning you don't have reviews of all these products.

Russ Roberts: It's the trust part.

Michael Munger: So, Uber has a chance of overcoming this. The reason it hasn't happened yet is that Uber has not yet moved into rental markets; and that barrier to entry on the trust part--which is absolutely crucial.

| | 28:56 |

Russ Roberts: Just a footnote on your U-Haul rental: My impression is that Uber doesn't have drivers. They just--they outsource that, also. I think what you saw was probably--

Michael Munger: Well put--

Russ Roberts: an individual who delivers for lots of people and happens to have rented a U-Haul truck for him- or herself. I see people pull up in front of my house in cars. I'm slightly surprised: 'Who is visiting me at 10 at night or 7 in the morning?' It's somebody delivering an Amazon package. They don't have a uniform on. They don't look like a UPS [United Parcel Service] driver--

Michael Munger: They don't. They're renting the people, too.

Russ Roberts: They're in their civvies.

Michael Munger: You're right. They're renting the people, too.

Russ Roberts: That's just point number one. The other question is--and you said a lot of really interesting things there, but you didn't answer the piece of the question that I'd like you to get to, which is: There are certain actual limits. So, even if Uber solves the autonomous car problem or somebody does, I'm willing to wait--I might be willing to wait half an hour to get the drill to drill the hole. I don't know if I'm ever going to borrow somebody else's jeans. Which, clothing is another example that you mention in the book. Or, just take a [?] example: I'm probably going to own my own silverware, because even though I could rent silverware for when I'm about to eat, the transactions costs of that, even though the app is seamless and fabulous and quick, I really don't even want to walk out to the curb, because the price savings on the silverware usage is so small that that time cost is going to act be large enough to keep me from doing it. So, talk about some of the ways in which those factors interact.

Michael Munger: Those are both really good questions. So, I think that this sharing--I'm more confident now about calling it the sharing revolution, because I think that my earlier claims about rental are pretty short-sighted: that we'll think of better ways to do it than sort of formal renting. But, sticking with formal renting, there are many kinds of--and I'm afraid I'm going to make a sort of Coasean point. Coase asked this really great question in 1937: If markets are so great, why are there firms? And his answer was--this is sound familiar: Transactions costs.

Russ Roberts: Explain the question first, though. Because a lot of people would say, 'What kind of a question is that?' We've talked about it before--it was a long time ago. Go ahead.

Michael Munger: Economists brag about the ability of prices to organize decentralized distributed activities--transactions--among people that don't know each other. So, Friedrich Hayek in 1945 gives the example of tin: If the price of tin goes up, I don't need to know why. I just know that I need to economize. People who produce tin don't need to know why. They'll just make more tin. Entrepreneurs don't need to know why. They'll just figure out a way to make substitutes. So, the price system directs people to do what they would do if they had perfect information. And that's a great savings. So, prices are really wonderful. Prices organize the economic system. Coase said, 'Well, if prices are so great, why are these little command economies that we call firms embedded in them?' Because, if I work for Ford motor company, I don't put a bolt into the chassis of the Ford car and then go on e-Bay and auction it off and find the highest price, deliver it to them, and then they put on the fender. Instead, the next guy in the line just puts on the fender. Price is not operating here: I'm being ordered to do this--

Russ Roberts: [?] boss you around[?]

Michael Munger: by an entrepreneur. That's the--and most people, when you ask, 'Who tells you what to do?' they don't say, 'Prices.' They say, 'My boss.' So, bosses do a lot more ordering around than prices. Coase's question was: Where is the margin? And firms call this the make-or-buy decision. So, firms make some things, but they buy other things. So, maybe for a while Ford Motor Company considered going out and making its own steel for cars, but they never grew the wheat for the sandwiches in the employee cafeteria. They always bought some things. So, that line between make or buy, Coase claimed, was based on transactions costs. It was the cost of using the market versus the cost of organizing this transaction within the company. Well, the point of--I say in the book, I think that if Coase were alive today, he might ask a question: Why is it that we own instead of share? And the answer is still: Transactions costs. The margin between owning and sharing will be determined by transactions costs. The thing is that Coase recognized that there was a dynamic component to this. That is, the size of firms, both in terms of the scope of products and the amount of products that they produce, will be determined over time by transaction cost. If it's cheaper to buy things in the market, then firms will shrink. Well, and the endogenous thing about sharing--and I think this is possibly worrisome--is that there will be a greater and greater gap between urban and rural people. So, people who live in cities are going to be able to participate in the sharing economy. You said you don't want to wait 30 minutes. If you live in a large city and there are these Uber robots that are going around delivering things, and they can go on the street and they can also go up the elevator, it might only be 4 or 5 minutes before it's delivered. Because the density of transactions is so high in a city. But that means that people who live not in a city are going to find themselves facing much higher costs of participating in the sharing economy. Either because they can borrow it from their neighbor in a tool library, or it's delivered by an Uber robot from someplace that they've rented. So, the transaction cost is going to drive more than which products are shared and which products are owned. Over time, if that claim is right, it's actually going to drive the structure of communities. Meaning that, people just like during the Industrial Revolution, are going to move from rural areas to urban areas. And the question is: How can we think about that in a way that makes it possible? The advantage is, you'll need far less storage. You won't need parking spaces. You won't need much closet space. And, yes, you are not going to borrow jeans--

Russ Roberts: Or underwear--

Michael Munger: but there's a company called--well, the example that I use in the book is toothbrush. I am an assiduous brusher of teeth. I don't brush other people's teeth. It's not creepy. I just brush my own teeth. But, I brush my teeth two minutes in the morning, two minutes in the evening. So, for 23 hours and 56 minutes, my toothbrush hangs there unused. It is hard to imagine any way of being able to commodify that excess capacity.

Russ Roberts: Well, you could commodify the handle, which has--if it's an electric toothbrush.

Michael Munger: The transaction costs are too high. You could share the handle; and in fact it's set up for that, for families, because you have different, separate--but that's a good point. It is set up for sharing. But, there are some products that it's unlikely transactions costs would ever fall enough that we would share them. But, if transactions costs fall, the thing is that entrepreneurs--any problem that you and I can think of is a problem that some entrepreneur is working to solve, because they can solve this problem. They can make money. They can make profits. Anything that looks like a problem is actually a profit opportunity. So, there's a company--and this is my favorite example of the sharing economy--called BlaBlaCar. And, I usually ask, if I'm giving a talk on this subject, I'll ask a young woman in the audience, 'Ma'am, do you hitchhike?' And of course the answer is always, 'No.' And I've already told them that the answer to every question is transactions costs. But, okay. I ask, 'Why don't you hitchhike?' Because, she looks horrified. And they--you would be, 'It would be creepy. It's too dangerous.' No, the answer is just transactions costs. Suppose that you had an app--and in Europe it's called BlaBlaCar, where an awful lot of people end up hitchhiking. So, all the trucks that go on the Interstate between the large cities, many cars, they just have one passenger. If you could commodify that excess capacity and solve the three transaction cost problem--triangulation, transfer, and trust--you could have hitchhiking. And so, BlaBlaCar--the app--provides 4 pieces of information. The first is where are you now? The second is where do you want to go? The third is, at what time do you want to go? And the fourth is, how much do you want to talk? So, 'blah-ha' means 'I really don't like other people very much.' 'BlaBla means enjoys a [?]. 'Blah blah blah' means rarely pauses even for breath.

Russ Roberts: Eh, heh, heh, heh [*laughter*--Econlib Ed.]

Michael Munger: So, you can go from where you are, where you want to go, using a completely unused seat that would otherwise be empty, at the time you want to go, and have a conversational partner that is interesting. The reviews that are available mean that both the rider and the driver can evaluate each other.

| | 38:12 |

Russ Roberts: So, I love that. One of the other reasons I love that--first of all, I just want to make a point about the toothbrush. Again, it's not just that the transactions costs are too high. It also is the factor that a toothbrush is relatively inexpensive. So, you always want to compare the costs of ownership to the benefits of renting. And in the case of the toothbrush, it's a relatively inexpensive thing. Again, I don't really want to trot out to the smart pod on my--the mailbox, say--and pick up my handle for my toothbrush, and then shove my brush part into the handle and then go back down to the pod, and all that. That's the first thought I had. The second thought I want to make is that you are really imagining--and you basically said this: I just want to re-state it in a different way: We could have a smart apartment building where the whole building--and maybe the whole city, but certainly to start with the building is designed for this kind of reduction in transaction cost where the delivery part would be much more seamless than it is in a rural area. Or even in a suburb. Or even in some cities. So that's--that's very interesting. But I also want to comment: The BlaBlaCar is really a fantastic thing. Because--do they charge? Is it a free thing?

Michael Munger: No. They charge.

Russ Roberts: Okay.

Michael Munger: There are some companies that try to arrange it. And basically it's like, it's a membership. So, sometimes you drive, and sometimes you are a rider. But the--you do actually pay. But, for BlaBlaCar, suppose I'm in Brno and I want to go to Prague. It's the equivalent of $100 to go on the train. It's $10 or $12 to go on BlaBlaCar. So, it's dramatically cheaper.

Russ Roberts: And the driver is getting some of the benefit--some of that profit, I assume. Not just the platform.

Michael Munger: Right. But the driver is also getting companies[?]--

Russ Roberts: No, no. It could be you pay. It could be you have to pay to be a driver. Because, they want the company, right? It's not obvious which way the payment is going to go.

Michael Munger: I think the driver gets some--the driver, the owner of the vehicle gets some of it. BlaBlaCar takes a small bit. But the--since--many people would just as soon have company, particularly company that's compatible, the cost is driven down.

Russ Roberts: The part I really like is that there have been a couple times in my life where, instead of renting a car on a trip--more than a couple--I don't rent a car. I just use Uber. And, but on some of those trips, I've had to take a lot of trips. It still might be worth it to me to take Uber. But, on a day where I've had 4 or 5 Uber rides, sometimes I'm just talked out. And I always--I struggle sometimes when I get an Uber, because I sometimes say to the driver, 'I'm really tired. I apologize. I'm just going to rest.' And I feel like I have let them down in certain circumstance. Of course, some Uber drivers don't want to hear me talk. Maybe all of them, actually. But, in general, I know there are some Uber drivers, the reason they are driving Uber is partly for the money, but partly to meet people. Literally. To just chat and to have an interesting day. A lot of Uber drivers I've met are retired, and they literally enjoy--one of the reasons they are driving is they enjoy meeting new people. And that's part of, obviously, what BlaBlaCar is. But what I'd love is you get to set it in advance--

Michael Munger: Yeah. They recognize that.

Russ Roberts: that is [?] a brilliant idea. I love that. So fantastic.

Michael Munger: It's so important that it's part of the name.

Russ Roberts: Yeah, exactly. The other aspect of this, though, which I think interesting on this question of monetary aspect of true sharing versus semi-whatever you want to call it, more like rental, is Couchsurfing. So, couch surfing is--again, in a different generation, people who are older find this bizarre, but younger people find it normal--you rent out your couch; but you don't rent it out: you share your couch. And you say, I'm going to let anybody stay in my house--you can put different gender preferences and other things on the app. But I'm going to let people come spend the night on my couch. There's no charge. My son recently was on the floor in a Couchsurfing experience. So, it's not literally a couch, but it's basically different ways to spend the night under a roof. But there's no money exchanged. There's sometimes--evidently there's a gift expected. My son said he brought a 6-pack of beer as a thank you. And there's also no terminal limit on how many nights you stay. It's all up for grabs. And, of course, it's different--different providers choose how much they want to limit, or whatever. But, it's just an extraordinary change that this platform that you're talking about makes possible that couldn't be imagined. That he was staying at a stranger's house is frightening. Hitchhiking is frightening. And all of a sudden it's normal. And, because the app has solved that trust problem, along with the triangulation and the transfer. It's a fascinating thing.

Michael Munger: I often do ask--and I'm sorry to pick on young women, but they are less likely to hitchhike. So, after we've all laughed and said, 'Okay, hitchhiking is possible,' I'll ask: Do you use Airbnb? And without exception she has always said, 'Oh, yes.' So, you are willing to stay in somebody else's apartment and know they have the key; but you are not willing to ride in somebody else's car. And the difference is Airbnb has normalized--and other companies, but Airbnb in particular--our sense that this is a transaction that the app can handle, and that trust, because of these reviews, tells you something about. So, Airbnb--

Russ Roberts: Well, it's not just the reviews. The fact that, if God forbid, something happens to me in that house--male or female; you don't have to be a female to have something horrible happen to you in a stranger's house--that still is--the app knows where you are. And that's huge. You don't walk up to a stranger in Times Square--

Michael Munger: Yep. It has [?]--

Russ Roberts: and say, 'You have a place to stay tonight?'

Michael Munger: It has their financial information; it has their ID [identification]. Many people--and I've done this as an Airbnb host--they have an image of my passport. So, you can do quite a bit of background check. So, once we've normalized that experience, then, yes, we start to think of this as 'Eh, it's not a big deal.' You raised the question of Couchsurfing, though, which is much more like a cooperative sharing activity. So I wanted to bring up the example of a platform that people may not have thought about, and that is Wikipedia. So, Wikipedia is also a platform. The triangulation problem is that people sort themselves into groups based on their interest and knowledge. And, I don't have to go out and find people, because Wikipedia has all these different categories. The transfer is they have a protocol for 'I get to make edits,' and, I'm invited, just to make edits. And, then, the community decides whether those edits are going to be accepted or not. And in terms of trust, there are reviews. If I'm always a troll, then you can disable my ability to make changes. Now, yes, I can come back and try to make it. But Wikipedia is remarkably consistent in being able to provide the three things that a platform needs in order to have this service. But nobody's getting paid. We only pay with honor in a sense of contributing to the public good. So, it's a voluntary contribution to the public good. And it works really well. So, I think the idea of sharing, if you can reduce the transactions costs of voluntary provision of public goods, then things like Wikipedia may proliferate. And the idea that there has to be some kind of fee for service may start to disappear. There are ways of sharing that are based on honor and our sympathy for other people--our desire, if you are out there playing the drinking game, here it comes; although Russ isn't saying it--but our desire to be lovely. We want not just to be loved, but to be lovely. And so, being part of a community that's an expert on some subject that takes care of the Wikipedia entries on that subject means that I have connections with somebody in South Korea, somebody in Europe that I've never met. But we have this feeling of being part of something larger than ourselves. And that is something that software platforms can also advance.

| | 46:29 |

Russ Roberts: So, I'm going to take us in a different direction now, because I think--hard to believe, but I'm going to say it next. We haven't talked about--some of what we've talked today, we've talked about before; we're talking about it in new ways. I think you and I could have a conversation every six months on transactions costs and I would learn something every time. So, it is one of those topics like the division of labor, like emergent order, that I think is so rich and so challenging to think about and keep everything juggling in your mind at once that it's very fruitful to talk about it at length and in depth. But I want to change our focus just a little bit here. Which is this idea of platforms that are for profit and platforms that are not. And, of course, actually you--we did an episode on non-profits that this is somewhat related to, I'm sure. But here's the thing I want to raise. So, I mentioned recently on EconTalk that George Stigler probably would say that Wikipedia doesn't exist, because obviously it's not going to--it can't be possible without using money to create a good encyclopedia that would be even possibly decent, forget about the fact that I think it's probably better than most printed encyclopedia in many dimensions. So, he was wrong about that. I'm using poor George as a sort of homo economicus--a little bit of a straw man.--

Michael Munger: Yeah. Those that knew him would say it's not that much of a straw man. He's [?].

Russ Roberts: Exactly. So, that was George. But he represents the way a lot of economists look at the world: they assume that people do things for money, and they need rewards; sometimes they're nonmonetary. But in general money works really well. And I think that's generally true. So, Wikipedia is an extraordinary example of how, without money, just honor, just pride, just showing off--earning a reputation for various things, returns--people have created something rather extraordinary. Having said that, it's my impression that Wikipedia is a little bit static. It hasn't quite fulfilled the promise that it had as it was growing. And it is less dynamic than I thought it would turn out to be. And, let me suggest a related challenge. So, there are a lot of apps out there that you and I might use and love. I'm going to pick one that's a big part of my life, which is Evernote. So, Evernote--it's an app that I use for just storing all kinds of information on my computer, on my phone; I really like it. A second example would be Medium. I write in Medium.com; I love--the platform is fantastic. Both those may disappear at some point. They may, just like other apps and other websites don't make it in the internet economy. So then the question is: What's going to happen to my stuff? And I've always wondered--and I've talked about this before on EconTalk, but not with you--which is: Couldn't a foundation then run the app in a nonprofit way? Couldn't it maintain? Could a foundation run Uber at some point? Could--is there a return, is there a benefit from using a nonprofit focus to run a platform? And, let me just give one more point and then I'll let you respond, which is: You say, toward the end of the book, that Uber and Amazon are in competition. Unsurprisingly. Surprisingly. Uber is not competing with cab companies; Amazon is not competing with Barnes and Noble any more. They are both competing with each other for providing stuff in ways that reduce transactions costs--not providing stuff--for just reducing transactions costs. I think it's a deep, deep insight. But it seems to me that what's going to happen is that Amazon will acquire Uber. Or, will create their own platform that solves the delivery problem on it's own--with driverless, autonomous vehicles. And then there's going to be this giant platform, which will be phenomenally pleasant, but it will have some monopoly power, because it probably will kill--if it really fulfills all the promise that we think about, it will kill all the brick and mortar stores that act now as something of a restraint on Amazon's profitability. So, I just--I wonder about the power--and a lot of people are starting to wonder about this--the power of these very broad platforms to provide sometimes information, to provide in this case goods and services. How are they going to work in a world that benefits the consumer when competition may not be what it used to be? And, one answer is, 'Well, somebody will create an alternative that isn't profit-driven.' And then the question is, when I think about Evernote, when we get to IOS-24 [iPhone Operating System]--we're at IOS-12 now on my phone--we get to IOS-24, is the foundation that runs Evernote going to be able to work with IOS-24? Because I don't really need Evernote to keep getting better. And that was my point about Wikipedia. I'd like Wikipedia to keep getting better, but it's pretty great as it is. If Evernote stayed the same, didn't add any new features, I'd be fine. But of course there's tremendous pressure on it to add new features. Because it needs to compete; and its stockholders--if it's a public company; I don't even know--they want more money, they bought at a time when it was already established, so Facebook has to keep finding new, for example, ways to generate money out of its user base. And after a while, I'm thinking, 'Maybe this would be better if it weren't profit based.' I know that's a radical thing for a hard-core free marketer like me to say, but that's my thought. So, that's a lot of rambling. Your turn.

Michael Munger: You asked three gigantic questions, each of which takes a 20-minute answer. I'll see if I can do all of it--

| | 51:59 |

Russ Roberts: Plenty of time.

Michael Munger: I'll see if I can do all of it in three or four. Yeah. Well, the problem is they are really great questions. So, one thing you asked was about motivations that are not profit driven. And, one of my favorite Nobel Prize winners in economics and a guest on EconTalk is Gene Fama. Gene Fama has a series of papers coauthored with Michael Jensen in the 1970s, early 1980s, where he looks at the nonprofit as a form of financing that is designed to attract capital. Now, that might seem paradoxical. But, what nonprofits do, after all, is they are a particular way of arranging financial activity. And so, Fama's insight was: There's a lot of nonprofits out there, and a lot of them behave a lot like profit-making companies, because they are trying to make revenue and they are trying to maximize revenue after taking out costs. It's just that they're not equity-financed. The fact that they're not equity-financed means that people are more willing to make contributions. And those contributions may be the impulse that we have to act for the common good. So, when you do experiments, it actually turns out that people are willing to make voluntary contributions to public goods. It's not true that markets can't provide these things. Now, for-profit, price-driven markets may not be able to provide public goods. But non-profits are pretty good at providing public goods. A lot of people voluntarily give money or make contributions to the public good--

Russ Roberts: Give blood--

Michael Munger: So, they give contributions to public radio. They make contributions to the opera, to the zoo, to art museums, to children's museums. There's all sorts of things where we make contributions. [?] Now, suppose--

Russ Roberts: Voluntarily.

Michael Munger: Yeah. Voluntarily. Without any coercion at all. Now, suppose that you were able to write an app that reduced the transaction cost of doing that. And suppose you live in a little community and there's a park. And we've decided that having a Public Works Department is pretty expensive: we're just going to do this voluntarily. So, what we have, is an app based on something we haven't talked about yet, the Blockchain. The Blockchain is a distributed ledger that can't be tampered with. And, the part of the blockchain that this app works on is that everybody has glasses. They have wearables. And, you can switch these glasses to have a VR--a Virtual Reality component. So, I come up by the park and I see, 'Dang, look at that. The grass is really high. Somebody ought to mow the lawn.' So, I switch on the VR component, and I see that somebody has bid to pay for the mowing of 100 yards over there. I will pay for mowing the grid right ahead of me. And so I take out my phone or whatever tool I have to connect with, and I put up a bid that then is available to everybody else. And my name is there. And, none of the bids are paid unless everybody has--unless enough people have put in bids to make sure that the park gets mowed. Well, that would reduce the transaction cost of this impulse that we now actually have. And, it can't be counterfeited because it's connected to the Blockchain ledger that makes sure that that payment that I have is now encumbered. It's in effect in escrow. As soon as someone says, 'Yes, I'll mow the park because there are a total of $45-worth of bids,' the money is transferred to the mower. He does the mowing. And we just have accomplished that whole thing voluntarily.

Russ Roberts: We have that now. We have that now with IndieGoGo and other crowd-sourcing, crowd-funding--I think it's IndieGogGo, but there's others: GoFundMe. They create a minimum. It's just that we haven't gotten in the habit of doing it with public goods. We do it with--you know, designing a new suitcase, or a new kind of smartphone.

Michael Munger: Yeah. But I don't think this is that far away. We have the VR, and we have this habit already for crowd-sourcing. The thing is that economists tend to make this hard line about public goods that they can't be provided by for-profit companies. Well, they don't have to be. We actually have almost all of the tools we would need to solve this problem by a kind of voluntary sharing. Instead of me sharing the tools, I'm sharing the costs. But I'm doing it in a way that really encourages other people also to share. So, you asked what is the future of sharing that's not based on profits? I think I'm not smart enough to understand or predict all of the ways that it could be changed. But I think there's an enormously rich set of connections, as long as it's tied to something like the Blockchain that solves the trust problem. Which brings me to the second question you asked, which was about monopoly. So, a big part of the reason why these companies are becoming monopolies is network economies where I want you to be able to see the picture of my dog that I put up on Facebook. And if we have different platforms, it's going to be more difficult. So, we're all going to tend to use the platform that everybody else is using. And, one of the things that confers this monopoly is having a big inventory of reviews. So, I'm worried about that kind of monopoly. I don't know--the barriers to entry of having, first, the place where everybody goes to look at pictures; and second, an inventory of reviews that means that you can't just buy that information very easily--sounds like it's going to be a problem. I think the solution is what I would say was your third question about reputation. We are probably looking at a world where instead of me having a reputation on Airbnb that I cannot easily transfer to Uber or to BlaBlaCar--what we could have is a single, universal reputation.

Russ Roberts: Yeah.

Michael Munger: And again, it's going to be a Blockchain app, so it can't be very usefully counterfeited. And so, you'll be able to tell whether I'm the sort of person that has the qual[?]--I haven't cheated on things. You can look at my credit report. Now that's a big problem for privacy. But that ship has sailed. We've already lost any claim that we had about privacy. And, you know, if you don't want to participate, you can already do that. You can unplug off of Facebook; you are not on Twitter; you don't use Amazon; you don't get any of the ads you don't want to see. That's a really high-cost way of doing it. But if you are plugged in and take advantage of this universal reputation, then, if I want to check, I can just go to this non-profit company that operates a Reputation App that's based on the Blockchain; and then the monopoly doesn't exist any more. Because it's something that's easily publicly available. And we would all be willing to contribute something to that, voluntarily, in order not to have companies be in charge of our private information. All we would have is some sort of summary information about trustworthiness, debt, willingness to pay. I don't know what the actual categories are. But I think there's a way around this that combines a blockchain application with universal reputation, and the ability of nonprofits to solve this problem--if you can reduce the transactions cost of participation and make it clear who has given the contribution, so that I can claim credit for it. So that, if I--if my standing in the community is raised because you can look and say, 'Well, look: they've really done a lot of good things. They've provided a lot of public goods,' I'm willing to participate more because I care about being lovely.

| | 59:43 |

Russ Roberts: Yeah. I was thinking--I think that's the name of the app, by the way; that's what we're going to call it: Lovely.com. I don't know if it's taken already. Maybe it's BeLovely. I always like 'Be Lovely' as a motto.

Michael Munger: Be Lovely. Yes.

Russ Roberts: And it could be the letter 'B'--BLovely.com, if 'Be' is already taken. But, I was just thinking: there's something really deep there. If I were 25 years old, I think I would be interested in trying to work on it. But I'm not 25. So I'm hoping there's a 25-, or 30-, or 40-year old, somebody younger than I am with a little more ambition and drive to work on it. And talent, of course. But, the issue of--I would call it--my loveliness quotient. So, I do a number of lovely things during the year. I know you do. Every human being does. Right? I'm not bragging here. Every human being does lovely things. They open the door for somebody who has got too many groceries. They make a donation to charity. They help out somebody who is struggling emotionally. Most of these things are only observed by a very small circle around us, right? Our circle of immediate friends. And it's an interesting idea of whether--I guess the word is 'agglomerating'--of collected--horrible word, ugly word--but a way of collecting my reputational success. The things I've done. Maybe that would ruin it, of course, if it became publicly known. But, the idea that across different--I'll give you just a small example. A friend of mine, he writes, he does a bike ride for a hospital in Israel that helps--a couple of friends might do this--it's called the Alyn Hospital--A-l-y-n. It helps kids. It's an extraordinary hospital. And, I give money to that, right? Now, I'm not going to say how much I give, because that's neither here nor there. But I give some amount. And, I can choose to make that public on the website. And I choose to make it public, because I think it's helpful to encourage other people to give. But I could choose to make it anonymous if I wanted. Most people, a lot of people, do it anonymously. A lot of people do it publicly. But let's say I do another, different, thing I gave money to this year, which I've done, and you don't know--the people on the hospital website don't know about that other one. And, would it be a good thing if all the "good deeds" I did during the year were collected in one place so you could decide how lovely I was? There's something repellent about that, I have to say. But, on the other hand, maybe it's not so repellent. Maybe there's something beautiful about it. It's sort of the modern way that people gossip about--you know, in a small town people say, 'Oh, he's a great guy.' Or, 'He's not a good guy.' And, in the modern world, we could make that available more widely. And maybe that would make people more likely to trust me to--you know, in my reviews, or whatever. That world's coming. Someone is going to develop that. I think. And it will change the world.

Michael Munger: And in some ways, it's already here. We're--it doesn't have to be all or nothing. There are some things you could do anonymously, and some things that you would do and be part of your reputation. But, on Uber, I have a reputation as a rider; I can look at it; I can--

Russ Roberts: You can see your own.

Michael Munger: And on Airbnb, I've been a host sometimes. My son, Kevin, has often been a host, and for a while had a little bit of trouble with some of his hosting: he needed some work on that. But, you are getting feedback. But, if you get feedback and you get better, then there's a reward like any brand name.

Russ Roberts: Yep.

Michael Munger: So, the reason why I think this is going to take off and why the blockchain is important is that you are acting on your own behalf in a sharing economy, some of which is for profit, some of which is not. And what that means is, you are basically your own brand. So, I can look up, on LinkedIn, what your skills are. And maybe LinkedIn or some program like it will connect to my Reputation. And I'll try to curate my Reputation. Maybe there's some things that I'll keep anonymous because I think it would be wrong for me to trade on that as part of my Reputation Score. But I think a lot of people think, 'Well, this is kind of a video game.' It might change the nature of what was altruistic or charitable impulse into something that's now instrumental. But the fact remains that your reputation would then condition the extent to which you are willing to act badly. And that's--that has been what the desire to be lovely has always meant--is, I care more than I should, if I were homo economicus, about the opinions of those around me. It's not just instrumental. I care about them because I value--primitively value--the opinion of other people about me. Not because it gets me something, but because I care about that.

Russ Roberts: Yeah. Having spoken about it now, and thought about it for about four minutes, I guess I'm kind of uncomfortable, the idea that--you know, when I was younger, I was in a Business School at Washington University, a fine institution which I think you--

Michael Munger: A fine institution--

Russ Roberts: which I think you have high regard for. I think that's where that conversation with Doug North took place in your Ph.D. defense.

Michael Munger: It may have.

Russ Roberts: It did. I remember being in a business school and thinking--we had a speaker come in and said, 'You have a brand. Your brand is your performance, your reliability, your--etc.' And there is something--that's not a bad thing for a young person to be aware of. At the same time--again, this is a little weird for a hard-core free-marketer to say--I really don't like the idea of turning my charitable, altruistic activities into something instrumental as you've described it. It comes back to this idea--I've mentioned in the past about Rabbi Jonathan Sacks. He talks about the difference between a covenant and a contract. Contract--a contract is about: What's in it for me? A covenant is about a commitment that doesn't necessarily use cost-benefit analysis. And, I'm not sure I want to mingle those. And that's the idea that I mentioned of having a reputation, a charitable reputational score or some kind of reputation in general for being a decent person. And reducing it to a number, or reducing it to a web page. There's something I find a little bit creepy about it, I have to say. It might--I think it would lead to a lot--maybe it would lead to more charitable giving. I don't know. And as an alternative way to generate public goods--which is where we got started on this--I think there's something really potentially magnificent about that as a way to reduce the transactions costs of government. The transactions costs of government are the tax system, compliance, monitoring, deadweight loss from those prices that we pay, the distortions; and to be able to do that through some kind of sharing or app, maybe it wouldn't be true for national defense but it could be true very much so at the local level. Or schools, say, in bad neighborhoods that struggle to generate enough money to pay for them, and that we could--those who are lucky enough to do well--could help contribute to that in an easy, effortless, low-cost way. That's a glorious thing. I'm not sure I want to go as far as the reputational score, thing, though. That's making me a little nervous.

Michael Munger: I think you have identified both sides of the argument. My Duke colleague, Jeffrey Brennan has a favorite joke; it goes like this: Two elderly gentlemen are sitting in a park in the sun, and one turns to the other and says, 'I say, how is your wife?' And the other one thinks for a moment and says, 'Well, compared to what?' Well, the problem of the public goods is, we're comparing this to a system where we have very little information, and where local public goods decisions are made coercively. So, we don't have much information, and we're taking tax money basically at gunpoint. The alternative would be: What is it that people really care about, and they get the sense of participation? So, having local public goods be provided voluntarily by the things that people actually care about, and have them be crowd-sourced--well, compared to what? Compared to the existing system, that might very well be an improvement. And it might increase people's sense of participation and belonging. The overall reputation score--the problem is, economic revolutions don't care what we think about them. I agree with you: It's not good. But you already--if you participate in this economy, if you are a young person, you already have a reputation on LinkedIn, on Airbnb, on Uber, on Yelp. If you operate any sort of business where you are trying to sell stuff, you really need to solve this problem of not having a reputation. And not having a reputation is an entry barrier in this kind of economy. So, yes, maybe you don't want it to be instrumental; but compared to what? The alternative is not to be able to participate at all. And, it's like the Industrial Revolution. The commodification of labor was in many ways bad for people who lived in villages who found that, 'You know, I need a source of money income where I can't acquire the things that I need.' They had to go get a job. Economic revolutions don't care what we think about them. Was the Industrial Revolution good? Maybe not. Maybe not at first. The ultimate result, though, was we found ways to manage it that improved the wealth. Most of those who had been very poor. So, I guess I'm optimistic that we'll solve this reputation problem, though I don't deny for a moment that there is something really repulsive about the idea of changing these relationships that we have that are based on a deep, sort of, human trust to a trust that's being manufactured through some algorithm. That's a different thing. And it's not good.

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(44 COMMENTS)

Ran Abramitzky on the Mystery of the Kibbutz

Economist and author Ran Abramitzky of Stanford University talks about his book, The Mystery of the Kibbutz, with EconTalk host Russ Roberts. Abramitzky traces the evolution of the kibbutz movement in Israel and how the kibbutz structure changed to cope with the modernization and development of the Israeli economy. The conversation includes a discussion of how the history of the kibbutz might help us to understand the appeal and challenges of the socialism and freedom.

This week's guest:

• Ran Abramitzky's Home page

This week's focus:

• The Mystery of the Kibbutz: Egalitarian Principles in a Capitalist World, by Ran Abramitzky on Amazon.com.

Additional ideas and people mentioned in this podcast episode:

• Peter Boettke on Elinor Ostrom, Vincent Ostrom, and the Bloomington School. EconTalk, November 2009. Cultural norms.
• Todd Buchholz on Competition, Stress, and the Rat Race. EconTalk, June 2011. Russ talks about his experience on a kibbutz.
• Bryan Caplan on Hayek, Richter, and Socialism. EconTalk, June 2010.
• Dunbar's Number
• "The Limits of Friendship," by Maria Konnikova. The New Yorker, October 7, 2014.
• "History of the Shakers." ShakerHeritage.org. Group sizes of 150 people.

A few more readings and background resources:

• Socialism, by Robert Heilbroner. Concise Encyclopedia of Economics.
• George Stigler. Biography. Concise Encyclopedia of Economics.
• Adam Smith. Biography. Concise Encyclopedia of Economics.
• Human Capital, by Gary Becker. Concise Encyclopedia of Economics.
• Gary Becker. Biography. Concise Encyclopedia of Economics.
• Friedrich Hayek. Biography. Concise Encyclopedia of Economics.

A few more EconTalk podcast episodes:

• Kevin McKenna on Solzhenitsyn, the Soviet Union, and In the First Circle. EconTalk, September 2018.
• Daniel Pink on Drive, Motivation, and Incentives. EconTalk, August 2010. Discussion of an Israeli daycare study and peer pressure to pick up children promptly.
• Jimmy Wales on Wikipedia. EconTalk, March 2009.
• Michael Munger on the Basic Income Guarantee. EconTalk, January 2017.
• Lisa Turner on Organic Farming. EconTalk, December 2012.

Time Podcast Episode Highlights

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0:33

Intro. [Recording date: October 4, 2018.]

Russ Roberts: My guest is author and economist Ran Abramitzky.... He is the author of The Mystery of the Kibbutz: Egalitarian Principles in a Capitalist World.... What is a kibbutz? And why did you get interested in them enough to write on them?

Ran Abramitzky: That's a good question. So, kibbutzim, which is the plural of kibbutz, are communities in Israel that were based for many years on full equality in the distribution of incomes. And, as such, they are puzzling for economic theory. They are based on full equality of incomes and collective ownership of property, and yet they survived for over a century. Now, the first--just a brief overview was that the first kibbutz was established in 1910 by a dozen[?] of people from Eastern Europe; but the vast majority of kibbutzim were established in the 1930s and 1940s, just before the creation of the State of Israel. They first were established as communal farms. But, in the 1950s and 1960s when Israel went through industrialization process, kibbutzim participated in this process and since then they have a large industrial base alongside agriculture. So today there are like 120,000 people living in 268 kibbutzim, and they come from about two and a half percentage of the Jewish population of Israel. They vary in size from, say, like 100 to slightly over 1000. The average size of kibbutz is 440 members--which is like about 150 families or so. And so I got interested in them from a very young age. So, I myself did not grow up on a kibbutz, but all my family did--part of my mother's family did. So my grandparents were among the founders of a kibbutz, and my grandma lived there for 50 years; and then my mother grew up there and left; her sister stayed. And then later on my brother married a kibbutz member. And, as children, my brother and I loved to hang out on the kibbutz. It's a fabulous place: it's like this picturesque village with small houses surrounded by green paths; and we used to go play table tennis and soccer and football, and basketball; and we used to go and eat in the communal dining hall with kibbutz members. And it was a great place; and our parents didn't have to worry about us, because it's super-safe and there is no pollution and no cars and it was great. And, as I grew a bit older, I became even more fascinated with kibbutzim, because, not just I enjoyed there so much, but I thought that this is the idea of splitting everything equally and having no poverty. And no poor people. It's a very just way to construct society. But, as the cliché goes, when I was a bit older, especially as I started to study economics at the Hebrew University, I became more skeptical. So, as the cliché goes: If you are under 20 and are not a socialist, you have no heart; but if you are over 20 and you are still a socialist, you have no brain. I started to be more skeptical. And so I remember one day in particular when I was having a discussion with my uncle, and he described one of the path-breaking innovations of the kibbutz, say, it's a very good irrigation factory system in Israel, a very successful factory; and I decided to provoke him. So, I told him, 'Uri, you know, according to economic theory, the kibbutz should not exist. Actually, the factory shouldn't be as good.' So, you know, why would anybody work very hard if all they get is an equal share of the total resources? I explained to him the brain-drain problem that I learned at university. And then I said, 'And besides, Israel is the size of New Jersey. Why would any talented person ever stay in the kibbutz? Why wouldn't it be a great deal to move to Tel Aviv and earn a premium for your ability and efforts? Why would you stay and share your income with people who are less ambitious and talented than you?' So, I explained to him the brain drain problem. And then I told him, 'What about entry? I expect all the lazy people who can't make it outside to seek to enter a kibbutz, because what a great deal it is to enter a kibbutz and have other people subsidize your earnings.' And so I explained to him the adverse selection problem. And then I continued with my annoying speech and told him that I also worry about his kids a little bit, because why--they don't have very much incentive to study hard, because why would you study hard if a high school dropout and a computer science engineer get paid exactly the same in the kibbutz? Why would you study hard at all? And so--and of course he got upset, and we started to fight. And he explained to me how, 'You economists are so cynical, and all you can think about is the selfish person that only thinks about themselves. But everybody [?]--'

Russ Roberts: Smart man, your uncle.

Ran Abramitzky: He's a very smart man. And a big inspiration for writing that book, I should add. And he said, 'You are so cynical. Everybody that is familiar with the kibbutz knows that the founders of the kibbutz were anything but selfish people that cared only about themselves. They actually in fact wanted to create a new human being, the opposite of the homo economicus that cares only about himself. And they wanted people to care more about the collective than themselves and beside, if you are so smart, then how can you explain that the kibbutz survived so successfully for almost a century?' And he got me thinking. And that's what I've been doing for the last 20 years, is like trying to answer that question.

6:31

Russ Roberts: And, it's a fascinating book, and it's a fantastic example of applied microeconomics. There's so many interesting intuitions in the book about incentives and the role that preferences play--because incentives are not everything. Culture and other things do play a role in our decision making. And I think for readers, for listeners who don't know much about kibbutzim, about the kibbutz, you should give them an idea of what a radical utopian vision it was. So, not only is--and I learned all this from your book, as well as a little bit of personal experience, having spent a summer at Kibbutz Revivim in the Negev. I think I've mentioned this to listeners before--picking fruit and cleaning out irrigation lines with a pin. Squatting on the ground every 18". They are just far enough apart so that if you crouch down to get one, you can't reach the next one. So you have to get up, crouch down again. It's a fantastic motivator to actually stay in school. If you are not committed to the kibbutz. But the point is that, not only is there egalitarian--total, in the early days of the kibbutz--total egalitarianism in terms of consumption; there's no money. The children are not raised with the parents: they sleep separately, and parents see their children at separate times. You have no property that is your own. Talk about some of those rules, implicit and explicit that made kibbutz life very different than, say, just communal living.

Ran Abramitzky: Yeah, that's a great question. So, by the way, you were in good company because, you know, Bernie Sanders and Jerry Seinfeld also spent some time on the kibbutz and they have similar experiences to share like you do. So, you're exactly right. This is not just like living in a neighborhood where people, a bunch of people decided to split things a bit more equally than otherwise. This is a radical experiment in the sense that it started with people who came from Eastern Europe, and they wanted to bring with them some of the things they liked about Socialism: 'From each according to ability, to each according to needs.' They came to a country full of uncertainty and it made sense for them to group together. They also had, like, strong--not just strong--Socialist ideology but also strong Zionist ideology, and the idea that people can, the Jews can only be saved by working on the land, as opposed to learning Torah and avoid work like they often did in the Diaspora. But they also wanted this to be voluntary. So, they didn't want to force people to join there. And so the idea of voluntary Socialism. And, at first they set up these communes. And, as you said, based on full equality in the distribution of resources. No private property at all. So, all property belongs to the commune. And, as you said, for many years it was a non-cash economy. So, equality was taken so seriously that basically they would be allocated things in kind. So, there would be like a clothing budget; and then there would be like a food, clothing, travel; and each person would get an equal amount of those. You are not able to save anything. You cannot leave anything to your kids. If you leave, you can only take with you your brain, but you cannot take with you your share of the factory and all. And, they also, as you mentioned, they had communal dining halls. So, people did not eat in the comfort of their home, but they would eat their meals together with others in the communal dining hall. They took equality so seriously that they wanted to also raise kids communally. And so, the system of special residences for kids started around the 1920s--where kids lived outside of their parents' homes. They would only visit a couple of hours, maybe from 4 to 6, their parents; but otherwise they would live together. There would be a nanny that would take care of their needs. And the idea was to teach them the ideals of equality and to make sure that everybody gets the same opportunity, but at the same time follow a strict pressure to conform, and so on. And there is a big literature, by the way--this is a whole interesting issue--there is a big literature about these communal residences. At some point all kibbutzim decided that they were not a good idea, and in the 1980s all kibbutzim eventually shifted away from this system. There is a literature about whether it was good for the kids and parents; we can talk about this, if you are interested, later.

Russ Roberts: Impossible to measure accurately.

Ran Abramitzky: Impossible to measure accurately. Exactly. But maybe the insight from this literature is that it kind of depends on the kids.

Russ Roberts: No doubt.

Ran Abramitzky: There are like these sensitive kids for whom this was not a great experience. There are those kids who loved the independence and liked it; those kids, popular kids who loved living away from parents, and so on--

Russ Roberts: It's like summer camp from Day 1. Which is hell for some kids, and glorious for others.

Ran Abramitzky: You know what? [?] I think that's the best way to summarize it. And then, they did have tough early days, but in the 1970s, the thing that is quite amazing is that you can imagine why maybe dozen people creating one kibbutz may have very radical belief system can survive. But then think about, by the 1960s and 1970s, those are not--they are really like villages that are surrounded by green paths and gardens and swimming pools, and tennis courts, and basketball courts. And they are really like, many of them are quite successful. And so the amazing thing is--and the kibbutzim, unlike many other communes in history, they were never at the margin of society. They always influenced and were influenced by society as a whole. They always were perceived to be like the example of how voluntary Socialism can work, and then how you could, alongside, contribute to the country. A lot of the borders of Israel to a large extent were based on where kibbutzim were located at the time the state was created. So, this is like a radical experiment in many ways, but one that was lived very long; and that's why it's perceived to be one of the most important experiments in voluntary Socialism.

13:40

Russ Roberts: One of my advisors in graduate school was George Stigler. And George Stigler was--he was a scholar of Adam Smith, among many other things. And he particularly was a scholar of the Wealth of Nations part of Adam Smith, and particularly interested in the role, the power, of self-interest and incentives. And I often wonder what George would have made of Wikipedia. I think he would have been guilty--I have been guilty of this kind of crime in my--intellectual crime in my past, 'Well, I'm sure it doesn't exist,' because without any incentives, if it exists it's going to be horrible. And of course it's not horrible. It's quite good. And the kibbutz lasted successfully as social institution for multiple generations. And we'll talk about how they maintained--how the rules that they established helped maintain their survival for as long as it did. But we should also mention that, starting in the 1980s and 1990s, some of the more radical pieces of the kibbutz started to unravel. The first being the one you mentioned--children were no longer kept apart from their parents. But, then--I would say most, if I read your book correctly, of the kibbutzim have gotten rid of complete egalitarianism on income. And now they are smaller, and they've had trouble getting the second and third and fourth generations to stay on. You know: 'After they've seen Paree [Paris], how do you keep 'em down on the farm?' is the expression. And that's been the challenge for the kibbutz movement in Israel.

Ran Abramitzky: Yes. That's right. So, starting in the 1990s, many kibbutzim for the first time in their history started to shift away from equal sharing. Some kibbutzim only had minor deviations from the equal sharing models, but many have moved to market forces and now earnings, income, is based on people's earnings. Only 20% of kibbutzim maintain the egalitarian model. And so, that's right. It followed--I'm not sure if you want me to talk more about how it came about, but that's basically right, what you are saying. They did shift away from equal sharing, recently. And part of what I'm trying to do in the book is try to understand: Why did they shift when they did? Why did some kibbutzim shift away from equal sharing and others did not? And then, what are the consequences of the shift away from equal sharing?

Russ Roberts: And that's all interesting; and maybe we'll talk about it. But I'm more fascinated by what I think motivated the book from the beginning. Which is that it lasted as long as it did. And, just to give one more piece of the strangeness of these institutions, talk about what would happen if you received a gift from an outside relative. Or, as happened in quite dramatic fashion, the role of German reparations and how that was handled.

Ran Abramitzky: Yes. So, in early days, if you received a gift from an outside source, then the kibbutz would have you give the gift for the collective; or, [?] if the kibbutz had the resources, maybe they would, like buy--say, you got a radio, maybe they would buy a radio for the entire kibbutz.

Russ Roberts: It's fascinating.

Ran Abramitzky: It is fascinating. The reparations are interesting because they kind of put--it was kind of a test for kibbutzim. And the reason is that, one of the problems that I mentioned was brain drain. Yes? So, people--the tendency of the more skilled people to leave the kibbutz. And so, many of the kibbutz members were Holocaust survivors. And at some point in the 1950s, Germany paid reparations to Holocaust survivors. And many of them were in the kibbutz. And so now, they were paid for individuals, not for the entire kibbutzim. But they had to decide whether they leave--they take the money and leave--or whether they stay.

Russ Roberts: Fascinating. Incredible.

Ran Abramitzky: It is. And so, there is no real amazing data on this that I can tell you exact numbers here. But, the story is basically that some people left; but many people arranged with the kibbutz to give them like a one-time gift to ensure that their kid will go to university, but otherwise stayed in the kibbutz. I think most generally for your question about how they--the fascinating [?] of how they survived for so long--I would say there are a few ingredients for this. One is that--and you know, I have in the book this imagined conversation between what if the founders of the kibbutz went to an economist and they asked them, 'What do you think? I want to have full equality. Why? Because I think it's the right way to go. I'm Socialist. I think it's--I'm altruistic. I want to create a new human being. What do you think about it?' And if the economist had the foresight of what economics knows today, I think that what they would tell them is to basically create the kibbutz in exactly the way they ended up creating it, or, like, very close to how they ended up creating it. And I can elaborate more on this if you like.

Russ Roberts: Yeah; go ahead.

Ran Abramitzky: And so, I think the first thing the economist would say is, 'Well, there are also, beyond all these non-economic reasons that you give me for why it makes sense for you to create a kibbutz, I think there is also economic sense to create a kibbutz, in the sense that a kibbutz provides you with very valuable insurance.' So, it's a safety net: insurance against any sort of idiosyncratic shocks to your income. So, in the kibbutz you know that you and your family will always be getting paid the same, and especially in a world of undeveloped insurance markets in Israel--Palestine, Israel--at the time, this is a very attractive form of insurance. And of course, by the way, it remains a good insurance even when insurance markets are developed, because, for example there is no insurance against human incompetence. So, if for example, economics becomes obsolete, Russ, then you and I to be[?] in trouble. But in the kibbutz, people are working at various different occupations, and they know that even if there is less demand for their occupations, there are people working in other occupations and there is like full insurance, even against shocks to your human capital. But then, of course, he would point out that there are all these problems--free riding, and brain drain, and adverse selection--lack of incentives. And then, he will say, 'Well, the first thing that will be great for you is if you can make sure the people are really idealistic.' So, idealistic people, whether it's Socialist or just people who are very committed to the idea of a kibbutz, they don't share, they don't free ride, they don't leave. They just stay and work very hard. So, like, 'Make sure that you have an education system that convinces the later generations that this is great. Make sure you have idealistic people,' and so on. 'But, do not just trust the human nature of people to be like idealistic. Because as typically happens, second and third generations will typically become less idealistic, because for them, living in a kibbutz is a default rather than a choice, like it was for the founders of kibbutzim. And so, if you want to design a system that will make sure that they respond well to incentives, well, let's start with the free rider problem.' So, we know that there is not much motivation for people to work hard if they don't get the full monetary returns to their education. But, how about social sanctions and peer pressure? And everybody familiar with a kibbutz knows that they wouldn't sit next to you in the dining hall if you are perceived to be shirking. They can make your life sufficiently miserable that you might leave. But for that to work, you need to make sure that the communities are small enough, because social sanction, peer pressure, are more effective in small communities. You have to make sure that there is not much privacy, so everybody knows the coming and going of people. So, for example, you ask my mom--until this day, if you ask my mom, 'Hey, Mom, where are you going?' you know what her answer is? She says, 'No, I stopped answering this question 45 years ago when I left the kibbutz. Don't ask me where. I don't need to report to you what I am doing.' But, in the kibbutz, if you want the social sanctions to be effective, you need to make sure that people have not much privacy and that social sanctions are effective. Everybody knows everybody. They repeatedly interact with one another. They go to the same school. They work in the same place. They leave, and so on. They also want to have social rewards. So, rather than having one leader that will lead the kibbutz forever, they have rotation in leadership. And they rotate who is the Secretary, the Kibbutz Manager, the Farm Manager, to make sure that they reward people who are perceived to be bigger contributors to the community. And so, that's kind of free riding. What about brain drain? Well, you know, how about we make exit costly? So, for example, if all property belongs to the collective and there is no private property, that means that it's very hard to leave. Because, once you leave, you can only take with you your brain; but you can't take with you your share of the kibbutz. And so, lack of private property made it more costly for people to move away from the kibbutz. And then, similarly, letting you study agronomy rather than law--like, kibbutz-specific human capital--means that you are, your skills are more valuable within the kibbutz rather than outside the kibbutz. So, ways like that, and other things like this: You can only enjoy the swimming pool and the local public goods if you stay in the kibbutz. But if you leave, you can't. And so, the idea of making exit costly to deal with the brain drain problem. And, of course, they are well aware of the issue of adverse selection. So, the kibbutz knows that if they open their gates to everybody, they will get disproportionately people who didn't make it outside. And they are well aware of it. So, they have tough screening process if you want to join. They would not let you in if you can't get a job in the kibbutz, if you can't earn your own living, if you can't be a contributor. Even if they let you in they would have a probation period of a year or so, and only at the end they will decide whether you are a good fit for the kibbutz. And so on. So, things like that, I can talk more about.

Russ Roberts: That was fantastic.

24:41

Russ Roberts: We've talked on here--I think it's a Walter Williams quote; maybe it's somebody else--but, a family is a Socialist institution. It's a top down institution, as well. As I've said many times on the program: I don't sell the last cookie to the highest bidder among my children. I make an estimate of who got a treat more recently; I might decide who looks hungriest. I might let them chat for a bit and gain knowledge about it. But, that system works. It's stood the test of time--the family--although it's a little bit different today than it was 50 years ago, and certainly different than it was 5000 years ago. But that stood the test of time. The kibbutz is--it's an attempt--what's fascinating to me--there are a lot of things that interest me about the book, but one of the things that's fascinating is the idea that, in a way, you are trying to expand the size of the family--the extended family concept. But not too far, because those monitoring devices of lack of privacy start to break down in a larger society. A lot of those incentives start to become more important and destructive of the kibbutz as it gets larger. So, you extend the family--in fact, something close to the so-called Dunbar Number of 150--so you might have 150 families; and after that, it gets quite difficult. But, within that 150, you could imagine that there's something quite glorious about sharing your destiny with people that you come to care about deeply. Or, perhaps that you find really annoying to be around all the time. You know, it's obviously quite complicated. But those years--to me it seems like it was maybe 40 years from around the time of the establishment of the State of Israel in 1948 till the mid-1980s or so, which we might call the golden years of the kibbutz movement--it captured the imagination of, not everyone, but certainly about 5% of the Jewish population of Israel. And, as you say, it didn't just exist in isolation. They had a big impact on the country's development and on the military and on other aspects of society. And it's really a marvelous little laboratory experiment in how far you can push Socialist ideals.

Ran Abramitzky: Yes, thank you. These are great points. This is exactly the way I thought about the book. It's, in a world of rising inequality today, when, say, in the United States I think the last number I've seen is that the top 1% owns, maybe, 35, 40% of the total wealth, it's natural that many people start to think about whether and how we can create a more equal society, and what are the costs of doing so, and when such societies will succeed and when they will fail. And so, I think about the kibbutz as exactly a case study of a society that went all the way to the other extreme of having everything shared fully equally. Full equality. And exactly, it's exactly--and that shows us some of the conditions under which this can be successful. And I think you touch a few very important ones. So, extended family--that's exactly right. One way to think about the kibbutz is an extended family. And this is, and to a large extent just like you care about your family, you can create a system in which you care about your extended family. But then, it cannot go too large. And so, for example, there were discussions in the history of kibbutzim about whether to create, instead of many small kibbutzim, 268 today with an average of 400 people--whether it makes more sense instead to create one big kibbutz. There are many reasons why that will make sense. For example, there are returns to scale in the provision of--it's cheaper to provide laundry and food services in larger numbers. And so there are some reasons--and even the insurance aspects will be better where people will work in more occupations. There are reasons to believe that one big kibbutz is successful. But they always go back to, 'No, you know, let's have many smaller kibbutzim, because for this to work people need to know each other. People need to care about what each other is thinking.' And that's not only the kibbutz. There are other communes--Shakers, for example, used to split every time they reached a certain size. And so I think that it's the small nature is what allows them to work like you describe, like an extended family. And as you say, even though they were successful in many ways, it's important to remember two things, I think, to be more--I don't want to create a sense of how successful and great they were. One is that, even in the days, as you mention, even in the days that they were successful, at most, kibbutz members accounted for 7% of the Jewish population in Israel. And so, at some level you can think--if you think about this is like a limit to how many people were interested in a model like that, even when it is successful--at some level the way I think about the kibbutz experiment, if you want, is that if people were given the choice of where to live, and whether they want to live in an egalitarian society or whether they want to live in a less egalitarian society, who would choose the egalitarian option? And usually it's very hard to know. For example, if you take former Communist countries, they are not very useful because people could not vote against Socialism, and they could not exit at will. But the kibbutz provides you this experiment. And so, 7% is people would like to join there. And the other thing is in the background and we didn't talk about it, but I think it's important is that: Yes, they were successful, but at the same time, they did always get government support.

Russ Roberts: Oh, yeah. Thank you.

Ran Abramitzky: And so, it's not like they did--there was this implicit contract between the kibbutzim and the Jewish agencies before the creation of the State of Israel and the government of Israel afterward that, whereby kibbutzim contribute to nation-building but in return they get land and they get subsidies--water subsidies and other ways in which they get, like, tax breaks and other ways. And so governmental support also has always been important. And cynical people would say, 'Well, you know, it was successful as long as governmental support was high.' I don't think it tells the whole story, but it's definitely part of the story.

31:25

Russ Roberts:

Russ Roberts: And so you say--you say, by the way, as a proportion of the Jewish population. The kibbutzim typically were not Arab citizens of Israel or Arab residents. These were Jewish, for whatever reason, Jewish settlers before the state was established in 1948. And, I don't know if you mention in the book, but, were they typically Ashkenazi--that is, Jews from Europe--rather than Jews from the Arab world's Sephardim?

Ran Abramitzky: Yep. I talk about this in the book, that this is--it's very interesting. Because, when you think about--to me, one of the general lessons of the kibbutz, if you want, is that homogeneity is important. So the founders of kibbutzim were, as you said, they were all Jewish. Not only they were all Jewish, but they were mostly if not entirely Ashkenazi Jews, people who came from Eastern Europe. And so, at some level: Yes; they created this society, a Socialist community. But they were not very inclusive of Arabs or other Jews. In fact, they--in the 1950s, when more people started to come from Middle Eastern countries to Israel and they lived in, like, transitional camps around kibbutzim and the Prime Minister at the time, David Ben-Gurion, asked them whether they can welcome some of these people to work with them, and to the dining halls. And you know what they report? They report that they were very welcome on the kibbutz fields, but not very much in the dining hall. And so, the idea is that this is--they were not very inclusive in some sense. The Arab--the Zionist and Socialist ideology oftentimes clashed with each other. So, for example, from Socialist perspective, the Arab is a fellow-worker. But from Zionist perspective, it is sometimes the enemy. And they did not accept Arabs to be members, of course. And so, I think the broader lesson here is that it's easier--one of the reasons why it's so challenging to create egalitarian society is that when people are homogeneous--in the case of the kibbutz members, Ashkenazi Jews--it's easier to agree. It's easier to have shared preferences and to agree on equality. It's easier to see how you could be in somebody else's shoes, and if something goes wrong with him, something could go wrong with you, than it is when people are coming from very different ethnic, social, and professional backgrounds. And so at some level if you think about it, it's easier to understand why in Norway and Sweden, where the population arguably is more homogeneous, it's easier to sustain a welfare state than it is in the United States--

Russ Roberts: A large--

Ran Abramitzky: Yeah. Than it is in the United States, for example.

Russ Roberts: It's a great point. I'm going to add another type of homogeneity I think is really important. You talk about it in the book, and I'm going to elaborate on it. Which is: When the State of Israel was established in 1948, when Jews were arriving before that, it was a very poor country. And, it was a very undeveloped country. And the people who came, came out of religious passion, or nationhood passion. And they came to try to create something. And that was an unbelievable idealism in those days, in the 1940s and 1950s in Israel. And it was primarily an agricultural place. So, there weren't a lot of choices in ways to express yourself, outside of farming, and services, of course. But, as Israel has become, by the 1990s, perhaps the premier high-tech, innovative country in the world, per capita, the idea of staying on the farm is radically less appealing. And so, if Israel had stayed a poor, agricultural economy, I think where the options were relatively homogeneous for the society, the kibbutz would have stayed closer to 7% or 10%--it could have risen, even conceivably. Right? But in today's world, really tough.

Ran Abramitzky: Exactly right. So, at first--and not only what you mentioned, but Israel was a relatively egalitarian society at first. So, yes, it is maybe easier to understand why, when people came to a country full of uncertainty, full of ideology, and the outside option of members were not that great, a kibbutz is something that is attractive. But once returns to skills increased in Israel, with the high-tech, as you mentioned, the high-tech boom, Israel in the 1990s, now, very skilled kibbutz members have great outside options. They might be lured to the city much more than they were before. And so, at some level these changes in the surrounding level of the kibbutz, in Israel as a whole, made living in the kibbutz less attractive. The part that is maybe the most difficult, that is most impressive in kibbutz survival, to me, is not the very beginning, and not the inevitable, if you want, shift away from equal sharing once the returns to skill increase so much in the rest of Israel; but it's those years--well, you see, by the 1970s, it's not the case that most of what kibbutzim are doing is agriculture. They have--

Russ Roberts: They had factories--

Ran Abramitzky: Each of them had--each of them at least has one successful factory; and they have large presence in industry. They produce more than their share of the product, say, in industry, in rubber and plastic. And at the same time, they are no longer as homogeneous as they used to be before. This is now second- and third-generation; and by the second and third generation, ideology wasn't as strong as the founding generation. And yet, kibbutzim at that point were still based on full, equal sharing. Many of them were still doing quite well. It is that period that is interesting. And one of the things that I find that help them in this period, is you see being rich is helpful. And so, if you become--when the kibbutz is rich, for example, then you can imagine why, even if people are very talented and they can earn more outside, why they might be tempted to stay. Because the average is good enough, and all the swimming pool, and the dining hall, and it's a great place to raise kids. There are reasons why staying is attractive, even for talented people. Once, even though the kibbutz--your, perhaps also have an outside option is relatively high. But it is exactly--so, if you can think about it, think about Norway, for example: Being rich is helpful, maybe, to maintain the--if, to the extent that the kibbutz is at all instructive for some, for other societies. If you think about Norway, it's easier to sustain a big welfare state and egalitarian, when you are rich enough. But, in the kibbutz, once there was a financial crisis that cheat them. And once some kibbutzim had to reduce their living standards, you can see that poor kibbutzim are the first to shift away from equal sharing. And so, it raises the question of to what extent being rich is helpful in maintaining the equality.

39:15

Russ Roberts: Yeah. I want to talk about a related point. Which is that, we're talking about the incentives, that if you could leave the kibbutz and go to the city, you might make a lot more money. There's also a non-monetary aspect to it that you don't stress much in the book, but I think it's a big part of it also. Which is: what I think of as the opportunity to flourish. To thrive. To apply your skills in creative and satisfying ways. And, again, speaking about my own, short, experience on kibbutz, which was my only agricultural experience of my life, by the way--you know, I found picking peaches to be remarkably boring. There was a box factory, by the way, that I could have worked at. But there wasn't a lot of economics instruction. So, if I wanted to be an economist, I would have to leave the kibbutz. So, if your skillset doesn't lend itself to what I would call , you know, aspects of manual labor, certain limited types of innovation--you point out there's some innovations in agriculture that the kibbutzim have led, and that's, you know, very nice. But if that's not your thing, you are kind of out of luck. And the other benefits of the kibbutz--raising children in nice ways and the egalitarian part of it, if that appeals to you--is what you are left with. So, what I want: React to that. Then I want to ask you a question about education.

Ran Abramitzky: Yeah. So I talk about it in the book a little bit. You are absolutely right. One of the things that might be troubling about living in the kibbutz, and one of the reasons that my mom left, for example, is exactly that. It's that, she felt that individualism was discouraged. And you are encouraged to conform to the norm. It is saying that the kibbutz education is like, it's kind of like a loan. When it below the average, they would pull you up. And when it's above, they will push you down. And so in this sense--and picking oranges is not something that is appealing to everybody. However, I would say that Israel, that the kibbutzim in recent years, and even like are not exactly like you remember them from your visit.

Russ Roberts: Sure. They've changed.

Ran Abramitzky: And, but, even more than just the shift away from equal sharing, there is a substantial: It used to be that all members worked inside the kibbutz. And it was useful--for, like, in an economic perspective, it's a useful lock-in device. You don't know what your outside option is, and so on. But they realize that this also discourages individualism and that some people just leave, because they think that they cannot--you know, you want to be an economic professor, then, if they wouldn't let you then maybe you will leave. And indeed the academia, and [?] is full of formal kibbutz members. But at some point, many members--it's no longer the case that everybody, all members work inside the kibbutz. There is substantial number--right now, it's about 20, 25% of people working outside of the kibbutz. They would--and so in the times before, when it was still equal sharing, it would be that the member would work outside of the kibbutz: Say, you are a professor in the Hebrew University, and then you bring your salary to the kibbutz and then it is shared equally among members. But you can work outside the kibbutz. What is true is that once kibbutzim started to let people work outside the kibbutz, now they are also more likely to leave. So, kibbutzim always had these tough tradeoffs to make, between, on the one hand, as employers they wanted people to be skilled on the one hand. But they also wanted to keep the mean[?] on the other hand. And as extended family, you want your son to go to study whatever they want, not just what you what you tell them to. And so they did, over time, become more, allowed more individual freedom in the choice of what to work in and what to do. It's not exactly like the early days when people would all pick oranges.

43:15

Russ Roberts: Yeah. I'm going to critique my view for a second. Which is that my son is currently in Israel on a gap-year program. And he spent some time this week on break, and was visiting a farm. And he said to me, he said, 'You know, maybe I'll work on a farm for a year.' And that's, of course--he's not alone. I know many children of our friends, who as now, teenagers or young adults, want to do something agricultural. Either out of the emotional returns and experience of where you do produce food, or because I think as they want to do it in a more sustainable way. I don't want to over-, I don't want to under-romanticize agricultural life, because I think there is--there always are going to be people who find that lifestyle appealing. And again, we are talking about a small group. But, what I want to turn to now is the idea of inculcation of ideology and the educational role of the kibbutz. And, one way to think about the changes that took place over the last 25 years, is that the educational system could not convince the children and grandchildren of the original kibbutzniks--the founders of the kibbutz movement--to find it appealing. And I want to describe it in a way that you describe it in the book, which I think is really powerful. Which is, when you stay in a kibbutz or when you go outside and work outside the kibbutz but keep your earnings within the kibbutz, you are voluntarily choosing a 100% tax rate. You are turning everything over--not the state, but to the organization that you've chosen to belong to. And, of course, you are also the beneficiary of anything that the other people bring in. And, you can think of--when I was reading your book, I was thinking of sort of two ideological appeals there. Two educational things that you can tell your children, if you wanted them to stay. One would be that the insurance aspect of it--you mention, if things go bad: If you get disabled, if you become poor, if your job becomes less profitable than it was, you'll be taken care of. And that's a nice. And, you'll have the opportunity to take care of others. And you'll be in this shared enterprise. The second part: this idea that we are all equal as human beings. There is something deeply appealing about that. And, Hayek talks about it in The Fatal Conceit. He says: We have this natural impulse to take the structures of the family, which are held together by love, and extend them into the larger society. He says that's the road to tyranny. And if we take the, what he calls the extended or the macrocosm, the market, and bring that into the family, we destroy the family. And, to me the beauty of the kibbutz, intellectually and philosophically, is that it recognized that. They were in a state--meaning Israel--where there was a huge Socialist philosophical bent already, but they wanted to do it in a way that was less ambitious. And they still failed. To some extent. And to me, the question is: They could not inculcate in their children and grandchildren a romance that would help overcome the incentives that make it challenging. In other words, you know: Incentives can be very powerful; but if you care deeply about the ideals of kibbutz, you'll be happy to turn your yourself, income over to the communal wellbeing of the group. But if you don't have that, it's hell. And obviously the Soviet system failed utterly. We're currently talking about In the First Circle, and Solzhenitsyn: for those who have been reading that book as part of our Book Club. That ideal of a new human being totally failed. But it seems that it even struggled to this modest extended family model of 100-200 families, in this Israeli setting. And they had total control over the education of these kids. They had limited understanding of what was going on outside. And yet they still struggled to make it appealing for those future generations.

Ran Abramitzky: So, there are many things you are right about. I think you are right that it's a--one of the reasons it has been so appealing to members and got so much attention in Israel in the world is that there is something about us humans that do want to care about people and find no poverty, and caring about others, very appealing. It's the practical aspects of it that are difficult. But, the idea of having, of caring about others--I'll just give you and example. My grandmother, over the last 7 years of her life, she had Alzheimer; and she died with the kind of care and compassion that money can't buy. And this is something that was amazing, the way that she was treated in the kibbutz. And there are many reasons for it. One is that it's all about caring about others, and so on. The other is more economics, a little bit: If you think about equal sharing, imagine that you are a person that has the tendency to want to do something that is to care about others--say, to become a nurse or become a teacher. But, you are also very talented. So, maybe in the city you will tell yourself, 'Well, becoming a derivative trader will be much more beneficial for me financially, even though I really want to be a nurse, or a teacher.' But, in the kibbutz, being a nurse or a teacher does not have negative financial consequence, so it attracts people that are very good to do these kind of jobs. And I would say that a lot of the education--the other thing I would say is that, while you are very right, and I discuss it in the book that the kibbutz education system, despite trying, was not able to instill the same strong idealism as the first generation to the second and third generation, and definitely ideology declined. And indeed, this was one of the reasons why kibbutzim eventually shifted away from equal sharing. I would say that, you know, you mentioned the word 'they failed.' I wouldn't call it that way. So, to me, it depends on how you define a kibbutz. If you define a kibbutz as a society in which community, in which everything is shared equally, then yes, maybe to a large extent they failed and only 20% of them are still based on full sharing; but the vast majority shifted away from equal sharing. However, even kibbutzim that shifted away from equal sharing, they are still based on much more equality than society around them--than a random neighborhood in Israel. And you should[?] add in assistance, and caring about others, and a sense of community is still very strong in kibbutzim. And so, even reform kibbutzim are nice communities where people care about--mutual aid is a building block. The other reaction I would have is that you are also right about--it's almost like you think about it in a more philosophical way--so you mentioned the Soviets. So, it's not surprising that when you try to do this on a very large scale, and you want to--even if you have good intentions and you want to have it [?] and it's the right thing to do, and it's great insurance, and whatever, because of all these incentive problems you kind of need to solve incentive problems. And so, one way to solve them is if you are living in a Russian kolkhoz, if you try to exit, they kill you. Well, that's a great incentive to never leave, but it's not very interesting; and so it's not surprising that often places that try to be like Socialists are often totalitarian and they put big restrictions on the ability of people to move and on how much media and knowledge they get from the outside world. What's nice about the kibbutzim is that they try to do it without such measures. But, as you pointed out, some by-products are there is not much privacy; and it can be a hell because it does not encourage individual freedom of choice. And so, these were--it points to cost that you have to somehow solve the incentive problems, and if you want to do it in a voluntary way, you have to construct mechanisms that will deal with these problems. And sometimes they are ones that most of us don't like--say, lack of privacy. And that's why it's only been 7% of the Israeli population and can only be found in Israel. Although, by the way, if you are me, you risk seeing kibbutzim everywhere. While you don't see them exactly as they are, to me, every time you see a revenue-sharing agreement, even if it's professional partnerships or village economies in developing countries, or economic departments, or--you see elements of kibbutzim.

Russ Roberts: Yeah.

52:30

Russ Roberts: I want to come back to something you said that I thought was very provocative about--if you could be a derivatives trader, that raises the cost of being a nurse or a teacher, if you live in, say, Tel Aviv. But, on the kibbutz, it's not such a big difference. So, the financial aspect gets taken out. The other part I think gets interesting, and I'd love your reaction to this, is the status part. We don't spend enough time, I think, talking in economics about status and some of the other nonmonetary aspects of life and work experience. So, if you become a derivatives trader, assuming you are a successful one, and you get a fancy car, and you live in a fancy house; and people look up to you. They envy you, perhaps. And you feel special and important. And I've always said that, having spent a good chunk of my life as a teacher--I always think I've been very blessed to be able to do that. And when I started doing it, it was very expensive. I gave up a lot of income in 1980 to be a teacher. Less so, now, although I'm not literally a teacher any more. But, through most of my career the amount, the cost of me staying as a teacher than rather, say, an industrial economist or a financial economist in the financial sector, got smaller over time; but I always enjoyed the non-monetary aspect of it. But it happens to be the case that college professors in the United States get a lot of honor. And they get a lot of prestige. And it's considered somewhat special. Maybe I'm deluding myself. I'm sure my listeners will correct me. But, I think schoolteacher, and sometimes nurse, doesn't quite get that status--a high school teacher, say, and nursing doesn't get the status. And I think there's something really interesting about the ability, again limited, of the kibbutz to instill respect across different occupations unrelated to the monetary compensation.

Ran Abramitzky: Exactly. So, the status--first of all, I would start by saying it's a shame that teachers and nurses don't get that status, because I think they should. They have some of the most important work that we have today. The other thing is that, yes, many of us do a lot of things for the nonmonetary returns aspect; and in some sense, one way in which kibbutzim were successful is exactly--it's a higher status to be a nurse that is so smart that you knew that she could have been a derivative trader, but chose to be a nurse instead. How amazing is that? As opposed to just go for something that is really only mostly beneficial for you. So, it's almost like--the way status works in the kibbutz is interesting. It's almost like being a big fish in a small pond: People who have leadership skills are really highly appreciated. In part, this is because you know that they can do other things, but they still chose to stay there and to contribute their time and their salary to the others. In fact, as kibbutzim shifted away from equal sharing, some of that started to disappear, because you are, 'Of course, now you earn a lot of money, but I don't respect you as much because you mostly get to keep it rather than share it with everybody else.' So, status is an interesting thing: Why do we have such high status for derivative traders and not for nurses? It's not clear. And in a kibbutz it's kind of like almost the other way around.

Russ Roberts: Although lately--since 2008--derivative traders aren't doing so well, either, on the status front, it's important to--

Ran Abramitzky: Right, right. As an example.

Russ Roberts: To remember.

56:09

Russ Roberts: I want to make an argument, for the economists who are listening, and I think that non-economists will understand it, I hope, understand as well. So, I loved your example: So, you are capable of being a financial and--some kind of trader, investor--and you choose instead to do the less lucrative, "more caring" profession. And, of course, some people in economics call that "inefficient"--meaning, it doesn't maximize the financial size of the pie. I just want to make the claim that that's a total misunderstanding, to me, of the human enterprise. The goal of life is not to make the pie as big as possible. It matters. Your standard of living matters. But, it's not the only thing. And I think a lot about one of the great minds--two of the greatest minds of all time--which would be Gauss and Newton. Gauss spent the last years of his life as a surveyor. His notebooks--which I think--the notebook he left had 16 pages and became one of the most fertile and incredible achievements of--that mathematicians studied for a long, long time. He created the normal distribution, which is also the Gaussian distribution. He made incredible contributions to statistics and math. And at the end of his life, he wanted to be a surveyor. Newton, at the end of his life, wanted to try to figure out what the celestial spheres--the music that they made when they rotated, which is the way he thought of planetary orbits--he was a mystic. And a lot of people say, 'Oh, here are these two great talents that were so inefficient. They should have been doing x, y, or z.' And the answer to me to that is: Well, that's not all that matters. It's really not all that matters at all. And, I think--I don't want to go the other way, and say that, you know, that Steve Jobs, just because he's rich didn't accomplish much. Or Jeff Bezos, or others. I think, at the same time, we often underestimate the human contribution that we do measure in financial terms that people make. LeBron James is very wealthy because he makes a lot of people happy. And I don't want to understate the value of his contribution to making the world a better place. At the same time, there's something really beautiful about the care your mother received. And I don't want to say that you can't put a price on it; but I'm close to saying that. I mean your grandmother.

Ran Abramitzky: Yeah; you're right that there is a lot more than just maximizing the total pie. I would say that there are a couple of things that I learned, at least from thinking about kibbutzim for a long time. And, one of them is that--you know, I started this whole project by just writing a series of papers, of like: Maybe economic incentives stop at the kibbutz gates. Maybe: Is there brain drain? Is there adverse selection? Is there free riding? Is there lack of investment in human capital? And so on. And the answer, the overall answer that I get is that basically, economic incentives matter. So, definitely, the more educated and skilled were more likely to leave, and people who earned less were more likely to seek to enter a kibbutz, and so on. But, at some level those negative economic incentives were not nearly as devastating as economic theory would suggest. Now, a big part of it is because the kibbutzim designed exactly social incentives to deal with them. But there are other things; for example, think about education. So, kibbutz members were never less educated than the population as a whole. Even in the period where there was full equal sharing. So, the idea that, for example, people study hard because of the financial returns to their investment is maybe--the kibbutz maybe would suggest that it's overstated. People studied--were not less educated than the population as a whole, even in the period of full equal sharing. Of course, they had different education; of course, maybe fewer of them went to advanced degrees and more of them didn't--but at the same time, more of them had basic education. So, there are certain aspects in which incentives matter, but it's not all about incentives. But I would make--another point I would make, and that's something that, again, this is more speculation than it is based on, you know, like data. But, imagine--it's not even clear 100% to me that when you want--even if you focus on maximizing the total pie, think about the following aspect of the kibbutz, the one we talked about with a nurse that is getting more. So, imagine that you think that some occupations have higher social values than others. So, imagine that you convince yourself that somehow nurses and teachers have higher social values than derivative traders--and by the way, I don't mean to pick on derivative traders at all. It's just like--the thing that's coming into my--

Russ Roberts: Let's call them computer programmers.

Ran Abramitzky: No! God, no. And, if that's the case, and in an egalitarian system would encourage people to study more, to go more for occupations with higher social returns but lower private returns, then even the total pie is--I'm not sure; I didn't think about this long enough--I think there is a recent paper by Glen Weyl trying to formalize, I think, that point. But it could be that--I can imagine a world in which encouraging you to study something with high social value but low private value actually increases the size of the pie.

Russ Roberts: Oh, and we used to always say, 'properly defined.' So, if you think the pie--whatever that means--is just the pile of stuff, the goods and services--obviously that isn't what we want to make as big as possible. We want to make human satisfaction, human flourishing--human experience is what matters. And so, if you define the love that your grandmother received as important--which, of course, it is--when she had Alzheimer's, that counts. We can't measure it. It doesn't get a monetary price on it. It could, if she had been hired out to a really expensive nurse. But as you point out, a lot of times the nurse that does the best job isn't the one that's paid the most. So, that's important.

Ran Abramitzky: It is important. The thing is, that we also have to think practically about, we all would like to live in a world where everybody is rich and everybody is equal, and so on. So, the book, I think, points to, on the one hand, the beauty and the things that are good about equal sharing. But at the same time tries to be practical about some of the costs that come along the way by trying to make sure that incentive problems are being solved.

1:02:48

Russ Roberts: And those incentive problems, by the way, reminded me a lot--I just want to mention this for listeners who might remember this--very similar to the work of Elinor Ostrom. Elinor Ostrom looked at the Tragedy of the Commons, where people had said, 'Well, if you have a commons, it's going to be over-grazed. If you have a fishing ground that doesn't have ownership, it's going to be over-used.' And what she showed is that in small societies, very similar to kibbutzim, there were monitoring devices that the people involved in this created to reduce the natural incentives of despoiling and overfishing and overgrazing that would be there in the absence--you know, I think the other aspect of the kibbutz that I really like, and of your book, is that it's a textbook example of what's wrong with textbooks. You know, the textbook says, 'This can't exist. They can't solve this. The incentives are all wrong.' Well, whether they knew it or not, they evolved such that they figured out ways to reduce the power of those incentives.

Ran Abramitzky: Yes; and, you know, it's interesting that you mention common property. This is one thing that, usually communal property and lack of private property is something that is associated with bad stuff. Interestingly, for the kibbutz, this turned out to be useful, because it solved the problem of--it served as a bond that made it costly for people to exit. At some level, that is one aspect that you can think of, if you want, cost, or having--if you want to really maintain a society that is fully functioning as the kibbutz, common property was very important there, because the fact that you couldn't take it with you once you exit, allowed the kibbutz to maintain a higher degree of equality without experiencing massive brain drain of the most talented members, because it helped as a locking device. But it is--

Russ Roberts: Explain.

Ran Abramitzky: another example like lack of privacy. So, imagine the founders of the kibbutz. Okay? Imagine you come to the kibbutz. You really want to have equality. You think it's fabulous. But, you worry that eventually people might--you are now young, and everybody shares similar prospects. But, you know that at some point, some people will turn out to be super-talented and productive; and they might want to leave, because they will have increased incentive to move to the city and earn a premium for their ability and efforts. What do you do? You say, 'Why don't we cancel all private property? Everything--we'll give everything we have to the collective. And when we exit, we can't take it with us.' You know, guess what happens? Now, when people realize they are talented and they want to leave: well, but at that point, they can't take their--there is no private property--

Russ Roberts: There is no savings--

Ran Abramitzky: they don't have savings. There is no savings. They have nothing. So, if they leave they can take only their brain with them. But they can't take their share of the kibbutz. And that makes exit costly, and allows kibbutzim to commit to a higher degree of equality without losing the most productive individuals. So, somehow, lack of private property as a bond--as a bond that allows a higher degree of equality without brain drain--is something that--but again, just like lack of privacy, something that many people find too costly, is too costly in order to maintain a high degree a high degree of equality.

(13 COMMENTS)

Kevin McKenna on Characters, Plot, and Themes of In the First Circle

Russian Literature Professor Kevin McKenna of the University of Vermont talks with EconTalk host Russ Roberts about the characters, plot, and themes of Aleksandr Solzhenitsyn’s masterpiece, In the First Circle. This is the second episode of the EconTalk book club discussing the book. The first episode–a discussion of Solzhenitsyn’s life and times–is available on EconTalk at Kevin McKenna on Solzhenitsyn, the Soviet Union, and In the First Circle.

This week's guest:

• Kevin McKenna's Home page

This week's focus:

• In the First Circle: The First Uncensored Edition, by Aleksandr Solzhenitsyn on Amazon.com. October 2009. Harry Willets (Translator).
• Kevin McKenna on Solzhenitsyn, the Soviet Union, and In the First Circle. Part I. of this Book Club series. EconTalk, September 10, 2018.

Additional ideas and people mentioned in this podcast episode:

• "A Spy's Path: Iowa to A-Bomb to Kremlin Honor," by William Broad, New York Times, November 12, 2007. Kovalev[sp.?] incident, 1949.
• Aleksandr Solzhenitsyn's Nobel Prize Lecture
• Aleksandr Solzhenitsyn's Commencement address at Harvard University, "A World Split Apart." Delivered June 8, 1978.
• William Faulkner. Nobel Prize Banquet Speech, December 10, 1950.
• Man's Search for Meaning, by Viktor Frankl on Amazon.com.
• On Soviet Soil (1957) Eleanor Roosevelt's visit to the Soviet Union. George Washington U. Eleanor Roosevelt papers project.

A few more readings and background resources:

• EconTalk Subreddit, a place to discuss In the First Circle.
• Facebook Group to discuss In the First Circle.
• The Sharashka Phenomenon, by Asif Siddiqi. Russianhistoryblog.org, March 10, 2011.
• "Pulitzer-Winning Lies," by Arnold Beichman. The Weekly Standard, June 12, 2003.
• Article 58 (RSFSR Penal Code)). Wikipedia.
• "Goodbye, My Friend, Goodbye" by Sergey Yesenin. Allpoetry.com. For the translation read by Russ, see Sergei Yesenin on Wikipedia.

A few more EconTalk podcast episodes:

• Paul Gregory on Politics, Murder, and Love in Stalin's Kremlin. EconTalk.

Time Podcast Episode Highlights

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0:33

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

Russ Roberts: This is a bonus edition of EconTalk, Part II of our Book Club reading In the First Circle, the first uncensored edition by Aleksandr Solzhenitsyn, with U. of Vermont Professor of Russian Language, Literature, and Culture Kevin McKenna.... In our first episode we talked about Solzhenitsyn's life and the political and social climate he lived through. Today we're going to turn to the book itself. I want to let listeners know you can talk about the book with your fellow readers and listeners on Facebook and on the EconTalk Subreddit we've created. We will have links to those opportunities posted on the page for this bonus edition. I also want to say there will probably be some SPOILERS in our conversation today. You might want to wait till you finish the book before listening. And having said that, for me, the plot twists are not that important to enjoying the book, in my view. But, you may feel otherwise. So be forewarned.

1:32

Russ Roberts: Kevin, let's start with the main characters in the book. And, you've singled out three. In the first episode, we talked about what you called the polyphonic nature of the book: There are many, many characters woven together, but there are main characters who take up more time and who Solzhenitsyn wants us to understand more deeply. Who are they?

Kevin McKenna: Sure. Well, the first so-called main character, I think the one that most identifies with Solzhenitsyn himself, would be Gleb Nerzhin. Gleb, as we know, has been arrested, serving in World War II. Eventually he ends up in this sharashka, or, that is, research camp, on the edge of Moscow. And, over the course of the novel, Gleb is searching--as was the case for Solzhenitsyn himself at this particular age--Gleb is searching for a number of answers to the meaning of life. We know he's engaged in a kind of spirit of Taoist philosophy, and skepticism, early on. And he turns to two other characters who we could call, refer to, as central characters. One would be, of course, his philosophical Communist friend, Rubin--Lev Rubin. Ironically, Rubin is a strong devoted Communist believer. This is ironic because the fictional Lev Rubin was one of Solzhenitsyn's or his character, that is Rubin's character, is based on one of Solzhenitsyn's closest friends, while he was in the Gulag camp. And the third character, Sologdin, has a quite different philosophy from that of Rubin. While Rubin is a dedicated, devoted Communist, Sologdin--I'll pronounce that slowly--has a very different philosophy of life; and he, Sologdin, tries, throughout the early part of the novel to influence Gleb's understanding and approach to life. Sologdin is essentially the master of himself. He does not give in to any philosophy; he does not give in to--certainly--Communism. He, Sologdin believes that he, himself, that the talented man or person themselves in life should dictate and control their own futures, their own fates. And as we're going to come to understand fairly early on in the novel, Sologdin is going to make a bargain with the system whereby he, as one of the engineers, the prison-engineer zeks in the camp--he is going to go ahead and to cooperate, because he has, Sologdin has discovered the secret to what has been making their whole phonologic research so difficult. And, in doing so, Sologdin is going to be able to leave the camp as a prisoner: He'll be able to return to Moscow, to live in freedom; he'll be given untold wealth, etc., etc., etc. Now, I don't want to get carried away: This goes into one of the major themes of the novel. But I would say that those three central characters--Nerzhin, Rubin, and Sologdin--certainly occupy the first half of the novel, with their various philosophical and ethical discussions. I would probably add, the character of Spiridon. He's the peasant. He's nearly blind--I believe he's blind in one eye and half-blind in the other eye. He is older than the other three. And he, in Solzhenitsyn's creation, essentially represents the wisdom, the home-spun wisdom, of the Russian peasant. And, in fact, while throughout the novel Gleb Nerzhin alternates between turning to Rubin and turning to Sologdin for answers to the questions that he, Nerzhin, has about life, ultimately he's going to turn to Spiridon. And this come a little bit later in the novel; and perhaps you and I can discuss that at a later point.

Russ Roberts: Yeah. I think it's actually my favorite scene in the book. But, there are many, so it's hard to--

6:59

Russ Roberts: And let's just also talk about the overall plot. The book opens very differently from its original edition, which I think was about a doctor dealing with a medical issue. Instead, this uncensored edition opens with a Russian, a high-ranking Russian bureaucrat trying to leak information to an American or Canadian counterpart in order to alert them to Soviet atomic bomb efforts. And that's the first 5 pages of the novel. And, for a while, it kind of disappears for a while. We're not quite sure how or if that's going to come back into the plot. But, of course, there's a phone call; and we don't know for a while whether it's recorded or not. But that phone call becomes a centerpiece to the last, oh, maybe third of the novel. And, why do you think he chose this--let's not talk about why he censored the plot. That's pretty clear; I can understand that. But, why is this the plot that he wanted to write about?

Kevin McKenna: Mmm-hmmm. Essentially, Solzhenitsyn was not satisfied with the success of Volodin--this is the name of state security officer, kind of a young diplomat in his early 30s. Solzhenitsyn was not, in his censored version, which is the version that appears in 1968, Solzhenitsyn was not satisfied with his success in both the character of Volodin himself as well the success of the plotline. In his censored version, Solzhenitsyn's censored version, as you noted, we have a fictional event where Volodin places a telephone call to a friend of the family, a doctor. And this all deals with, essentially, a fictional event. One of the problems with the first printed version--which would actually be the initial version of the censored novel--one of the problems with that is that there are 8 chapters that Solzhenitsyn had had to delete. And a lot of those chapters, particularly in the central part of the novel _ In the First Circle, as opposed to The First Circle--those chapters were deleted. And they create and embellish and focus on Volodin's character, as well as the central plot line. Solzhenitsyn goes to this factual event. He, as a Russian, he as a writer, is very keen on fact. And what may seem to us in the 2009 translation, _ In the First Circle, what may seem to us as an extraordinary difficult-to-believe event--that is, a Russian diplomat calling the American Embassy in Moscow to warn the American Embassy of a plot of a Soviet in New York City to receive the secret plans for the atomic bomb from the Americans--while that sounds ludicrous, it is entirely factually-based on the Kovalev[sp?] incident that takes place, indeed, in 1949 in New York City. As a reader of the novel, I would say Solzhenitsyn's treatment of the factual event is infinitely better than what I see to be his unsuccessful treatment of the fictional calling of a Russian doctor.

11:24

Russ Roberts: What I found surprising about that decision--and, you know, as an America, I don't know how a Russian of the time would view it, a Soviet citizen reading it in the 1960s, 1970s, 1980s, or today. But what I found fascinating about that as the lynchpin of the story is that, we are deeply enmeshed in the sharashka, with the ethical and moral dilemmas of Nerzhin, Rubin, and Sologdin. And they talk about them all the time. Some of them they don't talk about, obviously, because they can't. But we hear their inner dialog often. And we understand how the difference between, say, Rubin, and Nerzhin, and how the commitment to Communism for Rubin affects his decision-making and so on. We understand that Sologdin is tempted by rewards to make progress on this technology, that ultimately is going to help the regime enslave people, and harm them, and oppress them. And so, we all understand this horrible central dilemma, at the heart of the novel. And yet, the--Volodin phone call, which starts the novel--that's treason. He is betraying the Soviet Union. And there is a debate within the book--of course, the characters in the sharashka debate, whether they should rely on the Americans, whether the Americans are a force for good, whether the Soviets are evil--you know, the power in the Party. So they are all dealing with that. But Solzhenitsyn creates this character in the center of the novel in the background, Volodin, who is betraying his country, weakening his country, keeping his country--trying to keep his country from getting access to technology that will allow them to compete against the Americans. And I found that to be a fascinating decision. And--major SPOILER alert: so, if you want to stop listening here, you may. Major spoiler alert: He gets caught. And his--and it's a brutal experience. And we know it's going to be much more brutal than what we observe in the novel itself. And, are we supposed to root for him? feel sorry for him? And if I were a Soviet would I feel differently than I do as an American? I found that part very interesting. It created a lot of tension that--it didn't have to. It could have just been a much less complicated crime.

Kevin McKenna: Well, Russ, let me address some of the points that you are making there, because there's something that you're missing very, very key to this novel. Without a doubt, you are entirely correct: This act was treasonous. If, and when Volodin were to be captured, and, say, tried for having made this treasonous act, he would either be sent directly to a Gulag camp or even more likely--

Russ Roberts: he was killed--

Kevin McKenna: he'd be executed--

Russ Roberts: yup. Yup.

Kevin McKenna: in Lubyanka Prison.

Russ Roberts: After being tortured. Yeah.

Kevin McKenna: And what you missed there, you and your readers if you look, I believe it's perhaps the closing paragraphs of Chapter 1, if I'm correct--I unfortunately left my copy of the novel at my office on campus--

Russ Roberts: I have it with me; I have mine with me.

Kevin McKenna: Good. At any rate, there's a line that says, and this is these are Volodin's kind of inner thoughts; and he says to himself, 'If a man cannot live according or in concert with the dictates of his conscious, how can we possibly live? How can we possibly call ourselves human beings?' Now, I've entirely misquoted that, since I don't have the book here in front of me. But that is essentially one of the central themes throughout this entirely novel. In the censored version--that is, [?], I think 9 chapters shorter than the novel that your listeners are reading, this question appears just about in every single central character of the novel. Ultimately, of course, the peasant, Spiridon, is going to provide the answer to that question. Throughout the entirety of the novel, Volodin is on a search. He is on an adventure, of sorts. As you've already indicated, while the novel opens with Volodin, the final chapters of the novel will end with Volodin. He indeed is going to be caught. And we see that he, Volodin, in those closing chapters, commences a life at the point where we have been meeting Bleb Nerzhin. Tying, of course, the two characters together. Further tying the two characters together, of course, is this theme of conscience.

Russ Roberts: Yep.

Kevin McKenna: A human being, in Solzhenitsyn's mind, in his belief, in his character, in his soul--we human beings have to be able to live consistently with the terms of conscience in our own lives. Where Volodin, not to take this act, were he to continue to kind of live the sybaritic life that he has been leading all of his life, he understands that he essentially would not remain human. He would be giving in to the system. So while, Russ, you are entirely correct that this is a treasonous act, it's an act that he has to undertake in order to remain a human being, in order to be able to live with his conscience.

Russ Roberts: Yeah, I don't--I totally agree with that. I understand that--and when I called it a treasonous act, obviously treason in an immoral regime can be a virtuous thing. That treason is a negative term--but I just wondered whether the reader in the Soviet Union in 1968 or today would have some unease. Let me say it differently. The zeks in the sharashka who work on the technology--on voice recognition and voice cryptography--we sympathize tremendously with them because they are caught between a rock and a hard place that no human being should have to deal with--very similar to moral dilemmas in Auschwitz and elsewhere, where people were put in an--there's no attractive solution. There's nothing--you are forced to do something immoral or die. And often the immoral act that you're doing has grayness to it, in the sense that--I mean, here, in the sharashka, there's nothing gray about it. Obviously there's nothing good about giving the Soviet regime more ability to eavesdrop and punish people. So, it's not fun to work on that. But I would think that there is a certain level at which betraying your country in the middle of the Cold War--I'll say it--let me say it a different way. I understand that many Soviet citizens during the Cold War rooted quietly for the Americans in the West. But some of them must have had some misgivings about that. And, I find it interesting that the book doesn't come to grips with that, and gives us a moral dilemma at its center that's a little more complicated, to me, than the sharashkas' [?] moral dilemmas.

Kevin McKenna: Well, I think you might be over-emphasizing, let's say, the number of Soviet citizens during the Cold War who were rooting for the Americans. With respect to the Space Race between the two countries, indeed I did find that to be the case. I could go on and on for that at great length, but I don't think it's all that germane to the novel. But, during the Soviet period, and today by the way, the Russians in 2018 are fiercely patriotic. Your very good question about how would the readers today look at Volodin's treasonous act of calling the Embassy is good for this reason: I would say that those Russians today reading this novel who indeed have found that comfort place in their own conscience, they would agree with Volodin. But, I can assure you, the overwhelming, vast majority of Russians today--pretty much, by the way, the same for, the overwhelming number of American citizens today--have not reached that comfort zone between the way that we lead our lives and the success or failure in its relationship to our conscience. Are we motivated primarily, as is Solzhenitsyn, and of course, Gleb Nerzhin--are we motivated primarily by our conscience, our duty to our conscience? Or, like the overwhelming, vast majority of Russians and Americans, are we motivated more so by personal interests? That might have to do with a career or getting ahead, etc., etc.

Russ Roberts: Yeah, no, I totally agree with you on that. Just to be clear, I think Volodin's act is a heroic act. But I'm raising the question whether others might not have felt that way.

Kevin McKenna: Some would, and some would not.

23:02

Russ Roberts: I want to ask you another question about conscience, which I found fascinating, which is, and we touched on this very briefly--I might have confused some readers, some listeners last episode. In real life, Solzhenitsyn divorces his wife on the grounds that it's very hard for her to be married to a prisoner. It's a very common experience. And I think I asked you and we left it hanging: I think they re-marry. Is that correct?

Kevin McKenna: They do. I believe--this is his first wife, whom he divorces. And they remarry once he gets out of the camp. Not right away, not immediately. I think that they remarry somewhere around 1957. I could be off on that year, but it was toward the end of the 1950s.

Russ Roberts: But for me, one of the most poignant, unbearable parts of this book are the romantic and sexual relationships between the prisoners and the women in their lives, some of whom are staff members, some of whom of course their wives back home. And the very, the scene--I just want to mention this in passing: You are given the advice as a writer to write what you know about. Solzhenitsyn is drawing so deeply--when he's describing the corridors and the stairwells, you don't feel like he's trying to imagine them. You feel like you are with him in those situations. And, the scene where the prisoners have--I think it's--how long do they have with their wives? Is it 30 minutes?

Kevin McKenna: Oh, gosh, I want to say--

Russ Roberts: Is it 10 minutes?

Kevin McKenna: I think it's 30 minutes. And it's once a year.

Russ Roberts: Once a year, with a guard who is looming over you, not giving you a moment--

Kevin McKenna: And you can't touch.

Russ Roberts: And you can't touch. There's something just unbearably sad about this. And the Solzhenitsyn character in the novel, Gleb, has a sexual opportunity that he turns down. And, we also get to watch his wife, Gleb's wife, have a potential romantic or sexual relationship. And Gleb does the honorable thing: He honors his marriage, he forgoes the sexual opportunity. And it's really an extraordinary--I found it very powerful, given that--you know, we don't know what Solzhenitsyn did in the camps, romantically, personally; we don't know what he did ethically. But, what I found extraordinary about this--one of the many things I found extraordinary about the book is that it was clear that this is what he wanted to be, Solzhenitsyn, in the form of Gleb. Whether he actually lived such a high code in his real life experiences, we don't know--or, I don't think we know. But, it's clear that in his fictional ideal, he was an honorable man, in virtually every dimension. It's such a heroic story, for so many of the characters. But for him especially.

Kevin McKenna: Yeah. Well, Solzhenitsyn, the man now, not the writer, has acknowledged that he was not as comfortable with the way that he and the hundreds of thousands of Soviet soldiers during World War II conducted themselves as they approached, essentially, Germany. He does not, or he did not take pride in what his fellow soldiers and he himself were doing. I would not go so far as to say that he failed to live up to his ideals. Solzhenitsyn is perhaps, in my opinion--I can't think of anyone, any writer or any person, who succeeds in living up to his ideals more so than he himself. Does he have occasional failures? Yes, he did. But, I don't think that those--that is the failures of Solzhenitsyn personally as opposed to the fictional world that he creates in his novels--I find his fictional world far more interesting than his real world--

Russ Roberts: [?]

Kevin McKenna: And that's saying quite a bit. Because his real world was--

Russ Roberts: darn interesting.

Kevin McKenna: [?] quite alive.

28:01

Russ Roberts: Let's turn to the Stalin chapters. There are 4 or 5 chapters on Stalin. Which I enjoyed just tremendously. I found them incredibly entertaining--funny, in a dark way, of course. And fascinating as psychological portraits of a monster. But you could have cut them out of the book. They play no direct role. And, in fact, I'm going to add one more aspect to the book, which, I want you to tie these two together, which is: Another one of my favorite chapters was the trick of liars, where we see these bumbling, over-promising, stressed out Soviet bureaucrats and military officials lie and over-promise. The psychological insights are just unbelievable: the temptations in those settings, they are beautifully portrayed. But, you don't need them. So talk about what they add--and I say "need" them: they don't, if those were the chapters you cut, you wouldn't lose any of the plot. But there's something else. Why do you think they are there, other than to indulge our enjoyment of them? Which, they are spectacular. But why are they there?

Kevin McKenna: I'm going to speak out of both sides of my mouth. You've made a very good observation, in that many, many, many literary critics, both Russian literary critics and those from the United States and Europe, etc., etc.--a lot of literary critics feel that the Stalin chapters are unsuccessful and that indeed, they could be deleted. Speaking out of the other side of my mouth, I would not agree. And the reason I don't agree is that those chapters, 19 through 23, not only do we, not, let's say, American voyeur readers who encounter this scathing indictment of the psychopathology of Stalin himself, what we fail to recognize is that, like the zeks--the prisoners--in the First Circle of Hell, Stalin himself finds, by the last two chapters, 19 to 23, realizes that he himself resides in his own circle of hell--a hell of self-deception or a hell of ego or a fear or a doubt of suspicion. He's fearing and suspecting and resenting Lenin, who is now decades dead. And we see this psychological pathology of Stalin himself where he has imprisoned himself in his own personal circle of hell. And, by extension, I would say, as you initially indicated, the, what? The management, the head of the military departments and the research departments, they, too, find themselves find themselves in a First Circle of Hell, like the zek prisoners. For example, when, Chapter 10, entitled "The Rosicrucians," when the two prisoners, Prancikov[?] and Bobuinian[?] go to visit Colonel Yakoniv[?] and they are able to exercise far greater freedom than the head of this institute, Yakoniv[?] can--I think it's Prancikov[?] who says, and I quote, 'You need me, and I don't need you.' He goes on to say, 'Shout at your colonels and generals. They've got a lot to lose. But the man from whom you've taken everything is no longer in your power. He is free again.' This is a direct quote from that chapter. And, by extension, we note that the deputy minister of state security, Sebastianev[?], as well as the head of the special equipment section of the ministry of state security, Major General Roaskalupov[?], and finally, the Chief of Operations at the institute, the Colonel of Engineers, Yakoniv[?], they are going to have to meet with and lie to Stalin's minister of state security, General Abakumov[?] in the same way that the zeks have lied to Yakoniv[?].

Russ Roberts: Of their progress. Yeah.

Kevin McKenna: Yeah. In other words, the extension of Dante's metaphor of hell is very rich in this novel. And in response to your original observation, I would keep the Stalin chapters, because we see that at the very top, at the pinnacle of this triangular power-relationship, Stalin, obviously, he, too, is a prisoner.

Russ Roberts: And he's also, in some way--the other metaphor that came to my mind, besides the First Circle, is a web. A spider web of--

Kevin McKenna: Sure. Very good--

Russ Roberts: since everyone's trapped and struggling to get free. And Stalin in some sense is the weaver of the web--

Kevin McKenna: Absolutely.

Russ Roberts: He's the spider at the center. But he's entangled in it, also, in so many ways.

34:16

Russ Roberts: You know, there's another chapter you could do without, in theory, which is the extraordinarily brilliant chapter where there's a propaganda lecture on Stalinist theory. And it has no content--the lecture. But, of course, it seems grand and important; and we watch as the attendees drift off, write notes to each other, just like in a bad school setting. And, it reminded me--this is a very--it feels weird making this contemporary references, but it reminded me a lot of the series called The Wire, which is about Baltimore and David Simon's brilliant creation of, in the first season, of the drug war. And you see the different characters--the drug addicts, the dealers, the police, and the bureaucrats above the police all enmeshed in this system trying to do their jobs, get ahead, make money, get promoted. And it's a very symbiotic relationship, akin to, you know, 'You need me. I don't need you.' They all need each other, unfortunately--many of the characters need each other. And they find themselves in what is essentially an immoral landscape. There's really going to be no easy way to go forward in line with one's conscience. And, in that series, one of the things that's so effective about it is you don't know who to root for after a while. You start sympathizing with the drug dealers, who like any other business are just trying to--but then again, you've got people dying from drug overdoses, and then you've got the police doing brutal things but also trying to do what they think is the right thing. You know, it's just very--it's similar in the sense that the system itself has a set of incentives that are relentless. And I think that's a better way to describe what's going on here, rather than just say it's symbiotic. The incentives built into the system entrap everyone. In this case, the zeks want to provide the technology because that way they might get free. The bureaucrats want to make Stalin happy so they can get a promotion. Stalin wants to be free of his worries and fears of [?] being overthrown; he wants to have more power--hard to believe, but he does. And, given those incentives, which of course Stalin has created, and the system itself has emerged from his paranoia and brutality, everyone is then entangled in it in different ways, enmeshed with each other, enmeshed in those brutal incentives. And, of course, much of the book is the heroism of the zeks who refuse to respond to those incentives. It's just an important point in economics. We always assume people respond to incentives. And, of course, most of the time they do. Often they do; in some dimension they almost always do. But, sometimes something calls with a higher incentive--that of conscience. And, I think that triumph of people refusing to betray their conscience in return for what seems to be gain is really the--is, as you mentioned in private email with me--is really the essential lesson of the book. That, there are times when we forego benefit for greater good. And it's just such a poignant, powerful example of that.

Kevin McKenna: Spinning off of what you just said, let me note a kind of ironically we see how those people in the novel--and they are primarily the prisoners, the zeks--those who are in their own first circle of hell, prisoners, quite creatively and engagingly, Solzhenitsyn indicates that those occupants of the First Circle of Hell tend to be far freer than those who occupy the First Circle of Power. Whether it's Abakumov[?], historically accurate person--he's not a fictional creation--or whether it's Stalin himself. And I would say, next to or maybe alongside conscience, the theme of being free; and for a writer like Solzhenitsyn, as well as the prisoner Solzhenitsyn, the theme of freedom--how is it, can a prisoner be free? And what Solzhenitsyn I think succeeds in doing in this novel, and really in all of his fiction, is to indicate that prisoners in life or in the Soviet Union can actually be freer than most people living outside the camps. You may want to delete what I'm about to share, kind of a personal experience, but let me go ahead, if that's okay with you.

Russ Roberts: Please.

Kevin McKenna: To share an experience that I had, oh, gosh, this would have been about 1981. I won't go into all the details, but I was living for about a year and a half in, then Leningrad. And I was a great lover of jazz. And I happened into a jazz bar in Leningrad. And I met a man, a zek, a prisoner, who had been arrested in 1976 and sentences to a Gulag camp--his was up on the Arctic Circle--essentially for mooning the President of the United States. I believe this would have been, perhaps Jimmy Carter, way back in 1976. But at any rate, I met this fellow; his name is Sasha. No last names intended. And Sasha could not have been more excited to meet an American, whom he, naively though, would take Sasha's story back to Washington, D.C. And his story was essentially this: He and I spent a night together, essentially listening to, my listening to his account of what it was like to live in this camp for 5 or 6 years. And it was an awful story: I don't need to rehearse it; we can just read Solzhenitsyn's novel. But I remember how he ended the story. He said--we were on, oh probably about the 7th floor of a hotel and we were sitting in a window, an open window--and he said, 'Look at those people down there on the street.' This was now 5 a.m., and women were pouring in from all corners of that part of the city with their milk jugs, essentially to have their milk jugs filled up with milk, blah blah blah. And, looking out of this window on the 7th floor of the hotel, it looked like ants crawling around. And he said, 'This is life in the Soviet Union outside of the camps. There's no way in the world that these people are free.' He said, 'I, for 6 years, living in the camp, was far freer than these people that we're looking at down on the ground.' And, this is what, in my opinion, Solzhenitsyn is trying to capture and to share and to pass on to his readers, the value of the meaning of freedom. Matched, of course, with his great thoughts on living in concert with one's conscience.

Russ Roberts: Yeah. That's very well said.

42:31

Russ Roberts: I want to add two things to that. One is, it reminds me of Victor Frankl's Man's Search for Meaning, which book I recommend, which is a similar theme, idea, that physical suffering is not really the measure of our physical pleasure. It's not the measure of our wellbeing. And it's a theme we might come back to some time here on EconTalk: it's a deep, obvious deep philosophical issue. The other point I want to make is that I think Solzhenitsyn hammers on that relentlessly, in the book: the idea that, almost that--it reminds me of friends of ours who had two kids and lived in a two-bedroom apartment; and the two boys, young boys, shared a bedroom. When they went to visit a friend in the suburbs who lived in an enormous house, one of the kids said to the other, 'I feel sorry for them. Each kid has to sleep by himself.' And, I wonder how much Solzhenitsyn's rationalizing this unbearable, horrific deprivation that he has to go through--that his life is ripped from him, that the pleasures of married life and normal society are unavailable to him. And he's stuck in this horrible first circle of hell--it's better than the other ones, but he's stuck in this circle. So, one thought I had, of course, is: Well, this is the way he deals with it, is he says, 'Aaah, it's actually better. It's not just not so bad: it's actually better. I feel sorry for those poor people struggling as they did in the Soviet Union to get their milk for the day,' and to just go through the--I'll say it a different way. Daily life under Communism was somewhat degrading. It did not have the opportunities that we are blessed with and that so many people have today. And so, he was right, to some extent; but you also wonder whether he was psychologically just trying to make himself feel better. At the same time, it's obviously true, and he captures this so well, that his life in the prison was like being in a philosophy seminar. And I think he was being--I don't think it was just artistic. I think the conversations he had there, just like wartime is often, for all its horror, is a transformative event for the people who are fortunate to survive. So, it's not like he would say, 'Oh, everyone should have the thrill of being in a camp.' He's saying, 'Well, in the camp, you are forced to come to grips with meaning and with philosophical and ethical issues.' The other point I just want to make quickly, which I thought, as fiction motif is just extraordinary in the book, is that: The real Gulag looms over the book. The characters who, at the end, go off to the real Gulag, have to leave the sharashka, who trundle off in the meat wagon--which is unbelievably; I get goose bumps just mentioning it--as it's driving around town and deceiving the passers-by who see it and think it must be a food delivery, when it's actually human beings going off to a far worse fate than the First Circle of Hell--the sharashka. And Volodin, who we see basically his first night in prison--the worse and even more horrific things that await those people are never described. They are never made vivid. Now, we can read about them in his other books, obviously. We can read about them in the book The Gulag, which is nonfiction. We can read about them in One Day in the Life of Ivan Denisovich, which isn't a real camp. But, in this book, he makes the conscious, clearly conscious decision not to embellish. He lets--he doesn't exploit that to make us feel even sadder. It lets it be unspoken. I think that's just an unbelievably interesting fictional decision.

Kevin McKenna: Well, I could not agree with you more. And you're touching on something I believe is very important for us Americans reading Solzhenitsyn's novels to understand. When his works were first being translated into English and becoming accessible to us here at the end of the 1960s, throughout the 1970s, the early 1980s, and so on and so on, typically we Americans thought, 'Oh, Solzhenitsyn is a genius.' And we thought that he was so good because essentially he was revealing to the world the sins of Stalin and the tragedies of the camps, the Gulag camps. What I find to be--and this is going to triangulate back to the early part of your last observation--what I find to be the genius of Solzhenitsyn's fiction, his novels, is not that he reveals what Stalin did or what life in the camps was like. It's his artistry--the manner in which he does this. And what I mean by the manner or his artistry is precisely what you are referring to--the success--I think if we go back to One Day in the Life of Ivan Denisovich, those of your listeners who have read that novel already or who may want to in the future--your listeners are--and you and I--are absolutely astounded by the horror of this one day, this 24-hour period out of whatever it is, 3,364 days. And what Solzhenitsyn does, he never in the novella, Ivan Denisovich, or this novel, In the First Circle, he never screams out his pain. Or the pain of his prisoners, or his observation. It's the under-statement that is the main artistic device, I would say, that Solzhenitsyn employs in his writing. He leaves it up to us, his readers, to essentially scream our heads off. But never once does he or his prisoners do so.

49:18

Russ Roberts: Let's turn to the set pieces in the book that reminded me of Dostoevsky--there's a lot that reminded me of Dostoevsky, and we talked about this last time. The other thing I mentioned last time was the Faulkner Nobel Prize line about 'Great fiction is about the human heart in conflict with itself.' And I think your observation that--I think he made it very clear--it's very clear in his novels that Solzhenitsyn didn't want to write a bunch of books about Stalin's crimes. He wanted to also--he did; but he also wanted to also write about the human heart in conflict with itself. And that's really what makes this work, that understatement, so powerful. Let's turn to the set pieces. There are two chapters that struck me as sort of standalone: You could publish them as short stories. More than two, but two leap out, because they are so self-contained. One is "The Trial of Prince Igor, and the other is "The Buddha's Smile." It's the Buddha's--Buddha, possessive--the Buddha's Smile--is again, a heartbreaking glimpse at deception. It's hilarious, and it's heartbreaking at the same time. Talk about both those, if you can. It's almost--in a way it reminded me that he was channeling Dostoevsky--because Dostoevsky does the same thing: He'll have a chapter that sort of stands by itself. And many of Dostoevsky's chapters like that have been republished sort of on their own. So, talk about the influence of Dostoevsky on Solzhenitsyn, and those two chapters, if you could.

Kevin McKenna: Sure. Well, the way I would begin my comments is to refer back to the very last document that Solzhenitsyn wrote the day before he was kicked out, exiled, from the Soviet Union. And it's a letter which is called, "Live Not By Lies." "Live Not By Lies." And this is something that is very important thematically, as well as personally, to Solzhenitsyn the writer and Solzhenitsyn the person. And, in the chapter, "Buddha's Smile," the deception--

Russ Roberts: It's a whole lie.

Kevin McKenna: It's all a lie. And what he's in a certain sense, much as he does with the meat wagon at the very last two pages of the novel, there's the reality of a bystander on a street in the center of Moscow, looking at--I guess it's a Frenchman--looking at a wagon, a food wagon going by, and he says, 'Oh, how nice. The Soviets are trying to get deliveries of their food to their citizens.' While it's just the opposite. It's a meat wagon in the sense that some poor prisoners who have been just kicked out of the sharashka, the research institute, and they are now bound for Hell. Their first circle that they experienced in the sharashka, the research institute, long gone. They are going to worse circles of Hell. Now, "Buddha's Smile": Solzhenitsyn was very aware, and not pleased with--and we can even look later to his Nobel Prize address or to his speech at the Harvard Commencement--Solzhenitsyn was never comfortable with what he saw to be the United States's inability to see evil of the Soviet Union as it really was. And certainly, Mrs. Roosevelt and her little delegation visiting one of the camps, and falling into the trap of believing everything that their Soviet hosts are showing them--that is, the fresh clothing, change of clothing; the good meals, the elaborate[?] meals--

Russ Roberts: The religious books for exploring--the Koran and the Bible--

Kevin McKenna: That's right. That's right. And the prepared, and the system has prepared the prisoners so well, Mrs. Roosevelt inquires of one of them, 'I'm here representing the United States. Is there anything you prisoners here in the Soviet Union would like to share with me? That you would like Americans to understand?' And the question, of course, that one of them asks [?] were [?], 'We're very much upset by the issue of slavery and racism in the United States.' Well, clearly this is not at all an issue that Soviet prisoners in a Gulag camp are concerned about. This is what they have been told to say. And, of course, we see the naiveté of Mrs. Roosevelt, essentially through Solzhenitsyn's eyes, of this is yet another instance of Americans not understanding anything about actual life in the Soviet Union.

Russ Roberts: Now, this is a fictional event, as far as I can tell. Eleanor Roosevelt--

Kevin McKenna: Uh, no. Actually, she did--she--factual, I guess I want to say. She did visit a camp. Now, frankly, as I recall, this was not a camp in which Solzhenitsyn was present. But he heard this story of one of his fellow campmates, an experience that he had had a different Gulag camp. I could be wrong about that.

Russ Roberts: Yeah. I couldn't find it. I couldn't find any historical record of that. So, if there is, we'll put a link up to it. It doesn't matter. What's true is that Americans starting with Lenin visited the Soviet Union and brought back lone[?] reports that were terribly inaccurate. New York Times reporters won Pulitzer Prizes for reports that were literally lies.

Kevin McKenna: Exactly.

Russ Roberts: They hid the famine in the Ukraine, the deaths in the Ukraine--that's Walter Duranty. It's despicable that that prize--in my view--that this has never been revoked. But, people lied knowingly on behalf of the Soviet Union, as well as unknowingly. And this is an unknowing--

Kevin McKenna: Yeah, absolutely--

Russ Roberts: naive impression. Same thing has happened, of course, with Castro in Cuba, and others. But, that chapter is just spectacular.

56:34

Russ Roberts:"The Trial of Prince Igor" is--talk about what that represents.

Kevin McKenna: It's genius. Absolutely genius. While it might seem initially as, 'What does this have to do with the Gulag camps of the 20th century?' it's a wonderful satire, essentially talking about how it is that--oh, what would he be? probably 13th century--Russian prince by the name of Igor, how it is that Prince Igor becomes a captive of, I believe that it's a tribe of Mongol invaders. At any rate, the 20th century court trial is to try the 13th century Prince Igor for his failure to live up to the dictates of the Soviet system. So, it is a huge, comical chapter in which Solzhenitsyn brilliantly satirizes the Soviet system of law.

Russ Roberts: And the zeks are talking about Prince Igor because, 'Well, what's wrong with that? It's 700 years ago.' And of course they are really talking about the present.

Kevin McKenna: Yeah. And they are talking about the present in the sense that, that famous, what is it--Article 58? the criminal code article under which essentially all of the Gulag prisoners were tried and found guilty--this chapter essentially is bringing Prince Igor to trial under Article 58.

Russ Roberts: Yeah. And, I just want to mention--one of the most chilling asides in the book, which is just a passing remark, is when they can't decide which of the two potential suspects are guilty on the voice recording that they have. One of them, of course, is, we know, is the real person--it's Volodin. The other, I forget his name--some other bureaucrat in the state security office--it's a general, says, 'Oh, we'll find something on him, too. Don't worry.'

Kevin McKenna: That's right.

Russ Roberts: Don't feel bad, because all of us are guilty of something. We didn't maybe smile sufficiently when Stalin passed by or whatever it was.

Kevin McKenna: In fact, Rubin[?], a very, very enjoyable, prominent, likeable character, notwithstanding his marriage to Communism, Rubin, towards the end of the novel, when Volodin has been separated as indeed the person who made the telephone call, Rubin begins to experience a little bit of a sense of guilt, saying, 'Oh, gosh, now this fellow,' he doesn't know[?] well, 'Volodin, is going to be sentenced and subject to the kind of life that we live here in the Gulags.' And then he thinks, 'Well, no. The positive side of this is that the other four people who were accused are going to be free.' And it's an ironic kind of notion on Solzhenitsyn's part of how it is that we or one can kind of shift gain, guilt or blame to suit our consciences.

Russ Roberts: Yeah. It's extraordinary.

1:00:33

Russ Roberts: Talk about--I'd like to close with some insights about Spiridon. So, he's half blind. And, if I remember--by the way, I read the book this summer. Which was wonderful that I found time for it, but I didn't have time to read it again before our conversation. I suspect you've read it more than once. Is that correct?

Kevin McKenna: Yes. I follow Vladimir Nabokov's[?] beliefs on reading it. He made a very famous statement when he was teaching a literature class at Cornell University, end of the 1950s. And one of his graduate students made the observation that 'I,' like Russ, in fact, 'read this novel during the summer. But I haven't read it again since. And I'm not really following what you're saying.' And, Nabokov[?] responded by saying, 'Reading a novel? There is no such thing as reading a novel. Novels can only be re-read, re-read, and re-read.' So, that is kind of a humorous injection on my part, about your not having re-read it yet. I can pretty much guarantee that you will re-read this novel.

Russ Roberts: Oh, I hope to. But my memory is that Spiridon, who would mispronounce, worse, other than that--but Spiridon--he sweeps up. He's the guy who--is that right? Is he the snow sweeper?

Kevin McKenna: Yes. He's the snow sweeper. He's--unlike the genius physicists and chemists and mathematicians, etc., etc. who populate this research institutional, Spiridon is more or less sent there by mistake, to the Institute. And he ends up being--he never even finished high school, much less college. He's not an intellect. He's not an intellectual. But he's--

Russ Roberts: He's wise.

Kevin McKenna: He's very wise. He enlists in a sense to sweep floors or to sweep the snow or shovel the snow outside between two points in this camp. And, in relation to that, Sologdin[?] and Mirgin[?] come out to work--that is, to shovel the snow with Spiridon as often as they can, so that they can carry out and conduct the kinds of philosophical conversations that they so love to do.

Russ Roberts: And, you mentioned earlier that Spiridon stands in for some of the wisdom of the peasant. And before we started taping, you mentioned a proverb of his. So, explain what that is.

Kevin McKenna: Sure. We have seen how it is that Nerzhin, early on in the novel, sees himself as a follower of Taoism. He sees himself, later, as a skeptic. And then, for hundreds of pages, he's turning to Rubin, his friend, for kind of answers on the meaning of life. And he alternates in turning to--excuse me; I'm trying to Spiridon, but I don't want to say Spiridon--

Russ Roberts: Sologdin, right?

Kevin McKenna: Sologdin. Thank you. To his friend Sologdin. And finally, let's say roughly at the last third of the novel, Nerzhin realizes that neither Communism of Rubin or the kind of will, the power of the will of the intellect, which characterizes Sologdin--neither of these two paths in life satisfies Nerzhin in terms of providing the answers to the meanings of life. And so he turns, indeed, to Spiridon--lately, in the novel--and he, in a long, lead-in paragraph, he says, essentially we see all this suffering, crime, and the people who have been slaughtered in our country by Stalin, etc., etc.; and he said, 'Tell me: What is right? What is truth?' You know, this. And Spiridon responds with a very, very famous and yet age-old wisdom, Russian wisdom, Russian proverb, by saying--let's see, how would I try and [?] this into English--by saying something to the effect--

Russ Roberts: You want to say it in Russian first, for us?

Kevin McKenna: Well, I'm now in the English part of--'The wolfhound is right. The man who hunts men is wrong.' And what this proverb means is that the nature of a wolf out in the wilderness--

Russ Roberts: You can't blame him.

Kevin McKenna: That's right. It's by his own internal nature that he, the wolf, hunts. But he says, 'When a man hunts, the lives and souls of his fellow man--that is wrong.' And this is a moment that goes back--this particular moment that we're referring to--goes back to Tolstoy's novel, War and Peace, when one of the main characters turns yet again to a peasant; and the response of Prince Pierre[?Pyotr?], War and Peace, is the same response of Nerzhin in Solzhenitsyn's novel: 'What? Say that again. Finally I understand.' It's a brilliant chapter.

Russ Roberts: Well, my favorite moment of the book--I probably said that already, and if I did, I apologize, but I think this is my actual favorite, is, at the end of the book--I just looked it up; it's on p. 728 out of 741 pages, very near at the end. When, through the bizarre detail-oriented nature of the bureaucracy and the machinery of the bureaucracy, Nerzhin receives back his--finally gets back his volume of poetry. Yesinin--I would have pronounced it 'Ye'sinin'--

Kevin McKenna:'Ye-see'-nin'.

Russ Roberts: Ye--see'-nin. So, Yesinin died tragically at 30. I looked this up. He died young. He was harassed by the NKVD [Narodnyy Komissariat Vnutrennikh Del]--the Soviet police. And, I think--I don't know if this is true, but he wrote his last poem in blood--

Kevin McKenna: That's right--

Russ Roberts: on his deathbed.

Kevin McKenna: He commit suicide. That's right.

Russ Roberts: Physically broken. So, this is a--it's not a coincidence that that's the poet who Nerzhin--he's not reading somebody in the 19th century. He's reading somebody who had died a few decades before. And this book is very precious--as is every book, in the book. Which is also beautiful. But, he's trying to give the book away, and he's struggling to do so. And finally, he gives it to Spiridon--who is blind. So, he gives this precious gift of a book to a man who can't enjoy it. And, in case you missed it, he has--also tragic moment right after where he reads Spiridon a letter from his daughter. Because Spiridon can't read. He's blind. And I'm not sure he can read, anyway.

Kevin McKenna: That's right.

Russ Roberts: And so, the symbolism that Gleb Nerzhin is giving a book of poetry which is--a book of poetry is by definition about as pure a work of art as you can have. It's not going to help you sweep better. He gives it to a man who literally can't enjoy it. It just broke my heart. That scene is just--and that whole chapter, and chapters around it of farewell, are--the vividness of them--and we talked about this a little bit the last time: As the reader, we are saying goodbye to the characters. So, as they say goodbye to their friends and get into the wagon, we are feeling the same emotions that everyone's feeling, like maybe we won't see them again.

1:10:07

Russ Roberts: Anyway, it's just such a tremendous, beautiful work of art. I'll let you conclude, Kevin, with anything else you want to add about it.

Kevin McKenna: Well, I might triangulate off of what you just said about Yesinin, the poet, and this book of poems that Gleb leaves him. In actual fact, there were three books that Solzhenitsyn, the person, took with him when he was sent off into the Gulag camps. One of the books factually was a book of poems by Yesinin, who, by the way, was Solzhenitsyn's obviously his favorite poet. But he was Solzhenitsyn's favorite poet because Yesinin's poetry gelled[?] so much with the lives of peasants and the lives of rural Russia. The second book that Solzhenitsyn takes, of course, is a copy of the Bible. And the third book is a copy of [?] Collection of Russian Proverbs. Proverbs are unbelievably important to Solzhenitsyn's fiction, at least. This is something I'm arguing in the book that I'm currently writing, a book that essentially addresses the influence of Russian proverbs and the role of Russian proverbs in Solzhenitsyn's fiction. But at any rate, this parting with Spiridon, there could not be anything that Solzhenitsyn could leave to his great, close friend Spiridon than the one book that means more to him, Nerzhin, than anything else. It's a beautiful way to have that parting scene between two very close individuals.

Russ Roberts: Yeah. Here's--Yesinin wrote his last poem in blood because he couldn't find any ink. And there's some dispute about whether he committed suicide. Some say he was assassinated. But, his last poem is very brief. I'm going to read it. It's called "Goodbye, My Friend, Goodbye." It's also appropriate for the closing of the novel. This is in translation, obviously:

Farewell, my good friend, farewell. In my heart, forever, you’ll stay. May the fated parting foretell That again we'll meet up someday. Let no words, no handshakes ensue, No saddened brows in remorse, -- To die, in this life, is not new, And living's no newer, of course.

Kevin McKenna: Wonderful.

Russ Roberts: Really beautiful. And I think--maybe I'm misremembering this, but I feel like somewhere in In the First Circle, they refuse to make a grand farewell, because, of course, they want to at least pretend they'll see each other again. And I don't know--did Solzhenitsyn--Rubin, the character that Rubin is based on--was Solzhenitsyn's friend. Did they ever--do you know if they saw each other outside the camp when Solzhenitsyn got freed?

Kevin McKenna: Oh, yes, yes. I think it's roughly 1957. When--let us do it this way: Roughly in 1955, all of the zeks are freed from the Gulag's. They are not allowed to return home, however: They have to live on what is called [?], Eternal--oh, boy.

Russ Roberts: Exile?

Kevin McKenna: Exile. Thank you. I couldn't come up with that. But by roughly 1957, 1958, there is a proclamation of freedom, whereby these people who are living in Eternal Exile now may return home to their cities. Very interestingly, Solzhenitsyn does not return home to his--let's say his native home, Rostov[?], where he had left. He goes to--and this is the short story--Matrona's[?] house, Matrona's home, as the protagonist of that short story writes, having just got out of prison himself, 'I wanted to go to the real Russia.' And by the real Russia, he means the Russia of Yesinin, the Russia of Turgenev. And, by the way, by extension, the real Russia that Solzhenitsyn finds for himself in Vermont, where he settles for 17, 18 years after he has been kicked out of the Soviet Union.

Russ Roberts: My guest today has been Kevin McKenna. Kevin, I want to thank you for being part of EconTalk and enriching my understanding, and I'm sure my listeners' understanding of this great book.

Kevin McKenna: Well, I thank you for this opportunity to kind of share some of my thoughts and insights, particularly because later today I'm going into one of my classes where we're reading--it's a class on the fiction of Solzhenitsyn. So, this always helps me to kind of organize some of my thoughts.

(13 COMMENTS)

John Gray on the Seven Kinds of Atheism

Philosopher and author John Gray talks about his latest book, Seven Types of Atheism, with EconTalk host Russ Roberts. Gray argues that progress is an illusion and that most atheisms inherit, unknowingly, a religious belief in progress that is not justified. While Gray concedes that technological know-how and scientific knowledge improve over time, he argues that morality and political systems are cyclical and that there is no reason to be optimistic about the future.

This week's guest:

• John Gray at The Guardian.

This week's focus:

• Seven Types of Atheism, by John Gray on Amazon.com.

Additional ideas and people mentioned in this podcast episode:

• "The New Atheists." Internet Encyclopedia of Philosophy.
• Chuck Klosterman on But What If We're Wrong. EconTalk, August 2016.
• jeunesse dorée, Merriam-Webster dictionary.
• Friedrich Hayek
• Hayek on Liberty, by John Gray on Amazon.com.
• Friedrich Hayek. Biography. Concise Encyclopedia of Economics.
• Milton Friedman
• Milton Friedman. Biography. Concise Encyclopedia of Economics.
• Milton Friedman on Capitalism and Freedom. EconTalk, September 2006.
• The Silence of Animals, by John Gray on Amazon.
• Paul Bloom on Cruelty. EconTalk, September 2018.
• Steven Pinker
• "Unenlightened thinking: Steven Pinker's embarrassing new book is a feeble sermon for rattled liberals," by John Gray in The New Statesman.
• Enlightenment Now: The Case for Reason, Science, Humanism, and Progress, by Steven Pinker on Amazon.com.
• Jonathan Haidt on the Righteous Mind. EconTalk.
• Kolyma Tales, by Varlam Shalamov on Amazon.com.

A few more readings and background resources:

• Rabbi Jonathan Sacks.
• Karl Popper. Internet Encyclopedia of Philosophy.
• John Maynard Keynes
• John Maynard Keynes. Biography. Concise Encyclopedia of Economics.
• The Economic Consequences of the Peace. Library of Economics and Liberty.
• "Economic Possibilities for our Grandchildren". Yale.edu, PDF file.
• Protectionism, by Jagdish Bhagwati. Concise Encyclopedia of Economics.
• Thomas Robert Malthus. Biography. Concise Encyclopedia of Economics.
• Lucretius. Internet Encyclopedia of Philosophy.
• John Rawls. Internet Encyclopedia of Philosophy.
• Voltaire. Stanford Encyclopedia of Philosophy.
• Auguste Comte, French Philosopher. Encyclopedia Britannica.
• Karl Marx. Biography. Concise Encyclopedia of Economics.
• John Stuart Mill. Biography. Concise Encyclopedia of Economics.
• Julian Huxley Wikipedia.
• Thomas Leonard on Race, Eugenics, and Illiberal Reformers. EconTalk, December 2016.
• "The Secret History of the Dismal Science. Part VI. Eugenics and the Amoralization of Economics", by David M. Levy and Sandra J. Peart. Library of Economics and Liberty, May 13, 2002.
• Joseph Conrad Wikipedia.

A few more EconTalk podcast episodes:

• Michael Munger on Slavery and Racism. EconTalk August 2016.
• Kevin McKenna on Solzhenitsyn, the Soviet Union, and In the First Circle. EconTalk, September 2018.
• The Political Economy of Power, with Bruce Bueno de Mesquita. EconTalk, August 2006.
• The Economics of Religion, with Larry Iannaccone. EconTalk, October 2006.
• Thomas Leonard on Race, Eugenics, and Illiberal Reformers. EconTalk, December 2016.
• Yuval Harari on Sapiens. EconTalk, October 2015.
• Frank Dikotter on Mao's Great Famine. EconTalk, August 2018.

Time Podcast Episode Highlights

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0:33

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

Russ Roberts: My guest is philosopher and author John Gray. His latest book, which is the subject of today's episode, is The Seven Types of Atheism.... Now, your book, The Seven Types of Atheism is a fantastic, short, jarring, provocative book. It's jarring to someone who is religious; and I think it's jarring to someone who is an atheist. At the heart of the book there are two central ideas which we'll be talking about today, along with anything else that comes up along the way: the religious nature of most types of atheism, and the illusory nature of progress. And, I found that second theme deeply disturbing. I came to realize from reading your book that I had imbibed much of the--that I was a child of the Enlightenment, and I had adopted many of the progressive--the view that the world is making progress. And, it might be. So, I want to give you a chance to defend it, and I'll challenge you at some point. But you do make a very strong case that it might not be. But I want to start with atheism. You are very critical of the New Atheists--Sam Harris, Richard Dawkins, and others. You say that they bore you and that their view of morality doesn't hold up. So, what's wrong with the so-called New Atheism?

John Gray: The first thing that's wrong with the so-called New Atheism is that there's nothing in it which is new. Most of the criticisms of religion that they advance, nearly all of them, in fact, were made in similar but better forms in the 19th century. None of the New Atheists knows anything about the history of ideas; even of the history of atheism they are pretty ignorant beyond the last 20 years or so. And so, they make a number of criticisms which fit into the Victorian or mid-19th or 20th century dispute about a conflict between religion and science--in other words, they take for granted that religion is a body of propositions or even theories, and that the theories aim to explain the world; and now that we've got science, we don't need religion. It's been superseded or rendered obsolete. But, that's a primitive view of religion, which actually not many people who study religion deeply and professionally, hardly any of them would take that view. If you asked an anthropologist or a sociologist or even a cultural historian about religion, not one of them nowadays, or very few of them, would think of religion as bodies of theories or beliefs or propositions which try to explain the world. Religions are in most parts of the world, throughout most parts of human history, of being composed of practices more than of beliefs. Most of them haven't had creeds, written down as propositions. Ancient paganism in Greece and Rome, for example, had no creeds, which had an advantage, among many, which was that there weren't any heretics. You can't be a heretic if there isn't something to be a heretic against. What we now call Hinduism, very, very bold body of beliefs, of practices associated with very sophisticated philosophies, has never been summed up in a single body of beliefs. The same goes for Taoism, or Taoism and Confucianism and Shinto. And for most of its history--you would know more about this, perhaps, than I--Judaism hasn't been embodied in any single list of propositions or creeds. So, most religions haven't been like--don't conform to this New Atheist understanding of what religion is. And there's a reason for that, which is: New Atheism is a kind of inversion of monotheism, particularly Christian monotheism. It just turns upside down that body of thought, by rejecting the key beliefs in it. And New Atheists think that if they reject these beliefs, then they've rejected the whole framework of thought of monotheism. But, my view is that just turning the beliefs upside down, inverting them or rejecting them, leaves most of the rest of the framework of thought intact. And so, that's one reason why--although I did only discuss the New Atheists quite briefly, in fact I seriously considered not discussing them at all because I do find them boring and feeble in their arguments. But I did in the end, did discuss them in the end, because most readers, if we say the word 'atheism,' wouldn't nowadays be most familiar with figures like Dawkins and Sam Harris and the others that you mentioned. I did discuss them quite briefly, but only really to point out that they are recapitulating, repeating an argument that went on for several decades, a couple of generations in the 19th century, and coming up with the same narrow and to my mind rather parochial view of religion. Which is that religion is an early and obsolete kind of theory that we don't need any more. And that really doesn't correspond to what religions have been throughout human history and prehistory and most of the world. It simply corresponds to an upside down picture of Christian monotheism.

Russ Roberts: What's upside down about it? Why do you say 'upside down'?

John Gray: Well, I mean, what atheists do is they, treating religion even in general as a kind of system of beliefs, they say, 'well, what do religious people believe?' And they say, 'They believe that there's a Supreme Being that created the world--God--and created life and humanity, and lays down various sort of edicts for how human beings should live.' Now, the way I think of atheism, and I say this right at the start of the book, is that for me an atheist is just anyone who doesn't need the idea of a creator-god of that kind. You are an atheist if you don't need a superior negative[?] proposition: In other words atheism doesn't have to be organized; as a movement atheism doesn't have to be associated with any particular view of the world. It has several views of the world, many in its long history, even in modern times. An atheist is just someone who doesn't need that idea of a creator-god. But one important thing I point out is if you think of atheism in that way, that rather simple negative way, then many of the religions of the world have been atheist religions. For example, there's no creator-god in Buddhism. There isn't an immortal soul in Buddhism. But Buddhism is a very big and old religion. Polytheism doesn't contain a single supreme god. Most polytheist of the kind that flourished in Roman, for example ancient Rome before it was taken over by Christianity, featured many gods. And many of them didn't have any account of the world being created by a god, and certainly not by a single creator, one single god. So the idea of--you take atheism in that way, then there are many atheist religions. And that leads me to one of the major arguments in the book, which is that the boundaries between atheism and religion are much more blurred once you have a better and more complex and more pluralistic understanding of what religion is.

Russ Roberts: But we should make it clear that you are an atheist.

John Gray: I am. In that sense, certainly.

9:02

Russ Roberts: So the book's a little bit--there's an irony in the book, which is: It's a savaging in many ways of the illusions that you believe many atheists labor under. At the end we'll talk about how you reconcile your own atheism with that. But I just want to comment on the point you made about atheism versus religion in this way; so the New Atheists. You are absolutely right about Judaism. Of course. Judaism emphasizes action. Not solely--there are obviously beliefs in Judaism--there's emotional things. But Judaism emphasizes a set of obligations a person is supposed to do, rather than--

John Gray: In other words, practice.

Russ Roberts: Practice. And, there's even a dispute in Judaism whether believing in God is a requirement. Some thinkers and Jewish rabbinical sources say it is one of the commandments; others say, 'No, you just have to do the things.'

John Gray: Well, I met one of the last--not one of the last, but one of the few Rabbis in Poland, where of course most Jewish people were killed during the Nazi period, and he said, he quoted something from his teacher; he said, his teacher said, 'Don't worry about belief. Just practice.'

Russ Roberts: And then the second point is the view that somehow religion is falsified by, say, science, or history. And you point out--as by the way I think Rabbi Jonathan Sacks, former Chief Rabbi of the United Kingdom, that religion is not created to teach us history. It's not created to teach us science. It's created to give us meaning.

John Gray: Absolutely.

Russ Roberts: And science is not good at that. Despite the attempts. It's a different thing. It's to help us understand the world. That's fine. That's important. It's, I think glorious. It's a wonderful expression of human creativity and insight. And if you are religious person, you believe that God created the world so that we could understand it. And if you don't, it doesn't matter: you still could understand it, a lot of it, not all of it. But they are two different things. And I think that's a very profound insight.

John Gray: See, the important part--an example I give in the book is that the Biblical Genesis myth, the myth that Adam and Eve and the Garden of Eden and so on--which never meant as an early theory of how life came about on this planet. And I say that quite dogmatically, that it was never meant like that. Because you can go back an awful long way in the history of Christianity; and before Christianity are Jewish thinkers, who completely explicitly say that that Genesis myth is not to be read literally. Augustine, within the Christian tradition, quite explicitly, and before that--

Russ Roberts: It's an allegory to teach us something.

John Gray: Yes. Or, it's what I call a myth. Which is that I don't use in a bad sense. It's an allegory, as you say. It transmits certain truths in the form of a story, if you like, which are difficult to transmit or convey in other terms. And, the point is that this view of that story in the Bible was affirmed not just recently under the attacks of the New Atheists, but more than 2000 years ago--well over 2000 years ago--by Jewish and then later by Christian thinkers. So, they have always--there has been a tradition of literalism--

Russ Roberts: Sure--

John Gray: in Western religion. I don't deny that. And even of fundamentalism. But, all along there have been thinkers, theologians, with Christianity and within Judaism; and I also think, though it's a subject I'm less familiar with and may also be true of Islam--but, certainly within Christianity and Islam [Judaism?--Econlib Ed.], there's a long, long, long tradition of thought going back almost as far as we can see in which it's explicitly denied that these Biblical stories are theories to be understood literally.

13:15

Russ Roberts: Now, you argue that we've replaced the worship of God with the worship of humanity: that we've put the God who will transform human beings and redeem human beings into a different myth. Which is the myth that human beings will, through the application of reason and science, transform humanity. And, of course, much of human history of the last few hundred years is a tragic example of that practice. The Nazis and Communists in the Soviet Union being the most obvious examples. But what about science itself? A lot of people would argue, 'We're doing great. Look how much human suffering and misery have been reduced through the application of scientific understanding, through technology, through better economics, through better politics. We're heading toward progress.' And, you reject that extremely strongly. Why?

John Gray: I do. I reject that view. Because the view that so many people take confuses progress within science and progress in the increase of technological power that occurs as a result of progress within science with ethical and political progress, or I would call it the quality of civilization. They are two quite completely different things. As I say repeatedly. Although it's never, by the way, sufficient to--I think I say repeatedly and clearly in the book, many times over, that there is progress in science, in the sense of accumulating knowledge. We know a lot more about many things than we used to do. We have a lot better understanding of a perspective[?], the world around us, than we had in the past. And there's also progress in technology in the sense that technologies are spin-offs from advancing science--become more efficient and more powerful. So that's the [?] facts. So, I reject the post-modernist view which says there's no--and I've always rejected the post-modernist view, decades ago when I first started writing on these things--according to which science is just a series of pictures of the world which differ but none is truer than the other. There is progress in science. And there's a correspondent progress in technology. But, the human animal doesn't change very much, no matter how much it might want to or like to or imagine that it changes. And, human beings use science, and the fruits of science, the progressing and advancing fruits of science, to serve whatever goals or ends they have. So, of course, they can use progress in medical science to improve human health. Or, for example, to eliminate hereditary diseases. But they also use it for purposes which are either oppressive or purely destructive. For example, the potential of genetic science to improve the human lot is great; but I'm afraid I regard it as a certainty that, if it's not already happening that genetic sciences will be used to, from frivolous purposes like trying to produce children who are cleverer or more beautiful or smarter or who fit in to fashionable ideas of what makes a good child, I think that maybe that's not a terrible vice, but I regret it. Because I don't think the next generation should be genetically modeled on passing notions of what's best. But then you get into darker areas, where genetic science can be used to, or could be used in future, for racist purposes--to edit out certain groups, human groups, for the purpose of genetic weapons. Or even for purposes of genocide. And it's a general feature of human knowledge. I think this is one of the messages, actually, one of the lessons of the Genecists' story we talked about earlier on: It's a general feature of human knowledge and of human technology. And it can always be used for bad as well as good purposes. Now, following a kind of a maxim of one of the philosophers I knew, although and the irony is, spent, in my earlier life, I only spent one long afternoon talking to with him--Karl Popper, the famous philosopher of science, said you should always try and falsify any conjecture or view you put forward. And I don't accept Popper's, I think oversimple philosophy of science; but I think it's a very good tip, if you like. If you have a strong view, you should try--

Russ Roberts: It's a good starting point--

John Gray: you should try and falsify it. So, I've always tried to think of technologies or advances in science as if [?] being purely good. And I've come up with a couple. It's very hard to think of a downside to anesthetic dentistry.

Russ Roberts: Yes, unless you also believe that pain produces a challenge that we are supposed to endure and overcome. But, yeah; I'm with you.

John Gray: There are people who think that. And I would put in contraception, actually, as well; because although there are people, religious people of various denominations and traditions who--I think it's been overwhelmingly benign, those two things. But, nearly all technologies have been deeply ambiguous in their effects. And I've been through this. I remember a time, back in the 1970s and 1980s--and I don't regret this--I was a very active, very militant anti-Communist; I believed that--I was a Thatcherite party or even [?] for that reason. I believed that Communism could be defeated and that it would not just collapse: that it would be overcome. What I did not believe while I was an anti-Communist is that some new technology would destroy Communism. Many people at the time said that the photocopier would do it because it would enable anti-Communist literature to be more easily disseminated later. People said that the video camera and video recording would do it, and that, that would, when Communist or the atrocities came by Communist or neo-Communist regimes, neo-Communist regimes like that in China were photographed, filmed; and that would cause a collapse in the regime: Well, we had Tian An Men Square. Everybody's seen that actual footage. And it did not cause any such collapse. So, technology isn't liberating. Of course, it could also be used for atrocious purposes, of course, the worst of all being the Holocaust; and that colossal genocide would have been much harder to commit if there hadn't been telegraphs and telephones and filing[?] systems, for example.

Russ Roberts: And Zyklon B--

John Gray: And Zyklon B, and other killing devices. Other devices of industrial killing, let's say, if I can use that horrible term. It would have been harder to do. There have been pogroms throughout history. But that kind of vast, Europe-wide couldn't have been implemented. So, there is progress in science. I think that's just a fact. And there is corresponding progress in technology, in the sense that technologies get more reliable; they get more powerful; they enable human beings to do more things. But all these technologies don't add up to progress in civilization. In ethics and politics. I take the old-fashioned view, versions of which most people in the entire world took until about 1720 or something like that--1750. I take the old-fashioned view that civilizations require different tools, let's say, in their lifetimes: that, civilizations run in cycles. They are born, they grow up, they reach a peak, and then they start dying. And as they--and they are replaced then by periods of barbarism. Periods of barbarism including in modern times periods of modern barbarism. And, when they are at their peak, civilizations can be peaceful; they can have a lot of learning, even before modern science: they can be highly learned, have great libraries, and so on. They can avoid some of the worst human evils--of mass murder and oppression. But then they start to decay. And as they go downhill, various evils get embedded and bound up with them. They become less peaceful. They become less learned. The libraries are destroyed, burnt down, or ignored. And eventually the society disappears or turns into barbarism. Then [?] the cycle is repeated. Now that period now is considered so intolerably depressing that no one wants to think about it. But pretty well everybody in the entire world took that view. Or versions of it. Even in Christianity people believed in what they call 'original sin.' And many of these people led sort of reasonable lives. So, it's a modern weakness to reject the cyclical view of history. Which I think corresponds better with human experience. So, very few people anticipated how bad Nazism would be in the middle of Europe. They said, 'How could Europe,' then the greatest world civilization, 'produce something which was as monstrous as Nazism then became?' And very few people in my view, although it didn't commit the very worst crimes, appreciated how bad Soviet Communism would be. And yet, we see what actually happened: we see the barbarism with a modern face, barbarism with modern technologies, enabling the regimes, and their supporters of course, to commit or support crimes much bigger, much greater, in some cases more terrible than in any of the past. So, that view, which kind of cyclical view of history, you find it in writers like Machiavelli, in ancient Greek and Roman historians; some [?] apart from Machiavelli nearly modern period, then it nearly dies out more or less: that's what nearly all human beings believed until a few hundred years ago. And I think that in many cases--I'm not opposed to modernists, but sometimes I think I'm a pre-modernist--I think the ancient writers, the ancient thinkers, religious or not, were in many ways more truthful, more realistic, and more accurate than later ones. That's what everyone believed; and that's what I believe.

24:53

Russ Roberts: So, I'm going to say something nice about your book; and then I'm going to say something--well, it's challenging. Not critical, but challenging it. So, when I said that the book was jarring and very powerful to read, for me, it forced me to realize that my view of human progress was dogmatic. That it had a religious nature. It came, perhaps, from my religious, my actual religious beliefs. Or, my study of economics, the idea that economists through the right policies can transform society. And it came from my view of the 20th century, where I think the human standard of living increased probably something on the order of 25 to 30 times, with a corresponding, not of the same magnitude, but an increase in longevity, in the quality of life through the incentives of free market capitalism. And of course we don't have literally free market capitalism. But through market forces, that there'd been an enormous improvement in human wellbeing over the 20th century. And of course if you'd said to me, 'Well, what about the Nazis?' or, 'What about the Gulag?' I would have said, 'Oh, well, ehh, that's the bad kind. That's the kind of human activity--'. And, of course--we had Chuck Klosterman on this program talking about But What If We're Wrong?, and he asked the question in that book--it's a very provocative and thoughtful book--he says, 'How many of the things that we "know" are true today that turned out not to be true?' Because we realize that many of the things that people thought in the past were true, weren't. So, things are going to come along that are going to reverse what we think are true. One of the things--

John Gray: Well, it's not only that, Russ. It's not only that. I ask a different question: How many evils which we think have been safely consigned to the past--

Russ Roberts: Same--exactly--

John Gray: will in fact come back? And here's two. I think you'll agree with both.

Russ Roberts: I know what you're going to say. Go ahead.

John Gray: Two. Would be Britain, the practice of torture [?] in the Iraq War and later, was is something unexpected by practically everyone, although I have to say--I have to blow my own trumpet a little bit in this--I published a spoof article in the London New Statesman called "A Modest Proposal on Torture," saying that if we were going liberate the world in [?] human rights--this was before the invasion actually happened but when it was clear that it would, the article appeared in February 2003; the invasion started in March, I think--I said: If we are going to liberate the world, [?] the whole world in modern democracy, we should probably include modern techniques, and that would include modernizing torture. So, I predicted that it would be used in that war. Now, at the time people thought that that was the darkest possible pessimism: Misanthropy, nihilism, which is pure mischief on my part. But a few months later, of course, Abu Ghraib burst into the news. And I'm not convinced to this day that torture has been eradicated from this system. I think bringing it back, especially by the world's greatest liberal democracy, had a long term damaging effect. The second, of course, the second example, which I've also written about in more recent times, is the return in Europe and in Britain, and at the highest levels of politics, of anti-Semitism. How many people predicted that?

Russ Roberts: Well, I thought you were going to say slavery, which you talk about in your book, which I think is equally--

John Gray: Well, that's a third--

Russ Roberts: much more disturbing.

John Gray: Well, I think they are all disturbing. But, slavery in the Gulag and, of course, in China, and in Nazi Germany, on an absolutely colossal scale, was a 20th century phenomenon. And in other forms, continues--

Russ Roberts: We still have a human trafficking problem--

John Gray: We have human trafficking--

Russ Roberts: that's not trivial at all--

John Gray: not on the same scale. It's not trivial but--

Russ Roberts: It's still horrible, and it's--

John Gray: It's still horrible, and it's not on the scale of Nazi Germany and the former Soviet Union, but it's still a problem. And what I've said all along is these evils come back, but they're called--slightly different form--but they're normally called something else. So, torture was called enhanced interrogation. Slavery is called human trafficking. A system of slavery is called Socialist construction--

Russ Roberts: forced labor--

John Gray: Forced labor. But it's slavery, all right. And this leads me again to one of my observations, which is that bad ideas and bad practices don't slowly disappear in a process of gradual evolution or form [?]--

Russ Roberts: But do we get any credit for being ashamed of them? The fact that many, many Americans were upset about Abu Ghraib and spoke out about it?

John Gray: They get credit, but on the other hand there are quite a few people now, who, in Britain and I think in America as well, are beginning to turn back--as I long expected, [?] strong anti-Communism. And when I supported the defeat of Communism, I was very pleased that it happened in the Soviet Union, [?]. But from 1989 onwards, I attacked the Fukuyama view and the view of many others--from actually October 1989--I attacked the Fukuyama view that this is a victory and it's permanent victory. There are no permanent victories in ethics and politics. None. Literally, none. And what's happening now, which I must say I find bitterly amusing in the most horrible way in Britain I know about it better, is: People are beginning, returning to the illusions of the 1920s and 1930s about Communism. There have been recent claims that--

Russ Roberts: We have them here, too--

John Gray: Yeah--that the Gulag was a very compassionate institution has resurfaced. A British student group has said[?] it was very compassionate.

Russ Roberts: Yeah. That was--

John Gray: That was last week.

Russ Roberts: Yeah. That was rather--those who do not read history are condemned to keep embracing the worst parts of it. For sure.

John Gray: Well, or of repeating it for the rest of us. I mean, if it [?] be for themselves, that's their lookout[?]. I don't care what they do with their lives. But, if they are going to allow or encourage or permit a reintroduction of these horrible systems which have predictably bad effects, that's something we've learned from history. But, it's not just that they're ignorant of history. Here's the medievalism [?] invincible ignorance: they don't want to know about history, because it would destroy their hopes and illusions.

Russ Roberts: Yeah.

John Gray: So, you can't give them any evidence that will ever persuade them that what they believe about this is what's [?]. Let me give you the simplest example. I mean, I rarely write on this at any length now, though I occasionally mention it. But the reason I don't write on it at any length is it's always the time. Nearly all Western Progressive thinkers, not just the present generation but previous ones, would tell you, confidently, that large-scale serious repression began in the Soviet Union only under Stalin.

Russ Roberts: I know; yeah.

John Gray: It didn't. It began the moment the Bolsheviks took power under Lenin. And that can be extensively documented; and has been. So, there's no sort of--you know, it was easy to document after the Soviet Union fell because lots of documents which had been locked up before became available--actually it was known all along from émigré reports and others that this was so. But the Western Left, the Western Progressive Left, just didn't want to know. And they don't want to know now. And they will never want to know. So, there will always be--I mean, this is a bit depressing for someone who is, you know, for most people I think it's just a fact you've got to get used to, that the fantasies and illusions of Western Leftism about Communism were due for a revival, as it became more distant, that period, and as capitalism got into a bit of trouble. So, I began to expect that this would happen. And it's happened in a really grotesquely comical, though also tragically inhuman form. Because, after all, not only were millions, did millions of people die in these Gulag systems, but far more people had their lives irreparably broken. They survived, and even got back into society; but their health was shattered; their loved ones had died or disappeared in some sort of way. Even though they lived on for a few more years or decades, their lives had been broken. So, this was a vast human crime which is now being celebrated by the jeunesse dorée--the glittering young radicals of New York and London and Paris.

Russ Roberts: What did you call them? The jeunesse what?

John Gray: The jeunesse dorée. It means just the golden youth.

Russ Roberts: Oh, d'ure--

John Gray: Uh, dorée. So, dorée. That's from gold. They're celebrating; they've started to celebrate it again as a great landmark in human progress. In human progress. So, the cycle--I anticipated that, and I expected it. I'm not surprised by it. I'm still disgusted by it, but I'm not at all surprised that this has happened. And worse will be yet to come. And I say that again not out of pessimism, but this is what always happens. Because the people who defend some version of capitalism--I'm not and actually never was, even though I supported Hayek, I was never a kind of radical free marketeer. But I think the point is to have some intelligent forms of capitalism. And that central planning for reasons that Hayek explained doesn't and never will work, not even when it is by computers, and it also has many costs in human freedom. But if capitalism, Western capitalism in its present form, goes into deeper difficulty than these views will get a lot more wide support, even though they are demonstrably false. And we could even have Western governments, even in Britain. Even in Britain, there's something like a third to a half chance, a 30% to a 50% chance that we'll have a Corbyn Government in the next few years--in other words, a 30-50% chance of absolute catastrophe in my view, despite everything that has been proved about the workings of Communist governments and Communist societies. And of course that illustrates my earlier point: knowledge grows; humans stay the same. Knowledge grows, but humans do not become more reasonable. That's the confusion in Western, not only Communist but Liberal thinking. They think that as knowledge grows, humans become more reasonable and more civilized. They don't. They remain exactly the same. And that includes remaining the same--needing consoling stories, which kind of give meaning to their lives. Now, I'll just say something important about myths. Myths are indispensable in human life, what I call myths and what I think you earlier on call allegories are indispensable in human life. The idea that we can do without them is itself a myth. Only people who aren't aware of the myths they are living by tell you that myths can be abolished. But there can be good myths and bad myths. Better and worse myths. There can be shallow myths, silly myths, and even myths that are positively poisonous and harmful because they depend upon demonizing some section of the human species. And, the myths of the benign character of Communism that it had pure beginnings and somehow went away from them to tyranny and under Lenin and [?] saintly figure who only wanted good for humanity and wasn't at all ruthless, and so on; and then was taken over by the evil Stalin, and so on--they are all very harmful myths. They are shallow and silly myths, and they contain empirical propositions which are false. But even as pure myths or stories they are absolutely silly because they don't correspond with the repeated and deep human experience in which large-scale, radical, human projects of reconstructing society according to an idea you [?] model, normally, I would say, always lead to dreadful results.

37:57

Russ Roberts: Well, it was a cheerful thought. That I think correct. I'd just remind listeners of the conversation I had with Milton Friedman--shortly before his death--on EconTalk, where I asked him about: 'Isn't it at least cheering, doesn't it make you feel good that, despite high prices of, say, oil,' whatever it was at the time--I said, 'there's no demand for price controls? Maybe we've had some impact. As economists, we've taught people they don't work very well.' And he said, 'No, I think it's because too many people were alive in the 1970s when we had price controls. They saw how bad they were. When those people die, and [?] part of human memory any more, there will be a clamor for them once again.' So--

John Gray: It's the same phenomenon and I agree with him completely.

Russ Roberts: So--

John Gray: I agree with Milton Friedman on that.

Russ Roberts: So, I agree with that--unfortunately, or I'm sympathetic to it. But I want you to answer a tougher challenge. Which is: the extraordinary transformation of human material wellbeing. Obviously it's only material wellbeing. It's not spiritual wellbeing, ethical wellbeing. But we do have, I think--when you said that you are a man of the 1720s, the reason I think that the view of progress took hold is because there was material progress: the Industrial Revolution, although painful and created a lot of suffering, eventually for the next generations that came after led to a very strong reduction in economic insecurity, at least in material--in starvation. And we live in a world today where hundreds of millions of people have escaped the worst kinds of poverty. They're still somewhat poor. Many of us--I would include you in this group, and I would include myself, live an immensely more pleasant life, both in the workday and in our leisure time. We live longer. The quality of that longer life is often more pleasant. Now, I concede that I still suffer. Even with my high income, I still have emotional challenges. I still have the imperfection of human consciousness that you talk about quite eloquently, that I'm aware of my own--maybe it was Schopenhauer, or Spinoza, I can't remember who you write about. Obviously we struggle to deal with the fact that we are animals, living in a very material world, and yet strive sometimes to be something greater than that. And often fail. So, that's all true. But you do agree that there's been progress on material grounds.

John Gray: There's been a huge increase of what could broadly be called material wealth over the last few hundred years, and I don't deny that either. Because that's part of the spin-off from science and from technology. I mean, this huge increase in consumption and in the level of daily--

Russ Roberts: comfort--

John Gray: comforts of daily existence, and so on.

Russ Roberts: I don't have to wash my clothes. I don't have to haul water from the--

John Gray: Yes. They are nearly all spin-offs from the new technologies, which in turn are spin-offs from the growth of knowledge. So, that's progress.

Russ Roberts: But also--but you have to be fair: They are also spin-offs of the economic and political systems that are put in place--

John Gray: Yes, well that's where I become--

Russ Roberts: in places that don't have those, aren't doing so well--

John Gray: That's where I become more skeptical than you, and I think you should be, too--

Russ Roberts: [?]--

John Gray: You have stronger-than-my belief in the benign consequences of economics and in your strong belief in free markets. I'll just say a couple of things--

Russ Roberts: I just have--John, I'd just like to make a clarification. I really don't have a strong belief in the benign nature of economics. I'm increasingly concerned about the aspects of our economic theories and how they damage us. Go ahead.

John Gray: Well, that's also--I'm glad that's the case. But, even to the extent that--well, let me give my observation the way I thought of it--

Russ Roberts: Go ahead--

John Gray: First of all, I think the last 2- or 300 years is a very short time span. If you look out through the longer perspective of human history, you find many examples of civilizations that grew up and achieved higher levels of material progress than they had in the past. I mean, Rome at its peak was much more highly developed than it was 5- or 600 years before it reached its peak. They had what we call central heating; they had public baths; they had large libraries. These are all primitive by modern conditions, but by comparison with what they'd had a few hundred years before they were at a much higher level. And then, of course, Rome collapsed. And so, in the city of Bath where I live, a great Roman outpost with Roman baths--which, by the way, still work. Unlike many more recent baths that have been built in later times, you can still go down there and bathe in them; they are a tourist attraction. And we are replaced by much lower levels, when Rome collapsed, much lower levels of everyday comfort and technology, and of course consequently in many parts of Europe and other places in the world where the Romans had ruled, by lower levels of human population, too. So, that fell off. And that's maybe how the Aztecs collapsed--[?] some attribute that to the Spanish Conquistadors, but there are many means that American civilizations have collapsed. If you look at the longer run of human history, there have been many periods of technological advance, quite remarkable technological advance. It would be very different living in Rome at its peak, at least if you were a poor Roman citizen and not a slave, than living in what they called barbarism--which preceded it and which still existed in parts of the Roman Empire or edges of the Roman Empire--it would be a very different experience, not a much better experience but a collapse. So, if one isn't sort of blindsided by looking back only 200 or 300 years, and if one doesn't think that what has been achieved on a more global level has to last and endure, then you can see that this could be a major setback. And of course, the work in the 20th century--the setback which followed the First World War and the Bolshevik Revolution in Russia was colossal. They didn't get back--

Russ Roberts: or Weimar--

John Gray: anything. Sorry?

Russ Roberts: The Weimar Republic. And the post- --

John Gray: The Weimar Republic. But, in the case of Russia, they didn't get back to late Czarist levels of production and consumption till about the 1960s or later.

44:57

Russ Roberts: So, that may be true. I would push--I mean, I think--it's an open question. I think it's good to think about it. It's good to be agnostic about the potential for future technology to be passed on, and how important that is. I would have thought you'd have pushed harder on the idea that technology is distancing ourselves from each other, from human connection. That we don't have any more happiness: we just have a lot more stuff.

John Gray: No, I don't--I don't sort of push that hard on that. It may well be true. And, of course, when the Internet became, which started as we both know as a Cold War military tool. But when it became, started entering to everyday life, I said things which were considered very pessimistic. I said, one of the things that this might do, up to 10 or 15 years ago, is abolish privacy or make it much more difficult to achieve: Privacy will become a luxury good of the rich--if anyone can have it, which is doubtful. It will encourage living in a virtual world and less caring about the human world. I did not anticipate the virulence and rancor of Twitter debate, for example--if it can be called debate. I did not anticipate that. So it has all these negative sides to it. All these negative--to associate with these evils. But I'm not, as it were, pushing so much on that. I mean, I would grant you in a sense, for the purpose of interesting discussion, that the overall effect of material wellbeing is being very high, even though as you say, the Industrial Revolution was very painful and so on and so forth for large numbers of people. Later on, it increased the standards of living of practically everyone. But, you see, I think there's an inconsistency, or at least tension in your view, because, while allowing that bad human ideas come back in history, which you have done[?], or bad human practices, if you apply this to economics, then you can sort of more or less predict that policies which in economic terms are based on sheer fallacies, sheer errors, will be re-adopted. So, again, I'm not [?]--

Russ Roberts: Oh, yeah. If you're on the Left--

John Gray: for protectionism. Sorry?

Russ Roberts: If you are on the Left--

John Gray: Yeah--

Russ Roberts: it's easy to find policies you think are horrible, that have come back. There are whole books written about them. I'm not going to advertise them. And on the Right, same thing--

John Gray: but on the Right, too--

Russ Roberts: Oh, no; same thing: The Right says, 'Oh'; you just talked about it: central planning, Keynesian. Some people would disagree. They'd say that those are all good ideas--

John Gray: I'm more favorable to Keynes than you are. But protectionism is the best example.

Russ Roberts: No, for sure.

John Gray: Protectionism is one of the ideas that we most comprehensively--that the theoretical foundations of which have been most comprehensively destroyed, and by economists and by others. But it's back at least as a set of proposals, which, whether or not they eventuate in a full-scale trade war and the breakdown of world trade--whether or not that happens--certainly already have some damaging effects. So, that's--and, of course, one other thing that's missing is the way in which, in politics, ideas that have been--I'm not talking about religious ideas but here, ideas that in so to speak secular science such as economics which have long been discredited come back as bad ideas very often do, and make the world worse than it's been. That's actually happening now in the case--it's happening with the world's biggest trade--well, it would not be--with the world's biggest economy. The on which the global trading order has depended since the Second World War. And so the outcome is very uncertain. So, although I'm far from thinking that we are on an inexorable slope to the 1930s, I don't think that yet if we get a second Trump term if things go wrong in the bickering and conflict with China over these issues then we could but we're not quite there yet. But we are at a point of considerable risk. And that illustrates the general point that when bad ideas come back, the cycle of rising prosperity can be disrupted. And of course we can go to much lower levels of prosperity. When you get revolutionary regimes, you know an example: Venezuela. Venezuela went from being one of the richer countries in Latin America, huge oil riches, to being one of the most devastated, destroyed, and desperate countries in the world. Not because of any natural disaster or catastrophe--

Russ Roberts: they have [?]--

John Gray: but because they have a disastrously bad regime. Now, could that not happen in a bigger and more strategically important country? I think it absolutely could. That would just be a repetition of what happened in Russia. Russia was a growing economy, as you would know, from the 1880s, 1890s, onwards till about 1910. Was a fast-growing economy. And that was all--it had many things wrong with it, of course. But it was a fast-, um--and that all stopped. And it stopped for two human generations, roughly speaking. It took a hell of a long time to recover. It really sort of--it's still stopped in a way because--

Russ Roberts: Oh, yeah. They destroyed plenty[?]. They destroyed the cultural norms--

John Gray: Exactly--

Russ Roberts: trusts that are necessary to make a market system work--

John Gray: or [?] perhaps irretrievably destroyed, in that part of the world. So, that can happen. But again, the other thing we missed out is war. And of course, even when the wars are entirely justified and necessary and noble, even, as I think the Second World War was--got more doubts about the First World War--but as the Second World War was, both of those wars actually produced an enormous loss of material wellbeing throughout Europe. And even the world. And so are we[?] assuming with Pinker that there won't be major wars in future? Well, the wars that happen won't be the exactly same as those or even closely similar to the big world wars of the 20th century because we'll have new dimensions of conflict--cyber-conflict, possibly genetic weapons, and other dimensions of conflict that didn't exist then. And possibly also because nuclear weapons may prevent some of the full-scale collisions between major powers that happened in the 20th century, so that the wars will be fought as mostly 20th century--as all 20th century wars--

Russ Roberts: Surrogates--

John Gray: Surrogates. Yeah. So, there might be surrogates in Syria, or surrogates in other parts of the--but they could still be enormously costly in human wellbeing, and even in material human wellbeing. I mean, at the end of--one of the best parts of Keynes, by the way--you mention Keynes's writings--is his account of when he went to the Versailles Peace Conference in 1919 following the First World War. And he said he expected everybody to be worried about the fact that large parts of Europe were on the brink of starvation. As large parts were, in 1919. And he said they weren't: that they were concerned to score points with each other, and against each other; and to get onerous war reparations against the Germans. Which he thought, perhaps rightly, was a factor leading eventually to what was--to Nazism coming to pass.

Russ Roberts: He also, by the way, of course believed, inexorably in economic material progress. And it's an interesting question--we're not going to talk about it here, but I'm just going to raise it. And again, your book challenges me to reconsider. But, I assume that in the next two or three or four generations that people will be extravagantly, enormously more materially better off than I am. And that may not be true. And it's good to think about whether that's a view that's--

John Gray: And if so, why not? You said: Would it be because it had been a really unprecedentedly catastrophic war--?

Russ Roberts: There are so many possibilities, when you think about it. Which is--

John Gray: Yeah. Which is, bad, bad economic doctrines would take over and destroy. You'd have--

Russ Roberts: pluralism run amok. [?]

John Gray: I mean Keynes himself, as you know, was a neo-Malthusian.

Russ Roberts: Uh, yeah, but he also--I'm drawing on his--

John Gray: But he explicitly says--he explicitly says--that there'll be no continuous--that wealth of, that the growing wealth will be curbed and limited and perhaps even stopped. [?]

Russ Roberts: Maybe he had--

John Gray: if the [?]--

Russ Roberts: I don't know if that's true. He may have said that before at some point. He also--

John Gray: No, not before. Towards the end of his life.

Russ Roberts: An economics lesson for his Grandchildren. I think that's the title. I might have it wrong.

John Gray: But yeah. Whether it's optimism or pessimism I think is less important I think than whether it's true. But anyway, there are various reasons why for generations from now the level of material wellbeing of the human species may not be much higher--may even be significantly lower. And what I'm saying is that if you take the long run, the long run of the last 3000 years, say--

Russ Roberts: That's good. I like that.

John Gray: Yeah. Yeah. If you look at all the civilizations that have grown up and gotten richer, and didn't remain--we tend to think that only Western--

Russ Roberts: That's only because Adam Smith hadn't been born yet. Once Adam Smith was born, once--and of course he didn't create all the ideas, and hardly any of them. But, once the Wealth of Nations became the dominant view of the world for a few hundred years, that did have an impact.

John Gray: Well, here we differ.

Russ Roberts: Why?

John Gray: Well, I don't think that the growth of modern capitalism is dependent on those ideas.

55:05

Russ Roberts:

Russ Roberts: Oh, I agree. That's why I joked and said some of them weren't his. But certainly the growth of trade--exchange--mediated by prices, and property rights, had a positive impact on human wellbeing. You can debate that [?]--

John Gray: Well, generally. Well generally. Although, you know, you might or might not agree with it. I think it's actually a fact, though. It's a fact that, for example, with the growth of common protection in Britain--I'm not a person of thinking of the Left, but I think this is just true: It's not just a Marxian, there aren't Marxian facts and non-Marxian facts. Just facts. And it's a fact that before British colonialism in India, the level of production and level of production and consumption in India was incomparably higher than it was 100 years later. So, India was kind of one of the two great centers of the world economy. Although, the world economy of course didn't exist in a global sense at that time. And that shrank. So, actually, although I don't take the view that, at all, that Western prosperity depended on colonialism, some liberals did towards the end of the 20th century, the end of the 19th century--I don't take that view. I do think that parts[?] the West grew to higher levels of production, consumption, parts of the colonial world, British and otherwise, the very worst were parts of the world, like, for example, the Belgian Congo. Where a sixth[?] part of the population perished. So, that's a pretty dramatic drop in human wellbeing.

Russ Roberts: Yeah. [?] There's no--the part--

John Gray: Others went down. [?]--

Russ Roberts: The part we agree on--and we recently talked about this with Paul Bloom, the Yale psychologist, is that I am very much in agreement that the darkness of the human heart is unchanged, and its potential for destruction, the human potential for destruction, is unchanged.

John Gray: But--I agree with that fully. But I'd put it in a slightly different way. More amenable to, maybe, secular rationalists. The credibility of the human animal doesn't change.

Russ Roberts: The which?

John Gray: Sorry--the credulity of the human animal--

Russ Roberts: Yes.

John Gray: doesn't change.

Russ Roberts: Well, there's not much incentive to care about what's true. So--

John Gray: Usually, especially when the truth is difficult or painful or none at all--

57:32

Russ Roberts: Yep. So, I want to take us--let me take us to a direction on morality. Because this is related to this point, and I want to let you talk about what you say in your book about it. At one point, you paraphrase or quote Ivan Karamazov from Dostoevsky's The Brothers Karamazov. And you say--he says--without God everything is permitted.

John Gray: Mm.

Russ Roberts: And the--I think a lot of secular humanists, and the New Atheists, especially, believe that a morality can be fashioned without God. You can also argue--I'm not going to--I'm a religious person but obviously you can argue that religious morality has many flaws. That's not what I'm talking about.

John Gray: Well, all kinds of hidden [?] concepts[?]--

Russ Roberts: Has many flaws. You can argue--

John Gray: What has many flaws?

Russ Roberts: Religious morality.

John Gray: Yes. Yes. Yes.

58:24

Russ Roberts: So, obviously, there's much to talk about there. But I think most people--most people who reject religion believe, earnestly, that a morality can be fashioned without a law-giver. Without the divine, a creator. And you are extremely dismissive, despite your atheism, you are extremely dismissive of that. Why?

John Gray: No, I'm not dismissive of the view that there can be morality, or I would say moralities, without a divine law-giver or without God. I'm not dismissive of that. Because, as I said earlier, most religions are actually are without religion. Nothing [?] with that religion. Because most religions are atheist in the sense that we discussed toward the beginning of our conversation. They don't have a created God. They don't have a divine law-giver. This is all monotheism. You see. This is all parochialism, essentially on the part of atheists, that, Western atheism is a continuation of monotheism by other means. But, um, what I focus on in the book, more--and again, it's just a fact--that atheists who say that: Are we going to have morality without religion? They assume the morality of liberalism broadly, liberalism which in many ways is inherited from aspects of Jewish and Christian monotheism. That's what a atheists today assume. But that's because they are extremely provocular[?] and know nothing about the history of atheism more generally. If you went back to 1900, in London or Berlin or Prague or any other big European city, or for that matter New York, you'd find most atheists at that time held to a version of morality in which white people were superior to black people. In other words, they held to versions of a racist morality. Closer[?] to our time, you'll find that some atheists think that, who think that morality is--many atheists, maybe most atheists who think that morality can exist and thrive without religion--think of morality in terms of sympathy and altruism. But the most influential atheist writer of the late and early 21st century, who is in fact Ayn Rand--I mean, she is [?]--sniffed at, sneered at by I think by philosophers, but she is by far the more [?]--books have sold more copies than any of theirs by many, many factors. And also continues to have, her writings continue to have an impact in politics which none of these other atheists did in the 19th century: There was Marx and [?] and so on. But in the 20th, late 20th century, nearly 20th century, Ayn Rand is significant: She thought that the essence of a good morality was Angloism[?], and she detested altruism. The term 'altruism' was invented by--the word 'altruism,' or the French version of it, was invented by the 19th century French positivist Auguste Comte, who invented what he called--I didn't call it this--religion of humanity, and he said explicitly: 'We need a new religion in which we worship humanity, not the supreme being.' Or, as he then went on to say, 'Humanity becomes a supreme being.' And he faults[?] that the morality that went with that was altruism. The word he invented. But, so, what you find, if you just look at the history of atheism in different countries, even over just the last few decades, but certainly over the last hundred or two hundred years, you find that there are many, many different varieties of atheist morality. And atheist politics, as well. There are atheists who, like Rand, who like laissez faire capitalism. There are atheists like Marx who abominate it. There are atheists who believe in human equality like John Stuart Mill. And there are atheists--many, many of them, until the Second World War, who believe in human inequality and who were out and out racists. Including some of the well-known figures in British atheism like Julian Huxley. In the early 1930s he wrote that Negroes--as he called them, he called them, called people of different ethnic backgrounds in Africa and elsewhere--he said they were inferior specimens in terms of possible development of intellect. Then as we get closer to the war, you find them saying, about 1936 or 1937, that race actually isn't a scientific concept. Now, what has happened in the intervening three or four years? Nothing scientific. What had happened is that some of the terrible consequences, even before the War, of these dreadful theories being implemented, were becoming more evident--

Russ Roberts: [?]

John Gray: And my point is this. My point is this: When people say there can be morality without God--[?]--I repeat this over--I found this a completely boring, mawkish, pointless discussion, because it's all based on the idea that the morality they are talking about is the liberal morality--

Russ Roberts:'The right one'--

John Gray: Sorry?

Russ Roberts:'The right one. The good one. We'll have the good morality. The kind that I believe.'

John Gray: Right. The morality that they take for granted. Just as thirty years ago, just as a hundred years ago maybe they would have taken racism for granted. Some of them would have Bolshevik; some of them would have been Nietzschians, and probably Nazis. Key point: Historically speaking, most atheists in the history of modern Western atheism have not been liberals. They've been anti-liberals. Most. So, in other words, I don't give them any credit for picking a good morality. Because it's simply the one they grew up with and they never thought about it. They think that morality and their morality are the same things. But being skeptical--as I think we all should be--I can easily imagine, 30 or 40 years hence, I can imagine the worst kinds of racism coming back. And I can imagine the brightest atheists of the time being racist. Just as they were a hundred years ago. So, it's chance. You see, Nietzsche had a rather good observation on Christianity. He said: Christian laws believe what the rest of the world believes at the time in ethics and politics, but with a kind of inflection, a religious inflection. Atheists are exactly the same. They always believe what is the conventional view of their time, with a few sort of, [?] I mean, most atheists, not all atheists, are, believe that. So, nowadays, a form of liberal morality or maybe several forms of it, are predominant. Though, of course, more recently these, this development of liberality has included imposing censorship at universities and attacking people for having, slashing and attacking people for having politically incorrect views. That's a kind of queer, odd, unusual drawl[?] but the perverse transformation of liberal morality. But they simply replicate--so, when, for example, Harris[?] says we can get morality from science, what he means is the morality that most Americans and many Europeans accept at the start of the 21st century or towards the end of the last century. Why it produces that particular morality is a question to provoke you[?] to ask. But if you are not just an everyday person living their life as best they can by their best moral lights[?] and any religion they may have, you would think your [?] I think it's an obligation to be less parochial and to ask, if I was around in a hundred years ago, if I were have been around, what would I have thought then? Am I taking this morality as given? Not just for practical, everyday purposes. It might be legitimate, or more legitimate. But, am I taking it as meaning morality itself? Because clearly liberal morality isn't morality itself. It's a particular kind of version of it. And it, itself, can have many different versions, as we're now discovering. And some of them could be quite importantly different.

1:07:01

Russ Roberts: One topic we didn't get into today, which we don't have time for now: But an underlying theme of the books is that Judeo-Christian values and meta-philosophies have infected--

John Gray: Totally infected[?]--

Russ Roberts: Well, I'm trying to be a little cynical--

John Gray: Yeah.

Russ Roberts: Yeah. Some would say enhanced. But have shaped atheist philosophies in ways that atheists are unaware of--

John Gray: Absolutely--

Russ Roberts: and it's a very--it's a somewhat condescending argument, but it may be true, nevertheless. I think the deeper point you are making right now, which is profound, is that it's very hard to be free of your time--and you think you are. There's a wonderful story in the Talmud where, through a dream, a rabbi encounters a wicked man from the past. I forget who it is. It's not important. But he says--and he finds out--he's actually a pretty decent guy. In the dream. And he says, 'Well, how can you be so wicked in the past? How can you be such an idol-worshipper, such a cruel person?' He said, 'If you had lived when I lived, you would have lifted up your robe to run more quickly towards where the idols were.' Meaning: You think, 'Oh, well, I wouldn't have been--fill-in-the-blank.' But, of course, when you are part of the time, it's rather difficult. So, let's close on this question, which is related to--

John Gray: Well, I just say one thing about that--it's slightly worse than that in regard to the atheists or enlightened thinkers we are talking about. Because, when, in the 18th century and later in the late 19th century, atheist and agnostic and other enlightened thinkers defended atheism, they gave it an intellectual prestige that it didn't have among ordinary people. Amongst ordinary people it was just a set of pre-reflective prejudices and bigotries. But when Voltaire[?] developed it, and when, naturally, given his anti-Semitism, when Hegel[?], the Germany revolutionary thinker claimed that races were based in science, they gave it an intellectual standing it didn't have otherwise. And furthermore, remember, they wouldn't just be able to say, 'Well, I was like your,' like you sort of, in the Talmud, where that were the way things were then. They claimed to be the intellectual leaders of their age. And of humanity.

Russ Roberts: Yeah, I--

John Gray: A bit different. They are not just atheist, actually, versions of taxi drivers or of guys in the street, or women, voicing conventional prejudices. These are great minds, sometimes genuinely great minds. And they are giving dignity--they are giving rationality. They are giving authority to prejudices and errors that were strong at the time. And they are claiming to be--they all thought they were--Voltaire[?] certainly did; Hegel[?] certainly did--they are all claiming to be the leaders: Intellectual and moral leaders of humanity. So I think they bear a larger responsibility than that [?] story suggests.

Russ Roberts: Well, fair enough. And I think it's important--and this seems like a trivial thing, perhaps. But I think there are a lot of folks who think atheism is a new idea.

John Gray: Yeah. Yeah. Good point--

Russ Roberts: That a bunch of intellectuals have finally realized because of the advance of science that religion is wrong. And I've mentioned this before: I get listeners who tell me, 'You're smart. Why are you a religious person?' And--

John Gray: Yeah--

Russ Roberts: the idea that in the past, of course, people were religious only because they didn't understand everything. And now that we understand everything, of course religion will wither and die away. But is, as you point out--

John Gray: I think that's a form of credulity. I think religions are useful now. Antidotes to credulity.

Russ Roberts: Well, it's going to emerge and evolve in interesting ways, or thoughts on these things.

1:10:59

Russ Roberts: I want to close with two questions. First question is: You argue that much of human history--not 'much'--all of human history is cyclical. That the progress--

John Gray: Well, there are periods, there are periods, yes; there are periods of drift and chaos, of course.

Russ Roberts: And there is progress and it shifts back downward. What about my life? Do I have the potential for personal transformation? Do I have, if I wish--many, of course, don't wish--but if I wish to "improve myself," to know myself, to grapple with my flawed nature and try to be a better person even though I may be wrong about what is a better person--but if I have an urge to do that, do you think I'm capable of that? That one is capable of that?

John Gray: Well, I'll precede my answer with the following observation, which I'm sure you will agree with. Both you and I are lucky.

Russ Roberts: Oh. Absolutely. Yeah. I wrote a long essay on it. I haven't published it yet. I'm not sure I can handle publishing it. I'm incredibly lucky. Absolutely.

John Gray: Yeah. I mean, we weren't born in the Ukraine in the 1930s.

Russ Roberts: Yep. Sure.

John Gray: We weren't born in the Belgian Congo in the 1890s. There are many other ways we are both lucky--

Russ Roberts: Loving parents--

John Gray: Right. Parents. Education. I'm lucky in having been born after the Second World War because although the Second World War involved, as I say and to my mind a just an even noble war, it involved a lot of human suffering and destruction. In Britain it had many benign effects, including much higher levels of nutrition for people in poorer parts of society. Now this is not a Hayekian point; it's the exact opposite--

Russ Roberts: Yep. For sure.

John Gray: That's why I don't swallow the Hayek theory whole. Rationing during that war--we can't organize the whole economy forever on the basis of a war, wartime basis. That's true. But that time rationing worked; it was blurred at the edges and there were of course black markets, as there always are; but it worked. And so, diseases of deficiency, nutrition diseases like rickets which had been absolutely widespread throughout Britain beforehand pretty well disappeared as a consequence of the war. So, I'm lucky, and you're lucky. So, the very question, 'Can I improve myself? Do I have the personal capacity or the free will or whatever it is to improve myself?' I think presupposes--maybe not the existence of maybe free will if there is such a thing is possible, or reality[?] always; but the idea of personal self-improvement presupposes that you are living in one of those, to my mind, comparatively rare periods of human history when self-improvement is possible. Because, if self-improvement is going to be suddenly interrupted by your being arbitrarily arrested, murdered, starving in some gigantic famine, or consumed in some terrible war, you aren't going to be able to improve yourself very long, are you?

Russ Roberts: I think Solzhenitsyn--and we're talking about Solzhenitsyn on this program lately--or Viktor Frankl--they would say those were the great moments when actual transformation is most possible. That, many in the West who lead blessed material lives are no better than a sheep who gets to look at a cellphone and play video games on there.

John Gray: Yeah; the latter may be true. But, you know, the forepoint[?] about camps may also be false. I mean, if you want a different view of this, or your listeners want a different view, they can read--which had recently been published in a wonderful new edition by New York Review press, they can read the story, Gulag Survivor, Varlam Shalamov. I reviewed his new book in the London New Statesman just a couple of weeks ago. And, his view is--he was offered, by the way, by Solzhenitsyn who knew and admired him, and said, Solzhenitsyn said of Shalamov, 'Shalamov tasted deeper in the cup of despair and degradation we all drank in the Gulag.' He said, 'I bow my head to Shalamov.' And he offered cooperation with Shalamov, but Shalamov rejected it for whatever reasons. And Shalamov's description of life in the camps is wholly without redemption. But neither you nor I really can judge that, I don't think.

Russ Roberts: Fair enough. I'm just being provocative.

John Gray: It could be--no--it could be possible in some conditions. Some kind of possible[?] transformation and impossible in others. That might be the case. It's clearly not even something as simple of the extreme cold of the northern gold-mining camps in which Shalamov spent 15 years--the average lifespan seems to have been in those camps about 3 years. He survived 15 by being a hospital orderly for most of the time; that was the only place where there was sort of reliable food and a certain degree of medicine, and so on. But, anyway, we don't necessarily need to go--where were we in the conversation before we got to?

Russ Roberts: I was asking about personal transformation [?]--

John Gray: And my reply was personal self-improvement is only possible, I think, I may be wrong about this, as I say, if Frankl and others are right--I think it's only possible on a large scale--I'm sure I'm right about this--I mean, very unusual people, heroic people, people of extraordinary qualities can perhaps undergo remarkable positive transformations in terrible conditions. That may well be true. It may be a universal human truth. But large numbers of people can't improve themselves unless they live in those relatively rare parts of history which have enough stability and enough basic decency, [?] kind of minimal, to allow them to live lives in which what they do affects their longer pattern of their life. If the pattern of your life is wholly determined by forces you can't control by--

Russ Roberts: That's the fundamental question.

John Gray: Yeah.

1:17:17

Russ Roberts: I'm asking a psychological question, by the way, not a material question. Not a--

John Gray: Not a metaphysical question?

Russ Roberts: I am--

John Gray: You're not asking about free will?

Russ Roberts: I am.

John Gray: Yeah, you are. I think your question is not psychological. I think it's metaphysical.

Russ Roberts: That's what I meant. Sorry. I meant: Can I become--I want to make it clear I'm not asking, 'Can I improve my lot in life by studying and becoming a better tradesperson?' or whatever. I'm asking the question: Through religion or meditation or force of will, do you think I can become a better husband? A kinder colleague? A better friend?

John Gray: I think all of those means, all of the means that human beings have invented in the course of their history, which might include not only religions and therapies--all kinds of therapies [?]--but also arts--

Russ Roberts: Yep--

John Gray: fiction, novels, music. All kinds of social and other practices can enable people to improve themselves and become more of what they want to be. I think that's just a fact. Because, I think one of the reason human beings have got--maybe not the only reason or even not even is the most important reason--but the reason human beings have the arts, have religions, have music, have therapies, is to do that; and to some extent, it can work. But actually, you see, whereas I differ with many of your [?], I don't think it's necessarily a bad thing that people can't turn themselves into the person they want to be. It may be a bad thing if what they are trying to eradicate in themselves is cruelty or some trait that is definitely malignant or malevolent. But actually, the conception of what our understanding of what would be the best kind of person to be is very, very limited. It uses kind of an aspect I think--we're coming towards the end, now--I think it's quite important. People say, 'You're terribly pessimistic. You think we'll never achieve our noble goals,' and so on. Actually, I'm more optimistic than that. I think the goals are nearly always internally flawed somehow. However absolutely ghastly post-Soviet Russia was, it wasn't as bad as the Russia which achieved Communism would have been.

Russ Roberts: Yup. I agree with that.

John Gray: Because a Russia which had achieved Communism would have no religion. Apart from Communism. You would have extirpated religion. There would have been no families, as we've historically understood them. There would be no national or local cultures. There'd be maybe a kind of equality, but it would, to me, be a culture so emptied of what makes life meaningful and valuable that it would be intolerable. Now, actually, I'm an optimist in the sense that I believe that humans, the contradictions of human nature will always destroy, both at the personal level and at the collective level, the visions of a much better world or a perfect world that people have. The deepest truth in all this is that contrary to what--this is a truth in the best forms of Christianity and the best forms of Judaism and the best forms of religions [?] in all of them--is that we humans don't have a clear conception of what it means to be perfect. We think we do. [?] what would a perfect world be like? You can come up with a rather banal description of it. But once you actually dig deeper into it, you'll find that it actually could have [?]--

Russ Roberts: It's not a world that you--you might not want to live in such a world.

John Gray: You might fear such a world. You might dread such a world. You might try and get out of such a world. So, that tells you that there's something lacking in that world that you've not identified. But more. So I'm a [?] believer that humans can improve themselves when they're in unfortunate circumstances, for long enough--many do, and they become kinder or they become more reasonable or they conquer negative character traits in themselves. And that's the purpose of meditation and Buddhism, it's more to the purposes of prayer in theistic religions and it's more to the purposes of therapy that secular people take up. They can do all those things. I'm glad that human beings cannot turn themselves into the type of human beings that they think they want to be, because if they did, they would very often if not always impoverish themselves. And that's because I think that kind of the, one of the big illusions about time is that human beings really understand themselves. I don't think any of us understands what leads us to do and not do certain things. And that, again, is a good thing, very often. It may be a bad thing if you are driven to some, repeatedly, in what Freud called repetition compulsion, to do painful things that harm you and others. Then you have to seek some kind of therapy or some kind of help. But more generally, the fact that we don't live our lives according to a rational life plan--which is what the American philosopher John Rawls talked about: Thank God we don't live--or, what John Stuart Mill, the British utilitarian; he wanted to create our lives: he said we should have experiments of living in which we try different lives and find out the one that works best and adopt that. I think that's a very bad idea, actually, because if we treat our lives as an experiment in which it doesn't seem to work out the way we want, we just scrap it and get rid of it, you could say, 'Well, Judaism hasn't worked for me, or Christianity: I'm giving it up. Instead I'm becoming a drug taker.' 'Or, I'm becoming a follower of Ayn Rand.' I think that's a kind of way of life which will--you turn your life into a series of not-very-interesting short stories rather than being a deep human life. Which can only come from committing yourself rather deeply in daily practice to certain things, which might be religion or it might be learning an art or a craft of some kind, or it might be some human relationships, or even relationships with animals that you've cultivated. But it has to be deep and abiding and continuing. It can't just be experimental. So, although--I mean, one thing I am very critical of is the modern--and I've written about this--is the modern idea of self-realization, because the modern idea of self-realization implies that there is within each of us a sort of [?]--

Russ Roberts: idea of ourselves.

John Gray: Yes. Now, we can sort of extract--but that's just a kind of delusive image, because if you do succeed in extracting something, again you'd probably find there's something missing in it. Many people who have long been poor and suddenly become rich do not flourish in the new life that they have. Now, you can say that's because they don't know how to live [?], but it's also true of people who come from families and social groups that have long been rich. There's no simple form of a human life which can be imagined or which can possibly exist which is perfection; and that means you can't approach perfection because there's no such thing. You can improve on the way you are; people can improve on the way they are and have been; but they can't approach perfection. It's not that they get a better and better understanding of what a perfect life is. We never have that understanding. And that's why, although I am myself an atheist, I think the idea of a God that can be perfect in ways that we cannot ever understand, is actually a very useful and valuable myth.

25:16

Russ Roberts: Well, I want to close--we're way over time, but I want to close by letting you defend the kind of atheist you think one should be. You spend most of the book talking about the bad kinds of atheists--those who are channeling their inner Christian or inner Judeo-Christian or inner Messianic themes of progress or are worshiping of something else. What's the right kind?

John Gray: Oh, well, there are several examples in the book. I think maybe we have time--I can look at one now in brief detail that I discuss in the book, which is a Polish-British writer, Joseph Conrad. Now, he was an atheist, a strong atheist in the sense that I am. But he didn't worship or even revere humanity. He didn't want to replace--he wasn't looking for a surrogate for a religious theistic meaning for life. He accepted that there was no surrogate. He was actually, I think even pleased that religion was [?]. He had very few expectations of human progress. If you read his letters that he wrote with Bertrand Russell, the British atheist philosopher, Russell looking forward to a world governed by international socialism and peace and getting better and better, and so on. Conrad just sort of laughed at those ideas and ridiculed them and mocked them. I never subscribe to any of them. But he lived a very creative and productive and adventurous life, unlike most people who, even most novelists, I think; even most writers of fiction. He didn't spend most of his life in a study. He spent over 20 years as a sailor, as a seaman; in his late teens had a very adventurous time, went all over the world, was nearly killed two or three times in near drownings and maritime accidents. He got involved in an attempted coup when he was young against the Spanish government; he became part of--he became a gun runner for a period. He had a very adventurous life, a dangerous life, a risky life. And an extraordinarily demanding life in the sense that the language in which he wrote his novels and his short stories was not his first language or even his second language. His first language was Polish; his second was French. It was English which was his third language. So, he's one of very few world-class writers who wrote in a language--

Russ Roberts: I can think of two--

John Gray: twice removed from his first.

Russ Roberts: [?] Nabokov at least didn't write in his native language.

John Gray: No, there are others; but he didn't--I mean, Nabokov didn't write in Chinese. [?] don't forget that Nabokov grew up in a time when the Russians in his generation all spoke French, and many spoke English. He had a demanding and arduous life. He was also constantly involved in speculative investments: he tried every weird--you know, Peruvian tin mines or silver mines, and practically everything of the day. Railways, the lot. He was always losing money. He was always hard up, even when he was earning a fortune as a writer. He was a very adventurous character, in short. Now, what was distinctive of his--he didn't lead a privileged life. He got rich eventually, but through his own exertions as a writer. But he didn't live a privileged life in his study, sheltered from the horrors or mischances of everyday life. On the contrary, his life was as or more dangerous and risky than many human lives were at that time. And he also--I missed out--he visited the Belgian Congo, as a sailor, during its worst period; and witnessed it. And he said it changed him forever, because until he'd gone there, he said he had some shreds or vestiges of the European facing progress that was dominant in his time in the pre-[?] World War period. But when he got there, he saw what was happening; not only that: he saw that it was the Belgian King who owned it as private property, who owned the Congo, that part of the Congo at the time, called his rule a mission for civilization progress. So, he saw that amounted to then, it changed him forever. He said that when he went to the Belgian Congo, he was a mere animal, and when he left he was a human being. It's a very nice paradox, because he arrived with all the illusions of civilized human beings; they were destroyed and he became a real human being, when he left without those illusions. But, if you say what I like about his[?] atheism, a particular type of atheism: Conrad's lack of belief in progress is central to his atheism, because it's connected to his life as a seafarer, as a seaman. Which is that he thought that human beings were admirable. He wasn't a misanthrope. He didn't admire most human beings very much, but he wasn't a misanthrope either. He thought human beings were at their most admirable when they confronted situations that had no solution. I mean, if you are in a ship that could go under, everything depends on your skill and courage--that you don't lose your nerve or the knowledge that you've accumulated from other sailors. There's nothing you can do to overcome the power of the sea. The sea is many, many thousands of times, millions of times more powerful than you. How you live or die, how you save yourself from being drowning, or fail to save yourself from drowning or your shipmates, fail to save them or help them, is all up to you. And so, he thought that the type of behavior, the type of life in which human beings showed their true mettle and showed real grace and real courage and real integrity--showed these admirable qualities--was when they were up against these kinds of odds. If you are [?] against a storm, it's no good thinking, 'Well, 200 years from now there will be ships that don't sink in conditions like that.' You and the people you care for are going to drown anyway. Or, there may be something you can do to stop them drowning. There may be some measure, some brave measure that you can try, some human ingenuity that you can put to work whereby you can save them. That's what matters, not how people may or may not be 200 years time when technology has produced ships that don't sink in that kind of condition. So, he's one I dwell on in the book. There are others, too: the Spanish-American philosopher George Santayana, and several others I talk about in the book who embody the types of atheism, one of the types of atheism. In Conrad's case, atheism without progress that I admire. Now, they are a sort of minority--they would be, now, but if you look at atheism, as you mentioned earlier, Russ, atheism didn't suddenly pop up in the last hundred years with science. You can find versions of atheism in--

Russ Roberts: in Lucretius--

John Gray: In Lucretius, ancient Greek, Greece and Rome. And also, as I've said, you can find it in India and Chinese philosophy as well. You can find it even in Buddhism, as an atheist religion. So, a lot of[?] these different atheisms, different types of atheism, have been around for an awful long time, almost since human beings started thinking, actually. But, in the modern period, in the modern period, Conrad is one I admire and is one, I think, even though one can't write as well as he does--I certainly can't--and hardly any of us could, certainly not in another language, we can learn from how he dealt with his life. He had a kind of combination of extreme boldness with fortitude. He lost--and--fortitude in adversity. He got ill in his later years. He found writing terribly difficult. It was an enormous struggle for him to write what he did: not only a linguistic struggle, but a kind of conceptual struggle. He had periods following his books when he struggled to recover from the exertion of writing them; and despite that, he kind of, he went on. To me, he's a kind of--I'm not saying he was perfect. There were aspects of his personality which no doubt weren't. But, it embodies a kind--what atheism might mean, or did mean in his case, in a lived life. He lived a very productive, creative, in most ways admirable life without having any big hopes of the human species, now or in the future. And I think that's admirable.

Russ Roberts: My guest today has been John Gray. His book is the Seven Types of Atheism. I also enjoyed his book The Silence of Animals, which I read in advance of this interview.

John Gray: Thank you.

Russ Roberts: And I'm about to read Straw Dogs, which is earlier still. And he's written a book on Hayek we might want to look at. John, thanks for being part of EconTalk.

John Gray: And thank you, Russ, for a very stimulating and interesting conversation, and one which shows you've read my books very carefully and imaginatively, and you've thought about them a lot. Not only is that rare, but it's also produced a very interesting and, I think at points, deep and thought-stirring conversation.

(33 COMMENTS)

The 2008 Financial Crisis

It was, according to accounts filtering out of the White House, an extraordinary scene. Hank Paulson, the U.S. treasury secretary and a man with a personal fortune estimated at 700m (380m), had got down on one knee before the most powerful woman in Congress, Nancy Pelosi, and begged her to save his plan to rescue Wall Street.

    The Guardian, September 26, 20081

The financial crisis of 2008 was a complex event that took most economists and market participants by surprise. Since then, there have been many attempts to arrive at a narrative to explain the crisis, but none has proven definitive. For example, a Congressionally-chartered ten-member Financial Crisis Inquiry Commission produced three separate narratives, one supported by the members appointed by the Democrats, one supported by four members appointed by the Republicans, and a third written by the fifth Republican member, Peter Wallison.2

It is important to appreciate that the financial system is complex, not merely complicated. A complicated system, such as a smartphone, has a fixed structure, so it behaves in ways that are predictable and controllable. A complex system has an evolving structure, so it can evolve in ways that no one anticipates. We will never have a proven understanding of what caused the financial crisis, just as we will never have a proven understanding of what caused the first World War.

There can be no single, definitive narrative of the crisis. This entry can cover only a small subset of the issues raised by the episode.

Metaphorically, we may think of the crisis as a fire. It started in the housing market, spread to the sub-prime mortgage market, then engulfed the entire mortgage securities market and, finally, swept through the inter-bank lending market and the market for asset-backed commercial paper.

Home sales began to slow in the latter part of 2006. This soon created problems for the sector of the mortgage market devoted to making risky loans, with several major lenders—including the largest, New Century Financial—declaring bankruptcy early in 2007. At the time, the problem was referred to as the “sub-prime mortgage crisis,” confined to a few marginal institutions.

But by the spring of 2008, trouble was apparent at some Wall Street investment banks that underwrote securities backed by sub-prime mortgages. On March 16, commercial bank JP Morgan Chase acquired one of these firms, Bear Stearns, with help from loan guarantees provided by the Federal Reserve, the central bank of the United States.

Trouble then began to surface at all the major institutions in the mortgage securities market. By late summer, many investors had lost confidence in Freddie Mac and Fannie Mae, and the interest rates that lenders demanded from them were higher than what they could pay and still remain afloat. On September 7, the U.S. Treasury took these two GSEs into “conservatorship.”

Finally, the crisis hit the short-term inter-bank collateralized lending markets, in which all of the world’s major financial institutions participate. This phase began after government officials’ unsuccessful attempts to arrange a merger of investment bank Lehman Brothers, which declared bankruptcy on September 15. This bankruptcy caused the Reserve Primary money market fund, which held a lot of short-term Lehman securities, to mark down the value of its shares below the standard value of one dollar each. That created jitters in all short-term lending markets, including the inter-bank lending market and the market for asset-backed commercial paper in general, and caused stress among major European banks.

The freeze-up in the interbank lending market was too much for leading public officials to bear. Under intense pressure to act, Treasury Secretary Henry Paulson proposed a 700 billion financial rescue program. Congress initially voted it down, leading to heavy losses in the stock market and causing Secretary Paulson to plead for its passage. On a second vote, the measure, known as the Troubled Assets Relief Program (TARP), was approved.

In hindsight, within each sector affected by the crisis, we can find moral hazard, cognitive failures, and policy failures. Moral hazard (in insurance company terminology) arises when individuals and firms face incentives to profit from taking risks without having to bear responsibility in the event of losses. Cognitive failures arise when individuals and firms base decisions on faulty assumptions about potential scenarios. Policy failures arise when regulators reinforce rather than counteract the moral hazard and cognitive failures of market participants.

The Housing Sector

From roughly 1990 to the middle of 2006, the housing market was characterized by the following:

• an environment of low interest rates, both in nominal and real (inflation-adjusted) terms. Low nominal rates create low monthly payments for borrowers. Low real rates raise the value of all durable assets, including housing.
• prices for houses rising as fast as or faster than the overall price level
• an increase in the share of households owning rather than renting
• loosening of mortgage underwriting standards, allowing households with weaker credit histories to qualify for mortgages.
• lower minimum requirements for down payments. A standard requirement of at least ten percent was reduced to three percent and, in some cases, zero. This resulted in a large increase in the share of home purchases made with down payments of five percent or less.
• an increase in the use of new types of mortgages with “negative amortization,” meaning that the outstanding principal balance rises over time.
• an increase in consumers’ borrowing against their houses to finance spending, using home equity loans, second mortgages, and refinancing of existing mortgages with new loans for larger amounts.
• an increase in the proportion of mortgages going to people who were not planning to live in the homes that they purchased. Instead, they were buying them to speculate. 3

These phenomena produced an increase in mortgage debt that far outpaced the rise in income over the same period. The trends accelerated in the three years just prior to the downturn in the second half of 2006.

The rise in mortgage debt relative to income was not a problem as long as home prices were rising. A borrower having difficulty finding the cash to make a mortgage payment on a house that had appreciated in value could either borrow more with the house as collateral or sell the house to pay off the debt.

But when house prices stopped rising late in 2006, households that had taken on too much debt began to default. This set in motion a reverse cycle: house foreclosures increased the supply of homes for sale; meanwhile, lenders became wary of extending credit, and this reduced demand. Prices fell further, leading to more defaults and spurring lenders to tighten credit still further.

During the boom, some people were speculating in non-owner-occupied homes, while others were buying their own homes with little or no money down. And other households were, in the vernacular of the time, “using their houses as ATMs,” taking on additional mortgage debt in order to finance consumption.

In most states in the United States, once a mortgage lender forecloses on a property, the borrower is not responsible for repayment, even if the house cannot be sold for enough to cover the loan. This creates moral hazard, particularly for property speculators, who can enjoy all of the profits if house prices rise but can stick lenders with some of the losses if prices fall.

One can see cognitive failure in the way that owners of houses expected home prices to keep rising at a ten percent rate indefinitely, even though overall inflation was less than half that amount.4Also, many house owners seemed unaware of the risks of mortgages with “negative amortization.”

Policy failure played a big role in the housing sector. All of the trends listed above were supported by public policy. Because they wanted to see increased home ownership, politicians urged lenders to loosen credit standards. With the Community Reinvestment Act for banks and Affordable Housing Goals for Freddie Mac and Fannie Mae, they spurred traditional mortgage lenders to increase their lending to minority and low-income borrowers. When the crisis hit, politicians blamed lenders for borrowers’ inability to repay, and political pressure exacerbated the credit tightening that subsequently took place

The Sub-prime Mortgage Sector

Until the late 1990s, few lenders were willing to give mortgages to borrowers with problematic credit histories. But sub-prime mortgage lenders emerged and grew rapidly in the decade leading up to the crisis. This growth was fueled by financial innovations, including the use of credit scoring to finely grade mortgage borrowers, and the use of structured mortgage securities (discussed in the next section) to make the sub-prime sector attractive to investors with a low tolerance for risk. Above all, it was fueled by rising home prices, which created a history of low default rates.

There was moral hazard in the sub-prime mortgage sector because the lenders were not holding on to the loans and, therefore, not exposing themselves to default risk. Instead, they packaged the mortgages into securities and sold them to investors, with the securities market allocating the risk.

Because they sold loans in the secondary market, profits at sub-prime lenders were driven by volume, regardless of the likelihood of default. Turning down a borrower meant getting no revenue. Approving a borrower meant earning a fee. These incentives were passed through to the staff responsible for finding potential borrowers and underwriting loans, so that personnel were compensated based on “production,” meaning the new loans they originated.

Although in theory the sub-prime lenders were passing on to others the risks that were embedded in the loans they were making, they were among the first institutions to go bankrupt during the financial crisis. This shows that there was cognitive failure in the management at these companies, as they did not foresee the house price slowdown or its impact on their firms.

Cognitive failure also played a role in the rise of mortgages that were underwritten without verification of the borrowers’ income, employment, or assets. Historical data showed that credit scores were sufficient for assessing borrower risk and that additional verification contributed little predictive value. However, it turned out that once lenders were willing to forgo these documents, they attracted a different set of borrowers, whose propensity to default was higher than their credit scores otherwise indicated.

There was policy failure in that abuses in the sub-prime mortgage sector were allowed to continue. Ironically, while the safety and soundness of Freddie Mac and Fannie Mae were regulated under the Department of Housing and Urban Development, which had an institutional mission to expand home ownership, consumer protection with regard to mortgages was regulated by the Federal Reserve Board, whose primary institutional missions were monetary policy and bank safety. Though mortgage lenders were setting up borrowers to fail, the Federal Reserve made little or no effort to intervene. Even those policy makers who were concerned about practices in the sub-prime sector believed that, on balance, sub-prime mortgage lending was helping a previously under-served set of households to attain home ownership.5

Mortagage Securities

A mortgage security consists of a pool of mortgage loans, the payments on which are passed through to pension funds, insurance companies, or other institutional investors looking for reliable returns with little risk. The market for mortgage securities was created by two government agencies, known as Ginnie Mae and Freddie Mac, established in 1968 and 1970, respectively.

Mortgage securitization expanded in the 1980s, when Fannie Mae, which previously had used debt to finance its mortgage purchases, began issuing its own mortgage-backed securities. At the same time, Freddie Mac was sold to shareholders, who encouraged Freddie to grow its market share. But even though Freddie and Fannie were shareholder-owned, investors treated their securities as if they were government-backed. This was known as an implicit government guarantee.

Attempts to create a market for private-label mortgage securities (PLMS) without any form of government guarantee were largely unsuccessful until the late 1990s. The innovations that finally got the PLMS market going were credit scoring and the collateralized debt obligation (CDO).

Before credit scoring was used in the mortgage market, there was no quantifiable difference between any two borrowers who were approved for loans. With credit scoring, the Wall Street firms assembling pools of mortgages could distinguish between a borrower with a very good score (750, as measured by the popular FICO system) and one with a more doubtful score (650).

Using CDOs, Wall Street firms were able to provide major institutional investors with insulation from default risk by concentrating that risk in other sub-securities (“tranches”) that were sold to investors who were more tolerant of risk. In fact, these basic CDOs were enhanced by other exotic mechanisms, such as credit default swaps, that reallocated mortgage default risk to institutions in which hardly any observer expected to find it, including AIG Insurance.

There was moral hazard in the mortgage securities market, as Freddie Mac and Fannie Mae sought profits and growth on behalf of shareholders, but investors in their securities expected (correctly, as it turned out) that the government would protect them against losses. Years before the crisis, critics grumbled that the mortgage giants exemplified privatized profits and socialized risks.6

There was cognitive failure in the assessment of default risk. Assembling CDOs and other exotic instruments required sophisticated statistical modeling. The most important driver of expectations for mortgage defaults is the path for house prices, and the steep, broad-based decline in home prices that took place in 2006-2009 was outside the range that some modelers allowed for.

Another source of cognitive failure is the “suits/geeks” divide. In many firms, the financial engineers (“geeks) understood the risks of mortgage-related securities fairly well, but their conclusions did not make their way to the senior management level (“suits”).

There was policy failure on the part of bank regulators. Their previous adverse experience was with the Savings and Loan Crisis, in which firms that originated and retained mortgages went bankrupt in large numbers. This caused bank regulators to believe that mortgage securitization, which took risk off the books of depository institutions, would be safer for the financial system. For the purpose of assessing capital requirements for banks, regulators assigned a weight of 100 percent to mortgages originated and held by the bank, but assigned a weight of only 20 percent to the bank’s holdings of mortgage securities issued by Freddie Mac, Fannie Mae, or Ginnie Mae. This meant that banks needed to hold much more capital to hold mortgages than to hold mortgage-related securities; that naturally steered them toward the latter.

In 2001, regulators broadened the low-risk umbrella to include AAA-rated and AA-rated tranches of private-label CDOs. This ruling helped to generate a flood of PLMS, many of them backed by sub-prime mortgage loans.7

By using bond ratings as a key determinant of capital requirements, the regulators effectively put the bond rating agencies at the center of the process of creating private-label CDOs. The rating agencies immediately became subject to both moral hazard and cognitive failure. The moral hazard came from the fact that the rating agencies were paid by the issuers of securities, who wanted the most generous ratings possible, rather than being paid by the regulators, who needed more rigorous ratings. The cognitive failure came from the fact that that models that the rating agencies used gave too little weight to potential scenarios of broad-based declines in house prices. Moreover, the banks that bought the securities were happy to see them rated AAA because the high ratings made the securities eligible for lower capital requirements on the part of the banks. Both sides, therefore, buyers and sellers, had bad incentives.

There was policy failure on the part of Congress. Officials in both the Clinton and Bush Administrations were unhappy with the risk that Freddie Mac and Fannie Mae represented to taxpayers. But Congress balked at any attempt to tighten regulation of the safety and soundness of those firms.8

The Inter-bank Lending Market

There are a number of mechanisms through which financial institutions make short-term loans to one another. In the United States, banks use the Federal Funds market to manage short-term fluctuations in reserves. Internationally, banks lend in what is known as the LIBOR market.

One of the least known and most important markets is for “repo,” which is short for “repurchase agreement.” As first developed, the repo market was used by government bond dealers to finance inventories of securities, just as an automobile dealer might finance an inventory of cars. A money-market fund might lend money for one day or one week to a bond dealer, with the loan collateralized by a low-risk long-term security.

In the years leading up to the crisis, some dealers were financing low-risk mortgage-related securities in the repo market. But when some of these securities turned out to be subject to price declines that took them out of the “low-risk” category, participants in the repo market began to worry about all repo collateral. Repo lending offers very low profit margins, and if an investor has to be very discriminating about the collateral backing a repo loan, it can seem preferable to back out of repo lending altogether. This, indeed, is what happened, in what economist Gary Gorton and others called a “run on repo.”9

Another element of institutional panic was “collateral calls” involving derivative financial instruments. Derivatives, such as credit default swaps, are like side bets. The buyer of a credit default swap is betting that a particular debt instrument will default. The seller of a credit default swap is betting the opposite.

In the case of mortgage-related securities, the probability of default seemed low prior to the crisis. Sometimes, buyers of credit default swaps were merely satisfying the technical requirements to record the underlying securities as AAA-rated. They could do this if they obtained a credit default swap from an institution that was itself AAA-rated. AIG was an insurance company that saw an opportunity to take advantage of its AAA rating to sell credit default swaps on mortgage-related securities. AIG collected fees, and its Financial Products division calculated that the probability of default was essentially zero. The fees earned on each transaction were low, but the overall profit was high because of the enormous volume. AIG’s credit default swaps were a major element in the expansion of shadow banking by non-bank financial institutions during the run-up to the crisis.

Late in 2005, AIG abruptly stopped writing credit default swaps, in part because its own rating had been downgraded below AAA earlier in the year for unrelated reasons. By the time AIG stopped selling credit default swaps on mortgage-related securities, it had outstanding obligations on 80 billion of underlying securities and was earning 1 billion a year in fees.10

Because AIG no longer had its AAA rating and because the underlying mortgage securities, while not in default, were increasingly shaky, provisions in the contracts that AIG had written allowed the buyers of credit default swaps to require AIG to provide protection in the form of low-risk securities posted as collateral. These “collateral calls” were like a margin call that a stock broker will make on an investor who has borrowed money to buy stock that subsequently declines in value. In effect, collateral calls were a run on AIG’s shadow bank.

These collateral calls were made when the crisis in the inter-bank lending market was near its height in the summer of 2008 and banks were hoarding low-risk securities. In fact, the shortage of low-risk securities may have motivated some of the collateral calls, as institutions like Deutsche Bank and Goldman Sachs sought ways to ease their own liquidity problems. In any event, AIG could not raise enough short-term funds to meet its collateral calls without trying to dump long-term securities into a market that had little depth to absorb them. It turned to Federal authorities for a bailout, which was arranged and creatively backed by the Federal Reserve, but at the cost of reducing the value of shares in AIG.

With repos and derivatives, there was moral hazard in that the traders and executives of the narrow units that engaged in exotic transactions were able to claim large bonuses on the basis of short-term profits. But the adverse long-term consequences were spread to the rest of the firm and, ultimately, to taxpayers.

There was cognitive failure in that the collateral calls were an unanticipated risk of the derivatives business. The financial engineers focused on the (remote) chances of default on the underlying securities, not on the intermediate stress that might emerge from collateral calls.

There was policy failure when Congress passed the Commodity Futures Modernization Act. This legislation specified that derivatives would not be regulated by either of the agencies with the staff most qualified to understand them. Rather than require oversight by the Securities and Exchange Commission or the Commodity Futures Trading Commission (which regulated market-traded derivatives), Congress decreed that the regulator responsible for overseeing each firm would evaluate its derivative position. The logic was that a bank that was using derivatives to hedge other transactions should have its derivative position evaluated in a larger context. But, as it happened, the insurance and bank regulators who ended up with this responsibility were not equipped to see the dangers at firms such as AIG.

There was also policy failure in that officials approved of securitization that transferred risk out of the regulated banking sector. While Federal Reserve Officials were praising the risk management of commercial banks,11risk was accumulating in the shadow banking sector (non-bank institutions in the financial system), including AIG insurance, money market funds, Wall Street firms such as Bear Stearns and Lehman Brothers, and major foreign banks. When problems in the shadow banking sector contributed to the freeze in inter-bank lending and in the market for asset-backed commercial paper, policy makers felt compelled to extend bailouts to satisfy the needs of these non-bank institutions for liquid assets.

Conclusion

In terms of the fire metaphor suggested earlier, in hindsight, we can see that the markets for housing, sub-prime mortgages, mortgage-related securities, and inter-bank lending were all highly flammable just prior to the crisis. Moral hazard, cognitive failures, and policy failures all contributed the combustible mix.

The crisis also reflects a failure of the economics profession. A few economists, most notably Robert Shiller,12warned that the housing market was inflated, as indicated by ratios of prices to rents that were high by historical standards. Also, when risk-based capital regulation was proposed in the wake of the Savings and Loan Crisis and the Latin American debt crisis, a group of economists known as the Shadow Regulatory Committee warned that these regulations could be manipulated. They recommended, instead, greater use of senior subordinated debt at regulated financial institutions.13Many economists warned about the incentives for risk-taking at Freddie Mac and Fannie Mae.14

But even these economists failed to anticipate the 2008 crisis, in large part because economists did not take note of the complex mortgage-related securities and derivative instruments that had been developed. Economists have a strong preference for parsimonious models, and they look at financial markets through a lens that includes only a few types of simple assets, such as government bonds and corporate stock. This approach ignores even the repo market, which has been important in the financial system for over 40 years, and, of course, it omits CDOs, credit default swaps and other, more recent innovations.

Financial intermediaries do not produce tangible output that can be measured and counted. Instead, they provide intangible benefits that economists have never clearly articulated. The economics profession has a long way to go to catch up with modern finance.

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About the Author

Arnold Kling was an economist with the Federal Reserve Board and with the Federal Home Loan Mortgage Corporation before launching one of the first Web-based businesses in 1994.  His most recent books areSpecialization and Trade and The Three Languages of Politics. He earned his Ph.D. in economics from the Massachusetts Institute of Technology.

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Footnotes

1

“A desperate plea – then race for a deal before ‘sucker goes down’” The Guardian, September 26, 2008. https://www.theguardian.com/business/2008/sep/27/wallstreet.useconomy1

 

2

The report and dissents of the Financial Crisis Inquiry Commission can be found at https://fcic.law.stanford.edu/

3

See Stefania Albanesi, Giacomo De Giorgi, and Jaromir Nosal 2017, “Credit Growth and the Financial Crisis: A New Narrative” NBER working paper no. 23740. http://www.nber.org/papers/w23740

 

4

Karl E. Case and Robert J. Shiller 2003, “Is there a Bubble in the Housing Market?” Cowles Foundation Paper 1089 http://www.econ.yale.edu/shiller/pubs/p1089.pdf

 

5

Edward M. Gramlich 2004, “Subprime Mortgage Lending: Benefits, Costs, and Challenges,” Federal Reserve Board speeches. https://www.federalreserve.gov/boarddocs/speeches/2004/20040521/

 

6

For example, in 1999, Treasury Secretary Lawrence Summers said in a speech, “Debates about systemic risk should also now include government-sponsored enterprises.” See Bethany McLean and Joe Nocera 2010, All the Devils are Here: The Hidden History of the Financial Crisis Portfolio/Penguin Press. The authors write that Federal Reserve Chairman Alan Greenspan was also, like Summers, disturbed by the moral hazard inherent in the GSEs.

 

7

Jeffrey Friedman and Wladimir Kraus 2013, Engineering the Financial Crisis: Systemic Risk and the Failure of Regulation, University of Pennsylvania Press.

 

8

See McLean and Nocera, All the Devils are Here

 

9

Gary Gorton, Toomas Laarits, and Andrew Metrick 2017, “The Run on Repo and the Fed’s Response,” Stanford working paper. https://www.gsb.stanford.edu/sites/gsb/files/fin_11_17_gorton.pdf

 

10

Talking Points Memo 2009, “The Rise and Fall of AIG’s Financial Products Unit” https://talkingpointsmemo.com/muckraker/the-rise-and-fall-of-aig-s-financial-products-unit

 

11

Chairman Ben S. Bernanke 2006, “Modern Risk Management and Banking Supervision,” Federal Reserve Board speeches. https://www.federalreserve.gov/newsevents/speech/bernanke20060612a.htm

 

12

National Public Radio 2005, “Yale Professor Predicts Housing ’Bubble’ Will Burst” https://www.npr.org/templates/story/story.php?storyId4679264

 

13

Shadow Financial Regulatory Committee 2001, “The Basel Committee’s Revised Capital Accord Proposal” https://www.bis.org/bcbs/ca/shfirect.pdf

14

See the discussion in Viral V. Acharya, Matthew Richardson, Stijn Van Nieuwerburgh and Lawrence J. White 2011, Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance, Princeton University Press.

 

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Christopher Sims

Christopher Sims was awarded, along with Thomas Sargent, the 2011 Nobel Prize in Economic Sciences. The Nobel committee cited their “empirical research on cause and effect in the macroeconomy.” The economists who spoke at the press conference announcing the award emphasized Sargent’s and Sims’ analysis of role of people’s expectations.

One of Sims’s earliest famous contributions was his work on money-income causality, which was cited by the Nobel committee. Money and income move together, but which causes which? Milton Friedman argued that changes in the money supply caused changes in income, noting that the supply of money often rises before income rises. Keynesians such as James Tobin argued that changes in income caused changes in the amount of money. Money seems to move first, but causality, said Tobin and others, still goes the other way: people hold more money when they expect income to rise in the future.

Which view is true? In 1972 Sims applied Clive Granger’s econometric test of causality. On Granger’s definition one variable is said to cause another variable if knowledge of the past values of the possibly causal variable helps to forecast the effect variable over and above the knowledge of the history of the effect variable itself. Implementing a test of this incremental predictability, Sims concluded “[T]he hypothesis that causality is unidirectional from money to income [Friedman’s view] agrees with the postwar U.S. data, whereas the hypothesis that causality is unidirectional from income to money [Tobin’s view] is rejected.”

Sims’s influential article “Macroeconomics and Reality” was a criticism of both the usual econometric interpretation of large-scale Keynesian econometric models and ofRobert Lucas’s influential earlier criticism of these Keynesian models (the so-called Lucas critique). Keynesian econometricians had claimed that with sufficiently accurate theoretical assumptions about the structure of the economy, correlations among the macroeconomic variables could be used to measure the strengths of various structural connections in the economy. Sims argued that there was no basis for thinking that these theoretical assumptions were sufficiently accurate. Such so-called “identifying assumptions” were, Sims said, literally “incredible.” Lucas, on the other hand, had not rejected the idea of such identification. Rather he had pointed out that, if people held “rational expectations” – that is, expectations that, though possibly incorrect, did not deviate on average from what actually occurs in a correctable, systematic manner – then failing to account for them would undermine the stability of the econometric estimates and render the macromodels useless for policy analysis. Lucas and his New Classical followers argued that in forming their expectations people take account of the rules implicitly followed by monetary and fiscal policymakers; and, unless those rules were integrated into the econometric model, every time the policymakers adopted a new policy (i.e., new rules), the estimates would shift in unpredictable ways.

While rejecting the structural interpretation of large-scale macromodels, Sims did not reject the models themselves, writing: “[T]here is no immediate prospect that large-scale macromodels will disappear from the scene, and for good reason: they are useful tools in forecasting and policy analysis.” Sims conceded that the Lucas critique was correct in those cases in which policy regimes truly changed. But he argued that such regime changes were rare and that most economic policy was concerned with the implementation of a particular policy regime. For that purpose, the large-scale macromodels could be helpful, since what was needed for forecasting was a model that captured the complex interrelationships among variables and not one that revealed the deeper structural connections.

In the same article, Sims proposed an alternative to large-scale macroeconomic models, the vector autoregression (or VAR). In Sims’s view, the VAR had the advantages of the earlier macromodels, in that it could capture the complex interactions among a relatively large number of variables needed for policy analysis and yet did not rely on as many questionable theoretical assumptions. With subsequent developments by Sims and others, the VAR became a major tool of empirical macroeconomic analysis.

Sims has also suggested that sticky prices are caused by “rational inattention,” an idea imported from electronic communications. Just as computers do not access information on the Internet infinitely fast (but rather, in bits per second), individual actors in an economy have only a finite ability to process information. This delay produces some sluggishness and randomness, and allows for more accurate forecasts than conventional models, in which people are assumed to be highly averse to change.

Sims’s recent work has focused on the fiscal theory of the price level, the view that inflation in the end is determined by fiscal problems—the overall amount of debt relative to the government’s ability to repay it—rather than by the split in government debt between base money and bonds. In 1999, Sims suggested that the fiscal foundations of the European Monetary Union were “precarious” and that a fiscal crisis in one country “would likely breed contagion effects in other countries.” The Greek financial crisis about a decade later seemed to confirm his prediction.

Christopher Sims earned his B.A. in mathematics in 1963 and his Ph.D. in economics in 1968, both from Harvard University. He taught at Harvard from 1968 to 1970, at the University of Minnesota from 1970 to 1990, at Yale University from 1990 to 1999, and at Princeton University from 1999 to the present. He has been a Fellow of the Econometric Society since 1974, a member of the American Academy of Arts and Sciences since 1988, a member of the National Academy of Sciences since 1989, President of the Econometric Society (1995), and President of the American Economic Association (2012). He has been a Visiting Scholar for the Federal Reserve Banks of Atlanta, New York, and Philadelphia off and on since 1994.

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Selected Works

1. . “Money, Income, and Causality.” American Economic Review 62: 4 (September): 540-552.

2. . “Macroeconomics and Reality.” Econometrica 48: 1 (January): 1-48.

1990 (with James H. Stock and Mark W. Watson). “Inference in Linear Time Series Models with some Unit Roots.” Econometrica 58: 1 (January): 113-144.

1. . “The Precarious Fiscal Foundations of EMU.” De Economist 147:4 (December): 415-436.

2. . “Implications of Rational Inattention.” Journal of Monetary Economics 50: 3 (April): 665–690.

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Gordon Tullock

Gordon Tullock, along with his colleague James M. Buchanan, was a founder of the School of Public Choice. Among his contributions to public choice were his study of bureaucracy, his early insights on rent seeking, his study of political revolutions, his analysis of dictatorships, and his analysis of incentives and outcomes in foreign policy. Tullock also contributed to the study of optimal organization of research, was a strong critic of common law, and did work on evolutionary biology. He was arguably one of the ten or so most influential economists of the last half of the twentieth century. Many economists believe that Tullock deserved to share Buchanan’s 1986 Nobel Prize or even deserved a Nobel Prize on his own.

One of Tullock’s early contributions to public choice was The Calculus of Consent: Logical Foundations of Constitutional Democracy, co-authored with Buchanan in 1962. In that path-breaking book, the authors assume that people seek their own interests in the political system and then consider the results of various rules and political structures. One can think of their book as a political economist’s version of Montesquieu.

One of the most masterful sections of The Calculus of Consent is the chapter in which the authors, using a model formulated by Tullock, consider what good decision rules would be for agreeing to have someone in government make a decision for the collective. An individual realizes that if only one person’s consent is required, and he is not that person, he could have huge costs imposed on him. Requiring more people’s consent in order for government to take action reduces the probability that that individual will be hurt. But as the number of people required to agree rises, the decision costs rise. In the extreme, if unanimity is required, people can game the system and hold out for a disproportionate share of benefits before they give their consent. The authors show that the individual’s preferred rule would be one by which the costs imposed on him plus the decision costs are at a minimum. That preferred rule would vary from person to person. But, they note, it would be highly improbable that the optimal decision rule would be one that requires a simple majority. They write, “On balance, 51 percent of the voting population would not seem to be much preferable to 49 percent.” They suggest further that the optimal rule would depend on the issues at stake. Because, they note, legislative action may “produce severe capital losses or lucrative capital gains” for various groups, the rational person, not knowing his own future position, might well want strong restraints on the exercise of legislative power.

Tullock’s part of The Calculus of Consent was a natural outgrowth of an unpublished manuscript written in the 1950s that later became his 1965 book, The Politics of Bureaucracy. Buchanan, reminiscing about that book, summed up Tullock’s approach and the book’s significance:

The substantive contribution in the manuscript was centered on the hypothesis that, regardless of role, the individual bureaucrat responds to the rewards and punishments that he confronts. This straightforward, and now so simple, hypothesis turned the whole post-Weberian quasi-normative approach to bureaucracy on its head. . . . The economic theory of bureaucracy was born.1

Buchanan noted in his reminiscence that Tullock’s “fascinating analysis” was “almost totally buried in an irritating personal narrative account of Tullock’s nine-year experience in the foreign service hierarchy.” Buchanan continued: “Then, as now, Tullock’s work was marked by his apparent inability to separate analytical exposition from personal anecdote.” Translation: Tullock learned from his experiences. As a Foreign Service officer with the U.S. State Department for nine years Tullock learned, up close and “personal,” how dysfunctional bureaucracy can be. In a later reminiscence, Tullock concluded:

A 90 per cent cut-back on our Foreign Service would save money without really damaging our international relations or stature.2

Tullock made many other contributions in considering incentives within the political system. Particularly noteworthy was his work on political revolutions and on dictatorships.

Consider, first, political revolutions. Any one person’s decision to participate in a revolution, Tullock noted, does not much affect the probability that the revolution will succeed. Therefore, each person’s actions do not much affect his expected benefits from revolution. On the other hand, a ruthless head of government can individualize the costs by heavily punishing those who participate in a revolution. So anyone contemplating participating in a revolution will be comparing heavy individual costs with small benefits that are simply his pro rata share of the overall benefits. Therefore, argued Tullock, for people to participate, they must expect some large benefits that are tied to their own participation, such as a job in the new government. That would explain an empirical regularity that Tullock noted—namely that “in most revolutions, the people who overthrow the existing government were high officials in that government before the revolution.”

This thinking carried over to his work on autocracy. In Autocracy, Tullock pointed out that in most societies at most times, governments were not democratically elected but were autocracies: they were dictatorships or kingdoms. For that reason, he argued, analysts should do more to understand them. Tullock’s book was his attempt to get the discussion started. In a chapter titled “Coups and Their Prevention,” Tullock argued that one of the autocrat’s main challenges is to survive in office. He wrote: “The dictator lives continuously under the Sword of Damocles and equally continuously worries about the thickness of the thread.” Tullock pointed out that a dictator needs his countrymen to believe not that he is good, just, or ordained by God, but that those who try to overthrow him will fail.”

Among modern economists, Tullock was the earliest discoverer of the concept of “rent seeking,” although he did not call it that. Before his work, the usual measure of the deadweight loss from monopoly was the part of the loss in consumer surplus that did not increase producer surplus for the monopolist. Consumer surplus is the maximum amount that consumers are willing to pay minus the amount they actually pay; producer surplus, also called “economic rent,” is the amount that producers get minus the minimum amount for which they would be willing to produce. Harberger3 had estimated that for the U.S. economy in the 1950s, that loss was very low, on the order of 0.1 percent of Gross National Product. In “The Welfare Cost of Tariffs, Monopolies, and Theft,” Tullock argued that this method understated the loss from monopoly because it did not take account of the investment of the monopolist—and of others trying to be monopolists—in becoming monopolists. These investments in monopoly are a loss to the economy. Tullock also pointed out that those who seek tariffs invest in getting those tariffs, and so the standard measure of the loss from tariffs understated the loss. His analysis, as the tariff example illustrates, applies more to firms seeking special privileges from government than to private attempts to monopolize via the free market because private attempts often lead, as if by an invisible hand, to increased competition.”

One of Tullock’s most important insights in public choice was in a short article in 1975 titled “The Transitional Gains Trap.” He noted that even though rent seeking often leads to big gains for the rent seekers, those gains are capitalized in asset prices, which means that buyers of the assets make a normal return on the asset. So, for example, if the government requires the use of ethanol in gasoline, owners of land on which corn is grown will find that their land is worth more because of the regulatory requirement. (Ethanol in the United States is produced from corn.) They gain when the regulation is first imposed. But when they sell the land, the new owner pays a price equal to the present value of the stream of the net profits from the land. So the new owner doesn’t get a supra-normal rate of return from the land. In other words, the owner at the time that the regulation was imposed got “transitional gains,” but the new owner does not. This means that the new owner will suffer a capital loss if the regulation is removed and will fight hard to keep the regulation in place, arguing, correctly, that he paid for those gains. That makes repealing the regulation more difficult than otherwise. Tullock notes that, therefore, we should try hard to avoid getting into these traps because they are hard to get out of.

Tullock was one of the few public choice economists to apply his tools to foreign policy. In Open Secrets of American Foreign Policy, he takes a hard-headed look at U.S. foreign policy rather than the romantic “the United States is the good guys” view that so many Americans take. For example, he wrote of the U.S. government’s bombing of Serbia under President Bill Clinton:

[T]he bombing campaign was a clear-cut violation of the United Nations Charter and hence, should be regarded as a war crime. It involved the use of military forces without the sanction of the Security Council and without any colorable claim of self-defense. Of course, it was not a first—we [the U.S. government] had done the same thing in Vietnam, Grenada and Panama.

Possibly Tullock’s most underappreciated contributions were in the area of methodology and the economics of research. About a decade after spending six months with philosopher Karl Popper at the Center for Advanced Studies in Palo Alto, Tullock published The Organization of Inquiry. In it, he considered why scientific discovery in both the hard sciences and economics works so well without any central planner, and he argued that centralized funding by government would slow progress. After arguing that applied science is generally more valuable than pure science, Tullock wrote:

Nor is there any real justification for the general tendency to consider pure research as somehow higher and better than applied research. It is certainly more pleasant to engage in research in fields that strike you as interesting than to confine yourself to fields which are likely to be profitable, but there is no reason why the person choosing the more pleasant type of research should be considered more noble.4

In Tullock’s view, a system of prizes for important discoveries would be an efficient way of achieving important breakthroughs. He wrote:

As an extreme example, surely offering a reward of 1 billion for the first successful ICBM would have resulted in both a large saving of money for the government and much faster production of this weapon.5

Tullock was born in Rockford, Illinois and was an undergrad at the University of Chicago from 1940 to 1943. His time there was interrupted when he was drafted into the U.S. Army. During his time at Chicago, though, he completed a one-semester course in economics taught by Henry Simons. After the war, he returned to the University of Chicago Law School, where he completed the J.D. degree in 1947. He was briefly with a law firm in 1947 before going into the Foreign Service, where he worked for nine years. He was an economics professor at the University of South Carolina (1959-1962), the University of Virginia (1962-1967), Rice University (1968-1969), the Virginia Polytechnic Institute and State University (1968-1983), George Mason University (1983-1987), the University of Arizona (1987-1999), and again at George Mason University (1999-2008). In 1966, he started the journal Papers in Non-Market Decision Making, which, in 1969, was renamed Public Choice.

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Selected Works

 

1. . The Calculus of Consent. (Co-authored with James M. Buchanan.) Ann Arbor, Michigan: University of Michigan Press.

2. . The Politics of Bureaucracy. Public Affairs Press. Washington, D.C.: Public Affairs Press.

3. . The Organization of Inquiry. Durham, North Carolina: Duke University Press.

4. . “The Welfare Costs of Tariffs, Monopolies, and Theft,” Western Economic Journal, 5:3 (June): 224-232.

5. . Toward a Mathematics of Politics. Ann Arbor, Michigan: University of Michigan Press.

6. . “The Paradox of Revolution.” Public Choice. Vol. 11. Fall: 89-99.

1975: “The Transitional Gains Trap.” Bell Journal of Economics, 6:2 (Autumn): 671-678.

1987: Autocracy. Hingham, Massachusetts: Kluwer Academic Publishers.

1. . Open Secrets of American Foreign Policy. New Jersey: World Scientific Publishing Co.

 

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Footnotes

James M. Buchanan. 1987. The qualities of a natural economist. In Charles K. Rowley, (Ed.) (1987). Democracy and public choice. Oxford and New York: Basil Blackwell, 9-19.

 

Gordon Tullock. 2009. Memories of an unexciting life. Unfinished and unpublished manuscript. Tucson, 2009. Quoted in Charles K. Rowley and Daniel Houser. “The Life and Times of Gordon Tullock.” 2011. George Mason University. Department of Economics. Paper No. 11-56. December 20.

 

Arnold C. Harberger. 1954 “Monopoly and Resource Allocation.” American Economic Review. 44(2): 77-87.

 

Tullock. 1966. P. 14.

 

Tullock. 1966. P. 168.

 

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Division of Labor

Division of labor combines specialization and the partition of a complex production task into several, or many, sub-tasks. Its importance in economics lies in the fact that a given number of workers can produce far more output using division of labor compared to the same number of workers each working alone. Interestingly, this is true even if those working alone are expert artisans. The production increase has several causes. According to Adam Smith, these include increased dexterity from learning, innovations in tool design and use as the steps are defined more clearly, and savings in wasted motion changing from one task to another.

Though the scientific understanding of the importance of division of labor is comparatively recent, the effects can be seen in most of human history. It would seem that exchange can arise only from differences in taste or circumstance. But division of labor implies that this is not true. In fact, even a society of perfect clones would develop exchange, because specialization alone is enough to reward advances such as currency, accounting, and other features of market economies.

In the early 1800s, David Ricardo developed a theory of comparative advantage as an explanation for the origins of trade. And this explanation has substantial power, particularly in a pre-industrial world. Assume, for example, that England is suited to produce wool, while Portugal is suited to produce wine. If each nation specializes, then total consumption in the world, and in each nation, is expanded. Interestingly, this is still true if one nation is better at producing both commodities: even the less productive nation benefits from specialization and trade.

In a world with industrial production based on division of labor, however, comparative advantage based on weather and soil conditions becomes secondary. Ricardo himself recognized this in his broader discussion of trade, as Meoqui points out. The reason is that division of labor produces a cost advantage where none existed before—an advantage based simply on specialization. Consequently, even in a world without comparative advantage, division of labor would create incentives for specialization and exchange.

Origins

The Neolithic Revolution, with its move to fixed agriculture and greater population densities, fostered specialization in both production of consumer goods and military protection. As Plato put it:

A State [arises] out of the needs of mankind; no one is self-sufficing, but all of us have many wants… Then, as we have many wants, and many persons are needed to supply them, one takes a helper… and another… [W]hen these partners and helpers are gathered together in one habitation the body of inhabitants is termed a State… And they exchange with one another, and one gives, and another receives, under the idea that the exchange will be for their good. (The Republic, Book II)

This idea of the city-state, or polis, as a nexus of cooperation directed by the leaders of the city is a potent tool for the social theorist. It is easy to see that the extent of specialization was limited by the size of the city: a clan has one person who plays on a hollow log with sticks; a moderately sized city might have a string quartet; and a large city could support a symphony.

One of the earliest sociologists, Muslim scholar Ibn Khaldun (1332-1406), also emphasized what he called “cooperation” as a means of achieving the benefits of specialization:

The power of the individual human being is not sufficient for him to obtain (the food) he needs, and does not provide him with as much food as he requires to live. Even if we assume an absolute minimum of food –that is, food enough for one day, (a little) wheat, for instance – that amount of food could be obtained only after much preparation such as grinding, kneading, and baking. Each of these three operations requires utensils and tools that can be provided only with the help of several crafts, such as the crafts of the blacksmith, the carpenter, and the potter. Assuming that a man could eat unprepared grain, an even greater number of operations would be necessary in order to obtain the grain: sowing and reaping, and threshing to separate it from the husks of the ear. Each of these operations requires a number of tools and many more crafts than those just mentioned. It is beyond the power of one man alone to do all that, or (even) part of it, by himself. Thus, he cannot do without a combination of many powers from among his fellow beings, if he is to obtain food for himself and for them. Through cooperation, the needs of a number of persons, many times greater than their own (number), can be satisfied. [From Muqaddimah (Introduction), First Prefatory Discussion in chapter 1; parenthetical expression in original in Rosenthal translation]

This sociological interpretation of specialization as a consequence of direction, limited by the size of the city, later motivated scholars such as Emile Durkheim (1858-1917) to recognize the central importance of division of labor for human flourishing.

Smith’s Insight

It is common to say that Adam Smith “invented” or “advocated” division of labor. Such claims are simply mistaken, on several grounds (see, for a discussion, Kennedy 2008). Smith described how decentralized market exchange fosters division of labor among cities or across political units, rather than just within them as previous thinkers had done. Smith had two key insights: First, division of labor would be powerful even if all human beings were identical, because differences in productive capacity are learned. Smith’s parable of the “street porter and the philosopher” illustrates the depth of this insight. As Smith put it:

[T]he very different genius which appears to distinguish men of different professions, when grown up to maturity, is not upon many occasions so much the cause, as the effect of the division of labour. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature, as from habit, custom, and education. (WoN, V. 1, Ch 2; emphasis in original.)

Second, the division of labor gives rise to market institutions and expands the extent of the market. Exchange relations relentlessly push against borders and expand the effective locus of cooperation. The benefit to the individual is that first dozens, then hundreds, and ultimately millions, of other people stand ready to work for each of us, in ways that are constantly being expanded into new activities and new products.

Smith gives an example—the pin factory—that has become one of the central archetypes of economic theory. As Munger (2007) notes, Smith divides pin-making into 18 operations. But that number is arbitrary: labor is divided into the number of operations that fit the extent of the market. In a small market, perhaps three workers, each performing several different operations, could be employed. In a city or small country, as Smith saw, 18 different workers might be employed. In an international market, the optimal number of workers (or their equivalent in automated steps) would be even larger.

The interesting point is that there would be constant pressure on the factory to (a) expand the number of operations even more, and to automate them through the use of tools and other capital; and to (b) expand the size of the market served with consequently lower-cost pins so that the expanded output could be sold. Smith recognized this dynamic pressure in the form of what can only be regarded today as a theorem, the title of Chapter 3 in Book I of the Wealth of Nations: “That the Division of Labor is Limited by the Extent of the Market.” George Stigler treated this claim as a testable theorem in his 1951 article, and developed its insights in the context of modern economics.

Still, the full importance of Smith’s insight was not recognized and developed until quite recently. James Buchanan presented the starkest description of the implications of Smith’s theory (James Buchanan and Yong Yoon, 2002). While the bases of trade and exchange can be differences in tastes or capacities, market institutions would develop even if such differences were negligible. The Smithian conception of the basis for trade and the rewards from developing market institutions is more general and more fundamental than the simple version implied by deterministic comparative advantage.

Division of labor is a hopeful doctrine. Nearly any nation, regardless of its endowment of natural resources, can prosper simply by developing a specialization. That specialization might be determined by comparative advantage, lying in climate or other factors, of course. But division of labor alone is sufficient to create trading opportunities and the beginnings of prosperity. By contrast, nations that refuse the opportunity to specialize, clinging to mercantilist notions of independence and economic self-sufficiency, doom themselves and their populations to needless poverty.

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About the Author

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

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Further Reading

Buchanan, James, and Yong Yoon. 2002. “Globalization as Framed by the Two Logics of Trade,” The Independent Review, 6(3): 399-405.

Durkheim, Emile, 1984. Division of Labor in Society. New York: MacMillan.

Kennedy, Gavin. 2008. “Basic Errors About the Role of Adam Smith.” April 2: http://adamsmithslostlegacy.blogspot.com/2008/04/basic-errors-about-role-of-adam-smith.html

Khaldun, Ibn. 1377. Muqaddimah (Introductory) http://www.muslimphilosophy.com/ik/Muqaddimah/

Morales Meoqui, Jorge , 2015. Ricardo’s numerical example versus Ricardian trade model: A comparison of two distinct notions of comparative advantage DOI: 10.13140/RG.2.1.2484.5527/1 Link: https://www.researchgate.net/publication/283206070_Ricardos_numerical_example_versus_Ricardian_trade_model_A_comparison_of_two_distinct_notions_of_comparative_advantage

Munger, Michael. 2007. “I’ll Stick With These: Some Sharp Observations on the Division of Labor.” Indianapolis, Liberty Fund. http://www.econlib.org/library/Columns/y2007/Mungerpins.html

Plato, n.d. The Republic. Translated by Benjamin Jowett. http://classics.mit.edu/Plato/republic.html

Roberts, Russell. 2006. “Treasure Island: The Power of Trade. Part II. How Trade Transforms Our Standard of Living.” Indianapolis, Liberty Fund. http://www.econlib.org/library/Columns/y2006/Robertsstandardofliving.html

Smith, Adam. 1759/1853. (Revised Edition). The Theory of Moral Sentiments, New Edition. With a biographical and critical Memoir of the Author, by Dugald Stewart (London: Henry G. Bohn, 1853). 7/27/2015. http://oll.libertyfund.org/titles/2620

Smith, Adam. 1776/1904. An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith, edited with an Introduction, Notes, Marginal Summary and an Enlarged Index by Edwin Cannan (London: Methuen, 1904). Vol. 1. 7/27/2015. http://oll.libertyfund.org/titles/237

Stigler, George. 1951. “The Division of Labor is Limited by the Extent of the Market.” Journal of Political Economy. 59(3): 185-193

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Hoover’s Economic Policies

When it was all over, I once made a list of New Deal ventures begun during Hoover’s years as Secretary of Commerce and then as president. . . . The New Deal owed much to what he had begun.1 —FDR advisor Rexford G. Tugwell

Many historians, most of the general public, and even many economists think of Herbert Hoover, the president who preceded Franklin D. Roosevelt, as a defender of laissez-faire economic policy. According to this view, Hoover’s dogmatic commitment to small government led him to stand by and do nothing while the economy collapsed in the wake of the 1929 stock market crash. The reality is quite different. Far from being a bystander, Hoover actively intervened in the economy, advocating and implementing polices that were quite similar to those that Franklin Roosevelt later implemented. Moreover, many of Hoover’s interventions, like those of his successor, caused the great depression to be “great”—that is, to last a long time.

Hoover’s early career

Hoover, a very successful mining engineer, thought that the engineer’s focus on efficiency could enable government to play a larger and more constructive role in the economy. In 1917, he became head of the wartime Food Administration, working to reduce American food consumption. Many Democrats, including FDR, saw him as a potential presidential candidate for their party in the 1920s. For most of the 1920s, Hoover was Secretary of Commerce under Republican Presidents Harding and Coolidge. As Commerce Secretary during the 1920-21 recession, Hoover convened conferences between government officials and business leaders as a way to use government to generate “cooperation” rather than individualistic competition. He particularly liked using the “cooperation” that was seen during wartime as an example to follow during economic crises. In contrast to Harding’s more genuine commitment to laissez-faire, Hoover began one 1921 conference with a call to “do something” rather than nothing. That conference ended with a call for more government planning to avoid future depressions, as well as using public works as a solution once they started.2 Pulitzer-Prize winning historian David Kennedy summarized Hoover’s work in the 1920-21 recession this way: “No previous administration had moved so purposefully and so creatively in the face of an economic downturn. Hoover had definitively made the point that government should not stand by idly when confronted with economic difficulty.”3 Harding, and later Coolidge, rejected most of Hoover’s ideas. This may well explain why the 1920-21 recession, as steep as it was, was fairly short, lasting 18 months.

Interestingly, though, in his role as Commerce Secretary, Hoover created a new government program called “Own Your Own Home,” which was designed to increase the level of homeownership. Hoover jawboned lenders and the construction industry to devote more resources to homeownership, and he argued for new rules that would allow federally chartered banks to do more residential lending. In 1927, Congress complied, and with this government stamp of approval and the resources made available by Federal Reserve expansionary policies through the decade, mortgage lending boomed. Not surprisingly, this program became part of the disaster of the depression, as bank failures dried up sources of funds, preventing the frequent refinancing that was common at the time, and high unemployment rates made the government-encouraged mortgages unaffordable. The result was a large increase in foreclosures.4

The Hoover presidency

Hoover did not stand idly by after the depression began. To fight the rapidly worsening depression, Hoover extended the size and scope of the federal government in six major areas: (1) federal spending, (2) agriculture, (3) wage policy, (4) immigration, (5) international trade, and (6) tax policy.

Consider federal government spending. (See Fiscal Policy.) Federal spending in the 1929 budget that Hoover inherited was 3.1 billion. He increased spending to 3.3 billion in 1930, 3.6 billion in 1931, and 4.7 billion and 4.6 billion in 1932 and 1933, respectively, a 48% increase over his four years. Because this was a period of deflation, the real increase in government spending was even larger: The real size of government spending in 1933 was almost double that of 1929.5 The budget deficits of 1931 and 1932 were 52.5% and 43.3% of total federal expenditures. No year between 1933 and 1941 under Roosevelt had a deficit that large.6 In short, Hoover was no defender of “austerity” and “budget cutting.”

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Figure 1 

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Shortly after the stock market crash in October 1929, Hoover extended federal control over agriculture by expanding the reach of the Federal Farm Board (FFB), which had been created a few months earlier.7 The idea behind the FFB was to make government-funded loans to farm cooperatives and create “stabilization corporations” to keep farm prices up and deal with surpluses. In other words, it was a cartel plan. That fall, Hoover pushed the FFB into full action, lending to farmers all over the country and otherwise subsidizing farming in an attempt to keep prices up. The plan failed miserably, as subsidies encouraged farmers to grow more, exacerbating surpluses and eventually driving prices way down. As more farms faced dire circumstances, Hoover proposed the further anti-market step of paying farmers not to grow.

On wages, Hoover revived the business-government conferences of his time at the Department of Commerce by summoning major business leaders to the White House several times that fall. He asked them to pledge not to reduce wages in the face of rising unemployment. Hoover believed, as did a number of intellectuals at the time, that high wages caused prosperity, even though the true causation is from capital accumulation to increased labor productivity to higher wages. He argued that if major firms cut wages, workers would not have the purchasing power they needed to buy the goods being produced. As most depressions involve falling prices, cutting wages to match falling prices would have kept purchasing power constant. What Hoover wanted amounted to an increase in real wages, as constant nominal wages would be able to purchase more goods at falling prices. Presumably out of fear of the White House or, perhaps, because it would keep the unions quiet, industrial leaders agreed to this proposal. The result was rapidly escalating unemployment, as firms quickly realized that they could not continue to employ as many workers when their output prices were falling and labor costs were constant.8

Of all of the government failures of the Hoover presidency—excluding the actions of the Federal Reserve between 1929 and 1932, over which he had little to no influence—his attempt to maintain wages was the most damaging. Had he truly believed in laissez-faire, Hoover would not have intervened in the private sector that way. Hoover’s high-wage policy was a clear example of his lack of confidence in the corrective forces of the market and his willingness to use governmental power to fight the depression.

Later in his presidency, Hoover did more than just jawbone to keep wages up. He signed two pieces of labor legislation that dramatically increased the role of government in propping up wages and giving monopoly protection to unions. In 1931, he signed the Davis-Bacon Act, which mandated that all federally funded or assisted construction projects pay the “prevailing wage” (i.e., the above market-clearing union wage). The result of this move was to close out non-union labor, especially immigrants and non-whites, and drive up costs to taxpayers. A year later, he signed the Norris-LaGuardia Act, whose five major provisions each enshrined special provisions for unions in the law, such as prohibiting judges from using injunctions to stop strikes and making union-free contracts unenforceable in federal courts.9 Hoover’s interventions into the labor market are further evidence of his rejection of laissez-faire.

Two other areas that Hoover intervened in aggressively were immigration and international trade. One of the lesser-known policy changes during his presidency was his near halt to immigration through an Executive Order in September 1930. His argument was that blocking immigration would preserve the jobs and wages of American citizens against competition from low-wage immigrants. Immigration fell to a mere 10 to 15% of the allowable quota of visas for the five-month period ending February 28, 1931. Once again, Hoover was unafraid to intervene in the economic decisions of the private sector by preventing the competitive forces of the global labor market from setting wages.10

Even those with only a casual knowledge of the Great Depression will be familiar with one of Hoover’s major policy mistakes—his promotion and signing of the Smoot-Hawley tariff in 1930. This law increased tariffs significantly on a wide variety of imported goods, creating the highest tariff rates in U.S. history. While economist Douglas Irwin has found that Smoot-Hawley’s effects were not as large as often thought, they still helped cause a decline in international trade, a decline that contributed to the worsening worldwide depression.

Most of these policies continued and many expanded throughout 1931, with the economy worsening each month. By the end of the year, Hoover decided that more drastic action was necessary, and on December 8, he addressed Congress and offered proposals that historian David Kennedy refers to as “Hoover’s second program, ” and that has also been called “The Hoover New Deal.”11 His proposals included:

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

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

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

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

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More aid to Federal Land Banks.

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

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More vigorous enforcement of antitrust laws to end “destructive competition” in a variety of industries, as well as supporting work-sharing programs that would supposedly reduce unemployment.

On top of these spending proposals, most of which were approved in one form or another, Hoover proposed, and Congress approved, the largest peacetime tax increase in U.S. history. The Revenue Act of 1932 increased personal income taxes dramatically, but also brought back a variety of excise taxes that had been used during World War I. The higher income taxes involved an increase of the standard rate from a range of 1.5 to 5% to a range of 4 to 8%. On top of that increase, the Act placed a large surtax on higher-income earners, leading to a total tax rate of anywhere from 25 to 63%. The Act also raised the corporate income tax along with several taxes on other forms of income and wealth.

Whether or not Hoover’s prescriptions were the right medicine—and the evidence suggests that they were not—his programs were a fairly aggressive use of government to address the problems of the depression.12 These programs were hardly what one would expect from a man devoted to “laissez-faire” and accused of doing nothing while the depression worsened.

The views of contemporaries and modern historians

The myth of Hoover as a defender of laissez-faire persists, despite the fact that his contemporaries clearly understood that he made aggressive use of government to fight the recession. Indeed, Hoover’s own statements made clear that he recognized his aggressive use of intervention. The myth also persists in spite of the widespread recognition by modern historians that the Hoover presidency was anything but an era of laissez-faire.

According to Hoover’s Secretary of State, Henry Stimson, Hoover argued that balancing the budget was a mistake: “The President likened it to war times. He said in war times no one dreamed of balancing the budget. Fortunately we can borrow.”13 Hoover himself summarized his administration’s approach to the depression during a campaign speech in 1932:

We might have done nothing. That would have been utter ruin. Instead, we met the situation with proposals to private business and the Congress of the most gigantic program of economic defense and counter attack ever evolved in the history of the Republic. These programs, unparalleled in the history of depressions of any country and in any time, to care for distress, to provide employment, to aid agriculture, to maintain the financial stability of the country, to safeguard the savings of the people, to protect their homes, are not in the past tense—they are in action. . . . No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such time.14

Some might dismiss this as campaign rhetoric, but as the other evidence indicates, Hoover was giving an accurate portrayal of his presidency. Indeed, Hoover’s profligacy was so clear that Roosevelt attacked it during the 1932 Presidential campaign.

Roosevelt’s own advisors understood that much of what they created during the New Deal owed its origins to Hoover’s policies, going as far back as his time at the Commerce Department in the 1920s. Thus the quote at the start of this article by Rex Tugwell, one of the academics at the center of FDR’s “brains trust.” Another member of the brains trust, Raymond Moley, wrote of that period:

When we all burst into Washington . . . we found every essential idea [of the New Deal] enacted in the 100-day Congress in the Hoover administration itself. The essentials of the NRA [National Recovery Administration], the PWA [Public Works Administration], the emergency relief setup were all there. Even the AAA [Agricultural Adjustment Act] was known to the Department of Agriculture. Only the TVA [Tennessee Valley Authority] and the Securities Act was [sic] drawn from other sources. The RFC [Reconstruction Finance Corporation], probably the greatest recovery agency, was of course a Hoover measure, passed long before the inauguration.15

Decades later, Tugwell, writing to Moley, said of Hoover: “[W]e were too hard on a man who really invented most of the devices we used.”16 Members of Roosevelt’s inner circle would have every reason to disassociate themselves from the policies of their predecessor; yet these two men recognized Hoover’s role as the father of the New Deal quite clearly.

Nor is this point lost on contemporary historians. In his authoritative history of the Great Depression era, David Kennedy admiringly wrote that Hoover’s 1932 program of activist policies helped “lay the groundwork for a broader restructuring of government’s role in many other sectors of American life, a restructuring known as the New Deal.”17 In a later discussion of the beginning of the Roosevelt administration, Kennedy observed (emphasis added):

Roosevelt intended to preside over a government even more vigorously interventionist and directive than Hoover’s. . . . [I]f Roosevelt had a plan in early 1933 to effect economic recovery, it was difficult to distinguish from many of the measures that Hoover, even if sometimes grudgingly, had already adopted: aid for agriculture, promotion of industrial cooperation, support for the banks, and a balanced budget. Only the last was dubious. . . . FDR denounced Hoover’s budget deficits.18

Conclusion

Despite overwhelming evidence to the contrary, from Hoover’s own beliefs to his actions as president to the observations of his contemporaries and modern historians, the myth of Herbert Hoover’s presidency as an example of laissez-faire persists. Of all the presidents up to and including him, Herbert Hoover was one of the most active interveners in the economy.

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About the Author

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

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Footnotes

*

This entry is adapted, with permission, from Steven Horwitz, “Herbert Hoover: Father of the New Deal,” Cato Institute Briefing Papers, No. 122, September 29, 2011, at: http://www.cato.org/publications/briefing-paper/herbert-hoover-father-new-deal

As quoted in Amity Shlaes, The Forgotten Man: A New History of the Great Depression. New York: Harper Collins, 2007, p. 149.

Murray N. Rothbard, America’s Great Depression (1963; Auburn, AL: Ludwig von Mises Institute, 2008), p. 192.

David M. Kennedy, Freedom From Fear: The American People in Depression and War, 1929-1945. New York: Oxford University Press, p. 48.

See Steven Malanga, “Obsessive Housing Disorder,” City Journal, 19 (2), Spring 2009.

Federal government spending data can be found at: http://www2.census.gov/prod2/statcomp/documents/CT1970p2-12.pdf

See the data and discussion in Jonathan Hughes and Louis P. Cain, American Economic History, 7th ed., Boston: Pearson, 2007, p. 487. Hughes and Cain also note of those deficits, “The expenditures were in large part the doing of the outgoing Hoover administration.”

See Kennedy op. cit., pp. 43-44; Rothbard op. cit., p. 228; and Gene Smiley, Rethinking the Great Depression, Chicago: Ivan R. Dee, 2002, p. 13.

See Lee Ohanian, “What – or Who – Started the Great Depression?” Journal of Economic Theory 144, 2009, pp. 2310-2335.

Chuck Baird, “Freeing Labor Markets by Reforming Union Laws,” June 2011, Downsizing DC, Cato Institute, available at http://www.downsizinggovernment.org/labor/reforming-labor-union-laws.

See “White House Statement on Government Policies To Reduce Immigration” March 26, 1931, available at http://www.presidency.ucsb.edu/ws/index.php?pid22581#axzz1V7klWwZu. That statement opens with an explicit link between the immigration policy and unemployment: “President Hoover, to protect American workingmen from further competition for positions by new alien immigration during the existing conditions of employment, initiated action last September looking to a material reduction in the number of aliens entering this country.”

Kennedy op. cit., p. 83. The phrase “Hoover’s New Deal” is from the title of chapter 11 in Rothbard, op. cit..

Hoover’s higher tax rates backfired, as they further depressed income-earning activity, reducing the tax base, which in turn led to a fall in tax revenues for 1932.

As cited in Kennedy op. cit., p. 79.

Herbert Hoover, “Address Accepting the Republican Presidential Nomination,” August 11, 1932.

Raymond Moley, “Reappraising Hoover,” Newsweek, June 14, 1948, p. 100.

Letter from Rexford G. Tugwell to Raymond Moley, January 29, 1965, Raymond Moley Papers, “Speeches and Writings,” Box 245-49, Hoover Institution on War, Revolution and Peace, Stanford University, Stanford, CA, as cited in Davis W. Houck, “Rhetoric as Currency: Herbert Hoover and the 1929 Stock Market Crash,” Rhetoric & Public Affairs 3, 2000, p. 174.

Kennedy, op. cit., p. 83.

Kennedy, op. cit., p. 118.

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Unemployment

Few economic indicators are of more concern to Americans than unemployment statistics. Reports that unemployment rates are dropping make us happy; reports to the contrary make us anxious. But just what do unemployment!---- figures tell us? Are they reliable measures? What influences joblessness?

How Is Unemployment Defined and Measured?

Each month, the federal government’s Bureau of Labor Statistics randomly surveys sixty thousand individuals around the nation. If respondents say they are both out of work and seeking employment, they are counted as unemployed members of the labor force. Jobless respondents who have chosen not to continue looking for work are considered out of the labor force and therefore are not counted as unemployed. Almost half of all unemployment spells end because people leave the labor force. Ironically, those who drop out of the labor force—because they are discouraged, have household responsibilities, or are sick—actually make unemployment rates look better; the unemployment rate includes only people within the labor force who are out of work.

Not all unemployment is the same. Unemployment can be long term or short term. It can be frictional, meaning someone is between jobs; or it may be structural, as when someone’s skills are no longer demanded because of a change in technology or an industry downturn.

Is Unemployment a Big Problem?

Some say there are reasons to think that unemployment in the United States is not a big problem. In June 2005, for example, 33.5 percent of all unemployed people were under the age of twenty-four, and presumably few of them were the main source of income for their families. One out of six of the unemployed are teenagers. Moreover, the average duration of a spell of unemployment is short. In June 2005 it was 16.3 weeks. And the median spell of unemployment is even shorter. In June 2005 it was 7.0 weeks, meaning that half of all spells last 7.0 weeks or less.

On the basis of numbers like the above, many economists have thought that unemployment is not a very large problem. A few weeks of unemployment seems to them like just enough time for people to move from one job to another. Yet these numbers, though accurate, are misleading. Much of the reason why unemployment spells appear short is that many workers drop out of the labor force at least temporarily because they cannot find attractive jobs. Often two short spells of unemployment mean a long spell of joblessness because the person was unemployed for a short time, withdrew from the labor force, and then reentered the labor force.

And even if most unemployment spells are short, most weeks of unemployment are experienced by people who are out of work for a long time. To see why, consider the following example. Suppose that each week, twenty spells of unemployment lasting 1 week begin, and only one begins that lasts 20 weeks. Then the average duration of a completed spell of unemployment would be only 1.05 weeks. But half of all unemployment (half of the total of 40 weeks that the twenty-one people are out of work) would be accounted for by spells lasting 20 weeks.

Something like this example applies in the real world. In June 2005, for example, 42.9 percent of the unemployed had been unemployed for less than five weeks, but 16.9 percent had been unemployed for six or more months.

What Causes Long-Term Unemployment?

To fully understand unemployment, we must consider the causes of recorded long-term unemployment. Empirical evidence shows that two causes are welfare payments and unemployment insurance. These government assistance programs contribute to long-term unemployment in two ways.

First, government assistance increases the measure of unemployment by prompting people who are not working to claim that they are looking for work even when they are not. The work-registration requirement for welfare recipients, for example, compels people who otherwise would not be considered part of the labor force to register as if they were a part of it. This requirement effectively increases the measure of unemployed in the labor force even though these people are better described as nonemployed—that is, not actively looking for work.

In a study using state data on registrants in Aid to Families with Dependent Children and food stamp programs, my colleague Kim Clark and I found that the work-registration requirement actually increased measured unemployment by about 0.5 to 0.8 percentage points. If this same relationship holds in 2005, this requirement increases the measure of unemployment by 750,000 to 1.2 million people. Without the condition that they look for work, many of these people would not be counted as unemployed. Similarly, unemployment insurance increases the measure of unemployment by inducing people to say that they are job hunting in order to collect benefits.

The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a “reservation wage”—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer.

Consider, for example, an unemployed person who is accustomed to making 15.00 an hour. On unemployment insurance this person receives about 55 percent of normal!---- earnings, or 8.25 per lost work hour. If that person is in a 15 percent federal tax bracket and a 3 percent state tax bracket, he or she pays 1.49 in taxes per hour not worked and nets 6.76 per hour after taxes as compensation for not working. If that person took a job that paid 15.00 per hour, governments would take 18 percent for income taxes and 7.65 percent for Social Security taxes, netting him or her 11.15 per hour of work. Comparing the two payments, this person may decide that an hour of leisure is worth more than the extra 4.39 the job would pay. If so, this means that the unemployment insurance raises the person’s reservation wage to above 15.00 per hour.

Unemployment, therefore, may not be as costly for the jobless person as previously imagined. But as Harvard economist Martin Feldstein pointed out in the 1970s, the costs of unemployment to taxpayers are very great indeed. Take the example above of the individual who could work for 15.00 an hour or collect unemployment insurance of 8.25 per hour. The cost of unemployment to this unemployed person was only 4.39 per hour, the difference between the net income from working and the net income from not working. And as compensation for this cost, the unemployed person gained leisure, whose value could well be above 4.39 per hour. But other taxpayers as a group paid 8.25 in unemployment benefits for every hour the person was unemployed, and got back in taxes only 1.49 on this benefit. Moreover, they gave up 3.85 in lost tax and Social Security revenue that this person would have paid per hour employed at a 15.00 wage. Net loss to other taxpayers: 10.61 (8.25 1.49 3.85) per hour. Multiply this by millions of people collecting unemployment, each missing hundreds of hours of work, and you get a cost to taxpayers in the billions.

Unemployment insurance also extends the time a person stays off the job. Clark and I estimated that the existence of unemployment insurance almost doubles the number of unemployment spells lasting more than three months. If unemployment insurance were eliminated, the unemployment rate would drop by more than half a percentage point, which means that the number of unemployed people would fall by about 750,000. This is all the more significant in light of the fact that less than half of the unemployed receive insurance benefits, largely because many have not worked enough to qualify.

Another cause of long-term unemployment is unionization. High union wages that exceed the competitive market rate are likely to cause job losses in the unionized sector of the economy. Also, those who lose high-wage union jobs are often reluctant to accept alternative low-wage employment. Between 1970 and 1985, for example, a state with a 20 percent unionization rate, approximately the average for the fifty states and the District of Columbia, experienced an unemployment rate that was 1.2 percentage points higher than that of a hypothetical state that had no unions. To put this in perspective, 1.2 percentage points is about 60 percent of the increase in normal unemployment between 1970 and 1985.

There is no question that some long-term unemployment is caused by government intervention and unions that interfere with the supply of labor. It is, however, a great mistake (made by some conservative economists) to attribute most unemployment to government interventions in the economy or to any lack of desire to work on the part of the unemployed. Unemployment was a serious economic problem in the late nineteenth and early twentieth centuries prior to the welfare state and widespread unionization. Unemployment then, as now, was closely linked to general macroeconomic conditions. The great depression, when unemployment in the United States reached 25 percent, is the classic example of the damage that collapses in credit can do. Since then, most economists have agreed that cyclical fluctuations in unemployment are caused by changes in the demand for labor, not by changes in workers’ desires to work, and that unemployment in recessions is involuntary.

Even leaving aside cyclical fluctuations, a large part of unemployment is due to demand factors rather than supply. High unemployment in New England in the early 1990s, for example, was due to declines in computer and other industries in which New England specialized. High unemployment in northern California in the early 2000s was caused by the dot-com bust. The process of adjustment following shocks is long and painful, and recent research suggests that even temporary declines in demand can have permanent effects on unemployment, as workers who lose jobs are unable to sell their labor due to a loss of skills or for other reasons. Therefore, most economists who study unemployment support an active government role in training and retraining workers and in maintaining stable demand for labor.

The Natural Rate of Unemployment

Long before Milton Friedman and Edmund Phelps advanced the notion of the natural rate of unemployment (the lowest rate of unemployment tolerable without pushing up inflation), policymakers had contented themselves with striving for low, not zero, unemployment. Just what constitutes an acceptably low level of unemployment has been redefined over the decades. In the early 1960s an unemployment rate of 4 percent was both desirable and achievable. Over time, the unemployment rate drifted upward and, for the most part, has hovered around 7 percent.!---- Lately, it has fallen to 5 percent. I suspect that some of the reduction in the apparent natural rate of unemployment in recent years has to do with reduced transitional unemployment, both because fewer people are between jobs and because they are between jobs for shorter periods. Union power has been eroded by domestic regulatory action and inaction, as well as by international competition. More generally, international competition has restrained wage increases in high-wage industries. Another factor making unemployment lower is a decline in the fraction of the unemployed who are supported by unemployment insurance.

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About the Author

Lawrence H. Summers is Charles W. Eliot University Professor at Harvard University. He was previously the president of Harvard University. Before that, he was secretary of the U.S. Treasury.

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Further Reading

Feldstein, Martin. “The Economics of the New Unemployment.” Public Interest 33 (Fall 1973): 3–42.

Feldstein, Martin. “Why Is Productivity Growing Faster?” NBER Working Paper no. 9530. National Bureau of Economic Research, Cambridge, Mass., 2003.

Friedman, Milton. “The Role of Monetary Policy.” American Economic Review 58 (March 1968): 1–17.

Hall, Robert. “Employment Fluctuations and Wage Rigidity.” Brookings Papers on Economic Activity 1 (1980): 91–141.

Summers, Lawrence H. Understanding Unemployment. Cambridge: MIT Press, 1990.

Summers, Lawrence H. “Why Is the Unemployment Rate So Very High Near Full Employment?” Brookings Papers on Economic Activity 2 (1986): 339–383.

Summers, Lawrence H., and Kim B. Clark. “Labor Market Dynamics and Unemployment: A Reconsideration.” Brookings Papers on Economic Activity 1 (1979): 13–60.

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Unintended Consequences

The law of unintended consequences, often cited but rarely defined, is that actions of people—and especially of government—always have effects that are unanticipated or unintended. Economists and other social scientists have heeded its power for centuries; for just as long, politicians and popular opinion have largely ignored it.

The concept of unintended consequences is one of the building blocks of economics. Adam Smith’s “invisible hand,” the most famous metaphor in social science, is an example of a positive unintended consequence. Smith maintained that each individual, seeking only his own gain, “is led by an invisible hand to promote an end which was no part of his intention,” that end being the public interest. “It is not from the benevolence of the butcher, or the baker, that we expect our dinner,” Smith wrote, “but from regard to their own self interest.”

Most often, however, the law of unintended consequences illuminates the perverse unanticipated effects of legislation and regulation. In 1692 the English philosopher John Locke, a forerunner of modern economists, urged the defeat of a parliamentary bill designed to cut the maximum permissible rate of interest from 6 percent to 4 percent. Locke argued that instead of benefiting borrowers, as intended, it would hurt them. People would find ways to circumvent the law, with the costs of circumvention borne by borrowers. To the extent the law was obeyed, Locke concluded, the chief results would be less available credit and a redistribution of income away from “widows, orphans and all those who have their estates in money.”

In the first half of the nineteenth century, the famous French economic journalist Frédéric Bastiat often distinguished in his writing between the “seen” and the “unseen.” The seen were the obvious visible consequences of an action or policy. The unseen were the less obvious, and often unintended, consequences. In his famous essay “What Is Seen and What Is Not Seen,” Bastiat wrote:

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.1

Bastiat applied his analysis to a wide range of issues, including trade barriers, taxes, and government spending.

The first and most complete analysis of the concept of unintended consequences was done in 1936 by the American sociologist Robert K. Merton. In an influential article titled “The Unanticipated Consequences of Purposive Social Action,” Merton identified five sources of unanticipated consequences. The first two—and the most pervasive—were “ignorance” and “error.”

Merton labeled the third source the “imperious immediacy of interest.” By that he was referring to instances in which someone wants the intended consequence of an action so much that he purposefully chooses to ignore any unintended effects. (That type of willful ignorance is very different from true ignorance.) The Food and Drug Administration, for example, creates enormously destructive unintended!---- consequences with its regulation of pharmaceutical drugs. By requiring that drugs be not only safe but efficacious for a particular use, as it has done since 1962, the FDA has slowed down by years the introduction of each drug. An unintended consequence is that many people die or suffer who would have been able to live or thrive. This consequence, however, has been so well documented that the regulators and legislators now foresee it but accept it.

“Basic values” was Merton’s fourth source of unintended consequences. The Protestant ethic of hard work and asceticism, he wrote, “paradoxically leads to its own decline through the accumulation of wealth and possessions.” His final case was the “self-defeating prediction.” Here he was referring to the instances when the public prediction of a social development proves false precisely because the prediction changes the course of history. For example, the warnings earlier in this century that population growth would lead to mass starvation helped spur scientific breakthroughs in agricultural productivity that have since made it unlikely that the gloomy prophecy will come true. Merton later developed the flip side of this idea, coining the phrase “the self-fulfilling prophecy.” In a footnote to the 1936 article, he vowed to write a book devoted to the history and analysis of unanticipated consequences. Although Merton worked on the book over the next sixty years, it remained uncompleted when he died in 2003 at age ninety-two.

The law of unintended consequences provides the basis for many criticisms of government programs. As the critics see it, unintended consequences can add so much to the costs of some programs that they make the programs unwise even if they achieve their stated goals. For instance, the U.S. government has imposed quotas on imports of steel in order to protect steel companies and steelworkers from lower-priced competition. The quotas do help steel companies. But they also make less of the cheap steel available to U.S. automakers. As a result, the automakers have to pay more for steel than their foreign competitors do. So a policy that protects one industry from foreign competition makes it harder for another industry to compete with imports.

Similarly, Social Security has helped alleviate poverty among senior citizens. Many economists argue, however, that it has carried a cost that goes beyond the payroll taxes levied on workers and employers. Martin Feldstein and others maintain that today’s workers save less for their old age because they know they will receive Social Security checks when they retire. If Feldstein and the others are correct, it means that less savings are available, less investment takes place, and the economy and wages grow more slowly than they would without Social Security.

The law of unintended consequences is at work always and everywhere. People outraged about high prices of plywood in areas devastated by hurricanes, for example, may advocate price controls to keep the prices closer to usual levels. An unintended consequence is that suppliers of plywood from outside the region, who would have been willing to supply plywood quickly at the higher market price, are less willing to do so at the government-controlled price. Thus results a shortage of a good where it is badly needed. Government licensing of electricians, to take another example, keeps the supply of electricians below what it would otherwise be, and thus keeps the price of electricians’ services higher than otherwise. One unintended consequence is that people sometimes do their own electrical work, and, occasionally, one of these amateurs is electrocuted.

One final sobering example is the case of the Exxon Valdez oil spill in 1989. Afterward, many coastal states enacted laws placing unlimited liability on tanker operators. As a result, the Royal Dutch/Shell group, one of the world’s biggest oil companies, began hiring independent ships to deliver oil to the United States instead of using its own forty-six-tanker fleet. Oil specialists fretted that other reputable shippers would flee as well rather than face such unquantifiable risk, leaving the field to fly-by-night tanker operators with leaky ships and iffy insurance. Thus, the probability of spills probably increased and the likelihood of collecting damages probably decreased as a consequence of the new laws.

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About the Author

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

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Further Reading

Bastiat, Frédéric. “What Is Seen and What Is Not Seen.” Online at: http://www.econlib.org/library/Bastiat/basEss1.html.

Hayek, Friedrich A. New Studies in Philosophy, Politics, Economics and the History of Ideas. Chicago: University of Chicago Press, 1978.

Merton, Robert K. Sociological Ambivalence and Other Essays. New York: Free Press, 1976.

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Footnotes

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

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Urban Transportation

The defining trait of urban areas is density: of people, activities, and structures. The defining trait of urban transportation is the ability to cope with this density while moving people and goods. Density creates challenges for urban transportation because of crowding and the expense of providing infrastructure in built-up areas. It also creates certain advantages because of economies of scale: some transportation activities are cheaper when carried out in large volumes. These characteristics mean that two of the most important phenomena in urban transportation are traffic congestion and mass transit.

Traffic congestion imposes large costs, primarily in terms of lost time. (Economists measure the value of this time by examining situations in which people can trade time for money, such as by choosing different means of travel.) Researchers at the Texas Transportation Institute regularly estimate the costs of urban congestion; their estimate of annual congestion costs per capita in 2001 for seventy-five large U.S. metropolitan areas was 520, representing twenty-six hours of delay and forty-two gallons of fuel. This totals nearly 70 billion.1

But is the cost of congestion too high? Density dictates that we cannot expect to provide unencumbered road space for every person who might like it at 5:00 p.m. on a weekday—any more than one would expect to build a dormitory with a shower for every resident who wants to use one in the morning. Just as an architect might decide how many showers to provide for the dormitory, economists, by knowing how much people value their time and how much it costs to save time by increasing road capacity, can estimate the optimal amount of roadway capacity and the resulting level of congestion.

Virtually all economists agree that congestion in cities around the world is greater than this optimum. They also agree on the reason: driving in the rush hour is priced far below its real social cost. The social cost is the driver’s cost to himself plus the congestion imposed on other drivers. People often drive, therefore, even when the social cost is more than the trip is worth to them because they do not bear the cost of the congestion they cause. Whereas this social cost varies by time of day and location, the individual’s trip price (consisting of operating costs, fuel taxes, and the occasional toll) is more uniform. Even if the price covers the costs of providing road infrastructure, which it probably does not in U.S. cities, it is not serving the purpose of allocating road capacity at peak hours to those who value it most.

These observations lead directly to the frequent recommendation for “congestion pricing”: a system of prices that vary by time and location, designed to reduce congestion by encouraging people to shift their travel to less socially costly means, places, or times of day. Singapore has had congestion pricing since 1975. London adopted an ambitious pricing system in 2003, initially requiring five pounds (about eight U.S. dollars) to drive in its central area during weekdays. Singapore’s tolls are now collected electronically, and London’s through various off-site means, in both cases with enforcement by video recordings of license plates. In its first year, the London scheme appeared to have increased speeds to and in the central area by 15–20 percent and to have eliminated or diverted 67,500 weekday automobile trips there, with half of these shifting to public transit and another quarter diverting to less congested routes.2

A partial form of congestion pricing has recently been adopted in several U.S. locations. Known as “value pricing,” it applies only to a set of “express lanes” that are adjacent to an unpriced roadway. This scheme has the advantage that paying the price is voluntary, but also the disadvantage that congestion is eliminated for only a fraction of travelers and is even greater for the others than would be the case if the express lanes were opened to everyone. Value pricing has been in place on State Route 91 in the Los Angeles region since late 1995 and on Interstate 15 near San Diego since late 1996.3 Proposals have emerged for a nationwide network of such express lanes to replace the present system of intermittent carpool lanes.4

Since examples of congestion pricing are so few, the consequences of underpricing congested highways are far-reaching. People and businesses have rearranged themselves and their activities in time and place to lessen the!---- impacts of congestion, probably leading to more spread-out land-use patterns (although the land-use impact cannot be precisely predicted from theory). Furthermore, public authorities have responded by building more roadway capacity, including very expensive, wide expressways designed to allow high speeds, even though peak-period users cannot maintain those speeds. The result is a more spread-out urban area with bigger roads than would evolve if congestion pricing were in place.

The effectiveness of building capacity to relieve urban congestion is limited not only by its high cost, but also by the phenomenon of “latent demand” or “induced demand.” Because many potential peak-hour trips are already deterred by the congestion itself, any success in reducing that congestion is partially undone by an influx of these previously latent trips from other routes, hours of the day, or travel modes. As a consequence, adding capacity may still provide considerable benefits by allowing more people to travel when and where they want to, but it will not necessarily reduce congestion. The same problem afflicts other anticongestion policies, such as employer carpooling incentives, mass transit improvements, and land-use controls; moreover, these policies usually provide only weak incentives to change travel behavior.

Now consider mass transit, where economies of scale are critical. Researchers who have compared the costs of serving passenger trips in a given travel corridor via various modes consistently find that automobiles are most economical at low passenger densities, bus transit at medium densities, and rail transit at very high densities. (There is some disagreement about exactly where these thresholds occur, but not about their existence.) As passenger density increases, it becomes worthwhile at some point to pay one driver to serve many passengers by carrying them in a single vehicle, and eventually to incur the high capital cost of building a rail line. However, many rail transit systems recently constructed in the United States are uneconomical because the passenger volumes they carry are too low.5 An attractive alternative in such cases is “bus rapid transit,” in which local bus transit is configured to offer rail-like service quality at costs between those typical of bus and rail. Bus rapid transit was pioneered in Brazil and also operates on selected corridors in Ottawa, Los Angeles, Seattle, Boston, and other cities.6

In addition to the transit agency’s costs, scale economies have another dimension—costs incurred by its users. People using mass transit first have to access a station or bus stop and wait for the vehicle to arrive. Even if they know the schedule, they have to adjust their plans to match it, which is a cost to them. The more transit lines there are in a given area and the more frequent the service, the lower is each user’s cost to reach the station and wait for a vehicle to arrive. Empirical evidence reveals that people care even more about avoiding time spent walking or waiting than about time spent inside a vehicle. So these access costs are quite significant, as are the scale economies that result when increased passenger density leads to greater route coverage and/or frequency of service.

Scale economies are behind proposals to use land-use regulation to bolster transit demand by creating areas of high-density residential, commercial, or industrial development. However, many analysts are skeptical about how effective a given measure would be and whether such “transit-oriented developments” can overcome the preferences for low-density living that accompany rising income levels.

Scale economies create a prima facie case for transit subsidies because the social cost of handling a passenger is lowered by the favorable effects on the average cost for everyone. Another argument for transit subsidies is to overcome the inefficiently low price on peak-hour highway travel, if congestion pricing is deemed infeasible. Countering these arguments is the well-documented tendency of transit subsidies to be partly absorbed in higher wages to transit workers, less efficient use of employees, and excessive capital expenditures. This problem could be alleviated by giving the subsidies in the form of fare discounts rather than as grants to transit agencies. If subsidies are justified because of economies of scale in transit, however, then they would be justified for the many other industries with scale economies: it is infeasible and probably unwise to subsidize them all.

Because of scale economies in mass transit, it makes sense to focus service on those few markets with potentially high passenger density, especially suburb-to-downtown commutes and local travel in densely populated low-income areas. Unfortunately, this dictum collides with the political balance typically achieved in metropolitan-wide transit systems, where every participating jurisdiction is eager to receive some service in return for its financial contribution.

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Scale economies might make a case for highway subsidies as well, but it is even less clear-cut. Scale economies exist in construction of a given highway, but somewhat less so in an entire network because the cost of intersections rises more than proportionally to their capacity. Furthermore, because highways occupy a significant fraction of scarce urban land, expanding them drives up land prices and/or requires expensive mitigation measures, offsetting any scale economies in constructing them. On balance, there is probably not a strong case for subsidizing urban highway travel.

Today, government provides most urban transportation services and facilities, but this is not necessary, nor was it historically always the norm. Privately built and financed canals, and later “turnpikes,” were important in the industrialization of Britain in the eighteenth century and of the United States in the nineteenth century. And today, innovative private transit providers supply highly valued jitney service or specialized taxi service—sometimes illegally—in many cities around the globe, especially—but not exclusively—in the Third World. Ubiquitous private taxi fleets also play an important role in urban travel, and deregulating entry would bring down taxi fares substantially.

Private enterprise is making something of a comeback in infrastructure provision. A private company is completing Paris’s A86 ring road via tunnels under Versailles, financed by tolls. A similar proposal may break a thirty-year impasse over completing the final link in the Long Beach Freeway near Los Angeles. London is undertaking a controversial privatization of its subway system. In 2004, Texas solicited proposals for private construction and operation of new toll roads, and in 2005 Chicago privatized operation of its Skyway, an important segment of Interstate 90 bringing traffic into the city from the east.7

Evidence suggests that the private sector can carry out transportation activities more cheaply than the public sector can. Many experiments with the private sector have been motivated by huge subsidy increases or evident inefficiency of public sector operations. During the 1980s, all of Britain’s urban bus services outside London were privatized and the markets opened to free entry, resulting in cost savings but also some competitive problems. In most instances, some sort of regulation is needed to offset the market power that can accompany privatization. Success depends on the specifics of the situation and the details of any accompanying regulatory or franchising arrangements.

Urban transportation has historically had a dramatic influence on land-use patterns. Upon the invention of horse-drawn and then electric streetcars, “streetcar suburbs” quickly arose along newly laid tracks. Following World War II, widespread construction of express highways had a similar but even stronger effect, especially in the United States, causing development to spread more ubiquitously because automobiles relaxed the need for proximity to a transit line. These developments provided many desired amenities to residents, but also created problems. Whatever one’s judgment about the wisdom of those past decisions, the longevity of buildings makes such trends virtually impossible to reverse. In particular, a dispersed land-use pattern undermines the market potential of mass transit, making it ineffective as a means to counter the automobile’s dominance, even if promoting mass transit might have been a better policy in the first place.

Urban transportation is a vital part of economic activity and responds to well-designed economic policies. Much can be accomplished to improve urban life by using our basic knowledge of economic incentives.

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About the Author

Kenneth A. Small, research professor and professor emeritus of economics at the University of California at Irvine, specializes in urban, transportation, and environmental economics—especially highway congestion, air pollution from motor vehicles, and travel demand. Professor Small was a coeditor of the international journal Urban Studies for five years and is now associate editor of Transportation Research B. He received the Distinguished Member Award of the Transportation and Public Utilities Group of the American Economic Association in 1999 and is a Fellow of the Regional Science Association International.

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Further Reading

Introductory

Altshuler, Alan, and David Luberoff. Mega-Projects: The Changing Politics of Urban Public Investment. Washington, D.C.: Brookings Institution Press, 2003. Insightful description and analysis of the political changes behind the extraordinary increase in costs of the large U.S. urban infrastructure projects that started around 1970.

Arnott, Richard, and Kenneth Small. “The Economics of Traffic Congestion.” American Scientist 82 (1994): 446–455. Explanation of traffic paradoxes including induced demand, for a scientifically but not economically literate audience.

Downs, Anthony. Still Stuck in Traffic: Coping with Peak-Hour Traffic Congestion. Washington D.C.: Brookings Institution, 2004. A comprehensive look at numerous anticongestion!---- policies and their effectiveness, concluding largely that the only ones that are effective are politically infeasible.

Klein, Daniel B., Adrian T. Moore, and Binyam Reja. Curb Rights: A Foundation for Free Enterprise in Urban Transit. Washington, D.C.: Brookings Institution Press, 1997. Policy-oriented analysis of how the public sector can establish property rights to encourage successful private transit.

Meyer, John R., and José A. Gómez-Ibáñez. Autos, Transit, and Cities. Cambridge: Harvard University Press, 1981. A thorough analysis of urban transportation policy for an educated lay audience.

National Research Council. Curbing Gridlock: Peak-Period Fees to Relieve Traffic Congestion. Washington D.C.: National Academy Press, 1994. Full report by a study panel on congestion pricing. Volume 1 is the report, aimed at a general audience; volume 2 is a collection of commissioned papers.

Pickrell, Don H. “Rising Deficits and the Uses of Transit Subsidies in the United States.” Journal of Transport Economics and Policy 19 (1985): 281–298. Decomposes the dramatic increase in U.S. transit deficits into its sources, finding that about three-fourths of new subsidies were absorbed in higher costs.

White, Peter. “Deregulation of Local Bus Service in Great Britain: An Introductory Review.” Transport Reviews 15 (1995): 185–209. Reviews results of British bus deregulation of 1980s.

Winston, Clifford. “Government Failure in Urban Transportaion.” Fiscal Studies 21 (2000): 403–425. A nontechnical summary of inefficiencies in U.S. urban transportation policy drawing on the UK privatization experiment for perspective.

Advanced

Gómez-Ibáñez, José A., William B. Tye, and Clifford Winston, eds. Essays in Transportation Economics and Policy: A Handbook in Honor of John R. Meyer. Washington, D.C.: Brookings Institution Press, 1999. Collection of essays, some technical, on analytical and issue-oriented topics. Can serve as introductory textbook.

Santos, Georgina, ed. Road Pricing: Theory and Evidence. Elsevier: Oxford, 2004. Collection of scholarly articles about congestion pricing and related topics.

Small, Kenneth A. Urban Transportation Economics. Reading, Pa.: Harwood Academic, 1992, 2d ed. 2005. Advanced textbook and reference book.

Small, Kenneth A., and José A. Gómez-Ibáñez. “Urban Transportation.” In Paul Cheshire and Edwin S. Mills, eds., Handbook of Regional and Urban Economics. Vol. 3. New York: North-Holland, 1999. Survey of selected topics, aimed at professional economists.

Winston, Clifford, and Chad Shirley. Alternate Route: Toward Efficient Urban Transportation. Washington, D.C.: Brookings Institution Press, 1998. Analysis of mass transit policy in the United States, with emphasis on quantifying the inefficiencies of transit and highway investment and pricing.

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Footnotes

See David Schrank and Tim Lomax, 2003 Urban Mobility Report, available online at: http://mobility.tamu.edu/ums/.

See the Singapore Land Transport Authority Web site on electronic road pricing at: http://www.lta.gov.sg/motoring_matters/index_motoring_erp; and the Transport for London Web site on congestion charging at: http://www.tfl.gov.uk/tfl/cclondon/cc_intro. For other examples around the world, see the University of Minnesota’s Value Pricing Homepage at: http://www.hhh.umn.edu/centers/slp/projects/conpric/.

See the operators’ Web sites at http://www.91expresslanes.com/ and http://sandag.cog.ca.us/index.asp?classrd29fuseactionhome.classhome.

Robert W. Poole Jr. and C. Kenneth Orski, “HOT Networks: A New Plan for Congestion Relief and Better Transit,” Reason Public Policy Institute, Policy Study 305, February 2003, available online at: http://www.rppi.org/ps305.pdf.

See “The Public Purpose” Web site (http://www.publicpurpose.com/) for unabashedly critical and informative evaluations of many rail projects and other topics.

See the Bus Rapid Transit Policy Center Web site at: http://www.gobrt.org/; also Aaron Golub, “Brazil’s Buses: Simply Successful,” Access (University of California Transportation Center, Berkeley) 24 (2004), available online at: http://www.uctc.net/access/access.asp.

On privatization initiatives, see the periodicals Public Works Financing, and the Reason Foundation’s Privatization Watch (http://www.reason.org/pw.shtml), especially “Urban Toll Tunnels Solve Tough Problems” by Robert W. Poole Jr. (http://www.rppi.org/urbantolltunnels.html).

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Welfare

The U.S. welfare system would be an unlikely model for anyone designing a welfare system from scratch. The dozens of programs that make up the “system” have different (sometimes competing) goals, inconsistent rules, and over-lapping groups of beneficiaries. Responsibility for administering the various programs is spread throughout the executive branch of the federal government and across many committees of the U.S. Congress. Responsibilities are also shared with state, county, and city governments, which actually deliver the services and contribute to funding.

The six programs most commonly associated with the “social safety net” include: (1) Temporary Assistance for Needy Families (TANF), (2) the Food Stamp Program (FSP), (3) Supplemental Security Income (SSI), (4) Medicaid, (5) housing assistance, and (6) the Earned Income Tax Credit (EITC). The federal government is the primary funder of all six, although TANF and Medicaid each require a 25–50 percent state funding match. The first five programs are administered locally (by the states, counties, or local federal agencies), whereas EITC operates as part of the regular federal tax system. Outside the six major programs are many smaller government-assistance programs (e.g., Special Supplemental Food Program for Women, Infants and Children [WIC]; general assistance [GA]; school-based food programs; and Low-Income Home Energy Assistance Program [LIHEAP]), which have extensive numbers of participants but pay quite modest benefits.

Welfare reform, brought about through the passage of the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996, significantly altered the rules for delivering income support, but it was narrowly focused on one program. The 1996 law replaced Aid to Families with Dependent Children (AFDC) with TANF. SSI and food stamps were also affected, but to a much lesser extent.

Key Programs

The accompanying figures summarize trends in the coverage and expenses of the six major federal safety-net programs over the past three decades. Figure 1 shows the percentage of the American population receiving benefits from each program, and Figure 2 presents the share of!---- federal expenditures spent on each program. The bars in Figure 1 also plot the percentage of Americans classified as being in poverty. In addition to highlighting the evolution of these U.S. welfare programs, the following discussion briefly describes the forms of benefits paid out by programs, along with eligibility criteria.

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Figure 1  Percentage of Population Receiving Program Benefits

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Temporary Assistance for Needy Families pays cash assistance to single-parent or unemployed two-parent families for a limited term. The program also significantly funds job training and child care as a means to discourage welfare dependency and encourage work.

The origins of TANF are in the Social Security Act of 1935, which established the Aid to Dependent Children (ADP) program. ADP enabled state governments to help single mothers who were widowed or abandoned by their husbands. It was originally designed to allow mothers to stay at home and take care of their children, providing cash benefits for the basic requirements of food, shelter, and clothing. The program was expanded in the 1950s and 1960s to provide cash assistance to needy children and families regardless of the reason for parental absence. This expansion coincided with renaming the program Aid to Families with Dependent Children. While AFDC was principally a federal program managed by the Department of Health and Human Services, it was administered through state-run welfare offices. Indeed, states were responsible for organizing the program, determining benefits, establishing income and resource limits, and setting actual benefit payments. With relatively little flexibility, an AFDC program in New York City looked a lot like its counterpart in Reno, Nevada, apart from differences in the maximum amount each state paid to a family for assistance. Funding for AFDC was shared between the federal and state governments, with the feds covering a higher portion of AFDC benefit costs in states with lower-than-average per capita income. As with many other welfare programs, AFDC’s costs were not capped because the program was an “entitlement”—meaning that qualified families could not be refused cash assistance.

By the early 1990s, many policymakers were seeking alternatives to AFDC. Although the average monthly benefit in 1995 was only 376.70 per family and 132.64 per recipient, 40 percent of applicants remained on welfare for two years or longer. In response to this dependency, in 1996, Congress passed and President Bill Clinton signed the Personal Responsibility and Work Opportunity Reconciliation!---- Act, which replaced AFDC with TANF. Under the new program, the federal government eliminated the entitlement to cash welfare, placed limits on the length of time families could collect benefits, and introduced work requirements. By law, a family cannot receive TANF benefits for more than a lifetime limit of five years, cumulative across welfare spells. Regarding work requirements, TANF mandated that at least 50 percent of recipients participate in “work” activities by 2002, with activities including employment, on-the-job training, vocational education, job search, and community service. Together, these activities must account for thirty hours per week for a single parent. Recipients who refuse to participate in work activities must be sanctioned, resulting in a loss of cash benefits. Enforcement of sanctions could include immediately suspending all cash payments, stopping support only after multiple episodes of noncompliance, or only partially reducing grants to families who fail to cooperate. States could, and in fact did, introduce more stringent requirements for families to work or participate in educational activities to qualify for cash payments. TANF cemented the primary emphasis on getting welfare recipients into jobs.

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Figure 2  Program Spending as a Percentage of Federal Outlays

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Figures 1 and 2 reveal that growth in neither costs nor enrollments motivated the passage of welfare reform in 1996. Program expenditures have accounted for less than 3 percent of the federal budget since 1975. The caseload remained relatively stable until the mid-1990s. After welfare reform, however, the welfare caseload and welfare spending as a percentage of government spending dropped sharply.

The Food Stamp Program, authorized as a permanent program in 1964, provides benefits to low-income households to buy nutritional, low-cost food. After 1974, Congress required all states to offer the program. Recipients use coupons and electronic benefits transfer (EBT) cards to purchase food at authorized retail stores. There are limitations on what items can be purchased with food stamps (e.g., they cannot be used to purchase cigarettes or alcohol). Recipients pay no tax on items purchased with food stamps. The federal government is entirely responsible for the rules and the complete funding of FSP benefits under the auspices of the Department of Agriculture’s Food and Nutrition Service (FNS). State governments, through local welfare offices, have primary responsibility for administering!---- the Food Stamp Program. They determine eligibility, calculate benefits, and issue food stamp allotments.

Welfare reform imposed work requirements on recipients and allowed states to streamline administrative procedures for determining eligibility and benefits. Childless recipients between the ages of eighteen and fifty became ineligible for food stamps if they received benefits for more than three months while not working. According to Figure 1, the FSP caseload has included between 6 and 10 percent of the U.S. population, following a cyclical pattern before welfare reform: during recessions, the caseload percentage was higher. Welfare reform caused a decline in the FSP caseload percentage.

Supplemental Security Income, authorized by the Social Security Act in 1974, pays monthly cash benefits to needy individuals whose ability to work is restricted by blindness or disability. Families can also receive payments to support disabled children. Survivor’s benefits for children are authorized under Title II of the Social Security Act, not Title XVI, and are, therefore, not part of the SSI program. Although one cannot receive SSI payments and TANF payments concurrently, one can receive SSI and Social Security simultaneously. (In 2003, 35 percent of all SSI recipients also received Social Security benefits, and 57 percent of aged SSI recipients were Social Security beneficiaries.) The average SSI recipient received almost 5,000 in annual payments in 2003, with the average monthly federal payment being 417, and many state governments supplemented the basic SSI benefits with their own funds.

Welfare reforms and related immigration legislation in 1996–1997 sought to address three areas of perceived abuse in the SSI program. First, the legislation set up procedures to help ensure that SSI payments are not made to prison inmates. Second, the legislation eliminated benefits to less-disabled children, particularly children with behavioral problems rather than physical disorders. Finally, new immigrants were deemed ineligible for benefits prior to becoming citizens.

Medicaid became law in 1965, under the Social Security Act, to assist state governments in providing medical care to eligible needy persons. Medicaid provides health-care services to more than 49.7 million low-income individuals who are in one or more of the following categories: aged, blind, disabled, members of families with dependent children, or certain other children and pregnant women. Medicaid is the largest government program providing medical and health-related services to the nation’s poorest people and the largest single funding source for nursing homes and institutions for mentally retarded people.

Within federal guidelines, each state government is responsible for designing and administering its own program. Individual states determine persons covered, types and scope of benefits offered, and amounts of payments for services. Federal law requires that a single state agency be responsible for the administration of the Medicaid program; generally it is the state welfare or health agency. The federal government shares costs with states by means of an annually adjusted variable matching formula.

The Medicaid program has more participants than any other major welfare program. More than 17 percent of the population received Medicaid benefits in 2002, up from about 10 percent in the 1970s and 1980s. Spending on Medicaid has risen steadily as a fraction of the federal budget, increasing from approximately 2 percent in 1975 to 13 percent in 2002. Total outlays for the Medicaid program in 2002 (federal and state) were 259 billion, and per capita expenditures on Medicaid beneficiaries averaged 4,291.

Housing assistance covers a broad range of efforts by federal and state governments to improve housing quality and to reduce housing costs for lower-income households. The Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) administer most federal housing programs. Under current programs, each resident pays approximately 30 percent of his or her income for rent.

In terms of welfare policy, there are two principal types of housing assistance for low-income families: subsidized rent and public housing. The federal government has provided rental subsidies since the mid-1930s and today funds the HUD Section 8 voucher program. Local governments commonly provide for subsidized housing through their building authority in that they require a portion of new construction to be made available to low-income families at below-market rents. Public housing (the actual provision of dwellings) is almost exclusively a federal program administered by local public housing agencies (PHAs), not private owner-managers. In contrast to the mid-1960s, public housing now accounts for a small fraction of overall housing assistance.

Earned Income Tax Credit, enacted in 1975, pays a refundable tax credit for working Americans with low earnings. The tax credit increases family income by supplementing earnings up to a fixed level. The program was initially designed to offset the impact of Social Security taxes on low-income individuals and to encourage individuals to seek employment rather than rely on welfare benefits. Because EITC is part of the regular federal income tax system, receiving benefits is private, unremarkable, and without stigma. In 2004, the EITC paid out 33.1 billion to approximately 18.6 million claimants—several billion dollars more than the amounts projected to be spent on other primary programs such as TANF and food stamps.!---- EITC is one of the few programs that effectively reach the eligible population. Analysis of EITC claims in 1999 shows that 86 percent of eligible families with children received the credit. (In contrast, only 66 percent of eligible households with children received food stamp benefits in 1999.) Although the EITC is generally paid all at once as an annual refund, it can also be included with an employee’s weekly, biweekly, or monthly paycheck.

caption div style"background-color:#FFFFFF" hr span class"title"br bTable 1/b Benefits, Taxes, and Disposable Income for a Family of Four/span /div /caption

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Program Payments Tax Costs Disposable Income Earnings() TANF Food Stamps SSI Sec. 8Housing Federal EITC Health Care Federal Payroll Taxes Federal Income Tax Taxes, EITC Taxes, EITC, TANF, FSP Taxes, EITC, TANF, FSP,Sec. 8 0 8,148 5,988 9,660 10,800 0 MNP 0 0 0 12,663 20,611 4,000 7,498 5,510 8,170 9,400 1,600 MNP 306 0 5,294 16,503 23,279 8,000 5,498 4,550 6,170 8,000 3,200 MNP 612 0 10,588 19,317 25,393 12,000 3,498 3,590 4,170 6,600 4,300 MNP 918 0 15,382 21,631 27,007 16,000 0 2,630 2,170 5,200 4,101 Child 6–19 1,224 0 18,877 21,507 26,707 20,000 0 1,670 170 3,800 3,261 Child 1–6 1,530 0 21,731 23,401 27,201 24,000 0 710 0 2,400 2,421 Child 1–6 1,836 190 24,395 25,105 27,505

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Level of Benefits and Impacts on Work Incentives

How much do the above safety-net programs pay in benefits? Table 1 presents the benefit levels provided to a qualifying family whose annual earnings equal the amounts listed in the first column of the table. Calculations in this table assume that the family includes a father, a mother, and two children below the age of eighteen, and that this family lives in California.1 According to the row in the table for a family that earns 8,000 a year, this family would be eligible to receive 5,498 from TANF, 4,550 from food stamps, 6,170 from SSI, 8,000 in housing benefits from the Section 8 program, and 3,200 from EITC, for a total of 27,418 in government assistance. Moreover, this family would qualify for Medicaid’s Medically Needy Program (MNP), wherein all family members would receive zero-price health care. On reaching 16,000 in earnings, the family would qualify for Medicaid’s Children Ages 6 to 19 Program (Child 6–19), which provides zero-price health care to all children in the family; and at 20,000 in earnings, the family would qualify for Medicaid’s Children Ages 1 to 6 Program (Child 1–6), which offers zero-price health care to all children ages six and below.

To determine the disposable income available to a family, one needs to add the family’s earnings and the payments it receives in program benefits and then subtract the amounts paid in taxes. Any family faces three categories of taxes: Social Security payroll taxes, federal income tax, and state income tax. The eighth and ninth columns of the table show the amounts a family of four must pay in payroll and federal income taxes for the various levels of earnings—the negative values in these columns indicate payments that subtract from income rather than add to income. The table does not include a column for state taxes because none are paid for any of the income values considered in the table. The last three columns of the table report a family’s disposable income for each level of earnings, assuming participation in the programs listed in the associated column. The family that earns 8,000 receives 10,588 in disposable income for the year when it chooses not to participate in any welfare program and obtains benefits only from EITC. This family’s disposable income grows to 19,317 if it decides to take TANF and food stamps and to 25,393 if it also chooses to obtain assistance for rent.2

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Note, by looking at the “Taxes, EITC, TANF, FSP” column, that a family participating in these programs increases its disposable income by 5,294 when it raises its earnings from zero to 4,000. That means that, in this range of earnings, work is rewarded; the family actually increases its disposable income by more than 4,000. But if a family raises its earnings from 12,000 to 16,000, its government benefits fall so much that its disposable income literally declines by 124. This happens because program benefits fall as earnings rise. Families facing these latter circumstances (earning 12,000) clearly have no incentive to increase their work effort since they will see no enhancement of their spending power. If one alters the family’s situation and also has it participate in housing programs, then the last column shows that raising earning from 12,000 to 24,000 yields merely 498 more in disposable income. Such features of our welfare system sharply reduce the returns of work, and in doing so discourage families from increasing their work activities. The U.S. welfare system enhances work incentives at low levels of earnings, but discourages work thereafter. To counterbalance such work disincentives, welfare reform in the mid-1990s introduced work requirements that required families to work above specific thresholds in order to qualify for benefits.

Future Directions

Welfare reform was enacted to promote self-sufficiency and to improve flexibility in the design of income-maintenance programs. To a large extent, these goals have been achieved. TANF has brought about substantial increases in the work activities of low-income families and enhanced states’ flexibility to create welfare systems unique to their constituencies. States are using the monies they are allocated in a more efficient manner—focusing on job readiness, child care, education, and work placement.

What other policy trends characterize the evolution of welfare system in the United State today? Briefly, two key forces are changing the basic relationship between the government and welfare recipients in all programs.

First, welfare programs at all levels are being geared toward more work-related activities. Nearly every program gives priority to parents who show a willingness and commitment to work. At the same time, able-bodied adults who refuse to work now find themselves disqualified from many programs. The emphasis on work has gained strength only since 1996. Proposals for the reauthorization of welfare!---- reform all generally push for stricter work requirements and a longer work week.

Second, there has been a movement from pure in-kind provision to voucher-based systems. In-kind provision represents government efforts to both fund and directly serve the poor. Voucher systems are being emphasized not only for shelter but also for provision of food, health care, job training, and child care, among others. A cash-equivalent voucher is provided directly to the person served, who then redeems the voucher at any qualified/authorized service provider. This approach brings some of the advantages of market-based economics to the provision of welfare. The recipient spends dollars on the things he or she wants most. A classic example is public housing. HUD provides the funding for most public housing, and local government housing authorities use it to buy or build publicly owned residential units. This inefficient use of funds segregates low-income families into common facilities that typically duplicate housing resources that are widely available in the private market. Over the past decade, HUD and other government providers have been opting to fund more voucher-based, Section 8-type housing to meet the needs of the poor, thus allowing recipients greater choice in where they live.

Although welfare reform has achieved success in a short amount of time, more reform is needed. Of the many government assistance programs, only one, TANF, has seen any significant reform. The remaining programs (food stamps, SSI, housing assistance, Medicaid, and EITC) are about as inflexible as ever and generally ignore what is going on in the rest of the system. Future policy initiatives are likely to alter these programs toward the direction set for TANF in the 1990s welfare reform, with the two above trends continuing to influence new reforms.

Does Welfare Help the Poor?

David Henderson

Economists believe that people tend to make decisions that benefit themselves, so the answer to the above question seems obvious. If welfare did not help the poor, then why would so many of them go on welfare? This self-interest among the poor could also explain a phenomenon noted by those who study welfare, namely that only about one-half to two-thirds of those who qualify for welfare programs are enrolled in them. Presumably, the others have decided that it is in their self-interest to refuse the money and keep the government from meddling in their lives.

So, while it seems clear that welfare helps the poor who accept welfare, that does not mean that welfare helps the poor generally. Two groups of poor people, not counted in the welfare statistics, are hurt by welfare. The first group consists of the future poor. Economists know that welfare is a disincentive to work, and, therefore, that its existence reduces an economy’s output. If even some of this output would have been used for research and development, and if this forgone R&D would have increased growth, then welfare hurts growth by reducing R&D. If the annual growth rate of GDP in the United States had been just one percentage point lower between 1885 and 2005, then the United States today would be no richer than Mexico. The main thing that helps all poor people in the long run is economic growth. Even though the 1920s are thought of as a decade of prosperity, by today’s standards almost all Americans in the 1920s were poor. Economic growth made almost all Americans richer than their counterparts of the 1920s. A reduction in economic growth, even a slight one, if compounded, causes more future poverty than would otherwise have been the case.

The second group hurt by U.S. welfare is poor foreigners. The welfare state acts as a magnet for poor immigrants to the United States. Because of this, there are various domestic pressures to limit immigration. Without the welfare state, the number of immigrants would likely rise substantially, meaning that many previously poor foreigners would become much richer. The welfare state limits this improvement.

Based on Tyler Cowen, “Does the Welfare State Help the Poor?” Social Philosophy and Policy 19, no.1 (2002) pp. 36–54.

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About the Authors

Thomas MaCurdy is the Dean Witter Senior Fellow at the Hoover Institution and a professor of economics at Stanford University. He is a member of standing committees that advise the Congressional Budget Office, the U.S. Bureau of Labor Statistics, and the U.S. Census. Jeffrey M. Jones is a research fellow at the Hoover Institution. He was previously executive director of Promised Land Employment Service.

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Further Reading

DeParle, Jason. American Dream: Three Women, Ten Kids, and a Nation’s Drive to End Welfare. New York: Viking Books, 2004.

Jones, Jeffrey, and Thomas MaCurdy. “How Not to Mess Up a Good Thing.” Hoover Digest, no. 2. Stanford, Calif.: Hoover Institution Press, 2003. Pp. 99–108. Online at: http://www.hooverdigest.org/032/jones.html.

MaCurdy, Thomas, and Frank McIntyre. Helping Working-Poor Families: Advantages of Wage-Based Tax Credits over the EITC and Minimum Wages. Washington, D.C.: Employment Policies Institute, 2004. Online at: http://www.epionline.org/studies/macurdy_04-2004.pdf.

Malanga, Steven. “The Myth of the Working Poor.” City Journal (Autumn 2004). New York: Manhattan Institute, 2004. Online at: http://www.city-journal.org/html/14_4_working_poor.html.

Murray, Charles. Losing Ground: American Social Policy 1950–1980. New York: Basic Books, 1984.

O’Neill, June, and M. Anne Hill. “Gaining Ground, Moving Up: The Change in the Economic Status of Single Mothers Under Welfare Reform.” Civic Report, no. 35 (March 2003). New York: Manhattan Institute, 2003. Online at: http://www.manhattan-institute.org/html/cr_35.htm.

Rector, Robert, and Patrick F. Fagan. “The Continuing Good News About Welfare Reform.” Backgrounder no. 1620. Washington, D.C.: Heritage Foundation, 2003. Online at: http://www.heritage.org/Research/Welfare/BG1620.cfm.

Tanner, Michael. The Poverty of Welfare: Fighting Poverty in Civil Society. Washington, D.C.: Cato Institute, 2003.

2004 Green Book. Washington, D.C.: Committee on Ways and Means, U.S. House of Representatives, 2004. Online at: http://waysandmeans.house.gov/Documents.asp?section813.

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Footnotes

To qualify for low-income assistance, the family must have less than two thousand dollars in financial and housing assets. For the calculation of housing benefits, Table 1 assumes that the family pays nine hundred dollars in rent per month. In some circumstances, eligible benefit levels may be affected by dual-enrollment restrictions (e.g., cannot receive TANF and SSI concurrently).

In the calculation of food stamps and housing benefits, payments from TANF count as income: this lowers payments below the amounts listed in the table for the program. The program benefits listed in the first set of columns assume that the family participates only in that particular program.

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Supply

The most basic laws in economics are the law of supply and the law of demand. Indeed, almost every economic event or phenomenon is the product of the interaction of these two laws. The law of supply states that the quantity of a good supplied (i.e., the amount owners or producers offer for sale) rises as the market price rises, and falls as the price falls. Conversely, the law of demand (see demand) says that the quantity of a good demanded falls as the price rises, and vice versa. (Economists do not really!---- have a “law” of supply, though they talk and write as though they do.)

One function of markets is to find “equilibrium” prices that balance the supplies of and demands for goods and services. An equilibrium price (also known as a “market-clearing” price) is one at which each producer can sell all he wants to produce and each consumer can buy all he demands. Naturally, producers always would like to charge higher prices. But even if they have no competitors, they are limited by the law of demand: if producers insist on a higher price, consumers will buy fewer units. The law of supply puts a similar limit on consumers. They always would prefer to pay a lower price than the current one. But if they successfully insist on paying less (say, through price controls), suppliers will produce less and some demand will go unsatisfied.

Economists often talk of “demand curves” and “supply curves.” A demand curve traces the quantity of a good that consumers will buy at various prices. As the price rises, the number of units demanded declines. That is because everyone’s resources are finite; as the price of one good rises, consumers buy less of that and, sometimes, more of other goods that now are relatively cheaper. Similarly, a supply curve traces the quantity of a good that sellers will produce at various prices. As the price falls, so does the number of units supplied. Equilibrium is the point at which the demand and supply curves intersect—the single price at which the quantity demanded and the quantity supplied are the same.

Markets in which prices can move freely are always in equilibrium or moving toward it. For example, if the market for a good is already in equilibrium and producers raise prices, consumers will buy fewer units than they did in equilibrium, and fewer units than producers have available for sale. In that case producers have two choices. They can reduce price until supply and demand return to the old equilibrium, or they can cut production until the quantity supplied falls to the lower number of units demanded at the higher price. But they cannot keep the price high and sell as many units as they did before.

Why does the quantity supplied rise as the price rises and fall as the price falls? The reasons really are quite logical. First, consider the case of a company that makes a consumer product. Acting rationally, the company will buy the cheapest materials (not the lowest quality, but the lowest cost for any given level of quality). As production (supply) increases, the company has to buy progressively more expensive (i.e., less efficient) materials or labor, and its costs increase. It charges a higher price to offset its rising unit costs.

Are there any examples of supply curves for which a higher price does not lead to a higher quantity supplied? Economists believe that there is one main possible example, the so-called backward-bending supply curve of labor. Imagine a graph in which the wage rate is on the vertical axis and the quantity of labor supplied is on the horizontal axis. It makes sense that the higher the wage rate, the higher the quantity of labor supplied, because it makes sense that people will be willing to work more when they are paid more. But workers might reach a point at which a higher wage rate causes them to work less because the higher wage makes them wealthier and they use some of that wealth to “buy” more leisure—that is, to work less. Recent evidence suggests that even for labor, a higher wage leads to more hours worked.1

Or consider the case of a good whose supply is fixed, such as apartments in a condominium. If prospective buyers suddenly begin offering higher prices for apartments, more owners will be willing to sell and the supply of “available” apartments will rise. But if buyers offer lower prices, some owners will take their apartments off the market and the number of available units will drop.

History has witnessed considerable controversy over the prices of goods whose supply is fixed in the short run. Critics of market prices have argued that rising prices for these types of goods serve no economic purpose because they cannot bring forth additional supply, and thus serve merely to enrich the owners of the goods at the expense of the rest of society. This has been the main argument for fixing prices, as the United States did with the price of domestic oil in the 1970s and as New York City has done with apartment rents since World War II (see rent control).

Economists call the portion of a price that does not influence the amount of a good in existence in the short run an “economic quasi-rent.” The vast majority of economists believe that economic rents do serve a useful purpose. Most important, they allocate goods to their highest-valued use. If price is not used to allocate goods among competing claimants, some other device becomes necessary, such as the rationing cards that the U.S. government used to allocate gasoline and other goods during World War II. Economists generally believe that fixing prices will actually reduce both the quantity and the quality of the good in question. In addition, economic rents serve as a signal to bring forth additional supplies in the future and as an incentive for other producers to devise substitutes for the good in question.

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About the Author

Al Ehrbar is a principal in EVA Advisers LLC, an investment advisory firm. He formerly was editor of Corporate Finance magazine and a senior editor of Fortune magazine.

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Further Reading

Alchian, Armen. “Costs and Outputs.” In Choice and Costs under Uncertainty. Vol. 2 of The Collected Works of Armen A. Alchian. Indianapolis: Liberty Fund, 2006. Pp. 161–179.

Robinson, Joan. “Rising Supply Price.” Economica 8 (1941): 1–8.

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Footnotes

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

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Markets without Friction

“If you want to know why at present we own rather than share, the answer is transaction costs. And that is all going to change.” —Michael C. Munger, Tomorrow 3.0: Transaction Costs and the Sharing Economy

In his most recent book, Mike Munger sees Airbnb and Uber as portents of a future in which reduced transaction costs will allow us to make more efficient use of durable goods. In the process, Munger offers other important lessons in economics. His thesis also leads one to worry about the implications for liberty in a society where individuals own less and share more.

A Century of Risk, Uncertainty, and Profit

In 1917, Frank Knight submitted an essay entitled “Cost, Value, and Profit” to Hart, Schaffner, and Marx as part of an essay contest whose aim was “to draw the attention of American youth to the study of economic and commercial subjects.”1 Knight’s essay ended up winning second place. First place went to E. E. Lincoln, for his study of The Results of Municipal Electrical Lighting in Massachusetts, a very good example of institutional economists’ interest in the intersection of industrial studies and public administration which received several nice reviews. Both first and second place manuscripts were entitled by the terms of the essay prize to be published. Lincoln’s book was published immediately after the contest, appearing in 1918. Knight, on the other hand, heavily revised his manuscript at least once more while he taught during 1917-1919 at the University of Chicago and then again between 1919 and 1921 at the University of Iowa. When Risk, Uncertainty and Profit was published in 1921, it received only two reviews. However, while Lincoln’s study was quickly forgotten, Knight’s ended up changing the course of economic theory and teaching in the twentieth century.

How so, you might ask? What can a single book do?

Intellectual Impact

That Lincoln’s essay on municipal lighting won first prize was indicative of a shift in American economics graduate education, which had largely turned away from classic laissez-faire. Senior undergraduate students had previously learned classical laissez-faire economics in courses that assigned John Stuart Mill’s Principles of Political Economy or Francis Wayland’s Elements of Political Economy. The first graduate programs in economics, started in the 1880s, mirrored the German historical school methods that directed students to the study of a particular economic topic—labor, public utilities, transportation, trade, public finance, etc. These programs tended to be light on economic theory (some did not even require theory courses, although they were always offered), while providing historical and institutional study that would prepare students for a career of topical study. Knight’s approach in Risk, Uncertainty and Profit suggested that a core set of economic ideas were necessary to learn in order to understand any economic phenomena, challenging the prevailing institutionalist orthodoxy. Equally important, Knight’s contributions to the theory of perfect competition staked out a position different than those of existing theoretical traditions. While it shared much in common with both the Marshallian and Austrian traditions, Knight also provided a unique explanation for business profit. This explanation reflected modernist tendencies to emphasize uncertainty, while simultaneously grounding the explanation on the willingness of the entrepreneur to make judgments in the midst of uncertainty.

Knight’s Risk, Uncertainty, and Profit also changed how economists thought about competition, largely due to the influence of one of Knight’s own early students. Edward Chamberlin was an undergraduate at the University of Iowa in the early 1920s when he took Knight’s economic theory course. In the introduction to his The Theory of Monopolistic Competition (1934),2 Chamberlin mentions the discussion in Risk, Uncertainty and Profit of all the various prerequisites for perfect competition, suggesting that the inspiration for his own study came from Knight’s comment that, “it is remarkable that the theoretical treatment of economics has related so exclusively to complete monopoly and perfect competition.”3 Ironically, while Chamberlin had taken up the task of filling the gap between these polar extremes, Knight himself had changed his mind about the need for anything other than the theory of perfect competition. As East Coast economists began to follow Chamberlin’s argument, Knight and another of his students, George Stigler, became Chamberlin’s staunchest opponents (see Knight’s 1939 essay “Imperfect Competition”4). Still, Risk, Uncertainty and Profit can be said to have helped launch the monopolistic competition tradition, if indirectly.

The role that Risk, Uncertainty and Profit is best known for today is the contribution it made to the teaching of and theorizing about competitive markets. And here two institutions—the London School of Economics and the University of Chicago—are central to our story. Lionel Robbins began teaching the undergraduate General Principles of Economic Analysis course at the LSE in 1929, and by 1935 had made Knight’s text central to the course. Indeed, Risk, Uncertainty and Profit was so central to Robbins’ LSE teaching that early in 1933, he realized the existing supply was insufficient to match student demand at any price that would fit within a student’s budget constraint! Given that the publisher had ceased further printing of the book, Robbins pleaded with Knight to allow the LSE to include it in the new series of Reprints of Economics Classics. Knight agreed not only to the re-publication but also to writing a new introduction, and the LSE reprint edition soon became the standard, superseded only when George Stigler arranged for another reprint by the University of Chicago Press in 1971.

Risk, Uncertainty and Profit also played a central role in the teaching of price theory at the University of Chicago. When Knight left Iowa to return to Chicago in 1928, Jacob Viner was teaching economic theory there. Knight was, in fact, primarily hired to teach history of economic thought and institutionalism. Viner’s price theory course extended the Marshallian “real cost” tradition, of which Knight was critical, now relying more on the Austrian doctrine of opportunity cost. But Viner was often away on public service, and thus from about 1930 until Viner’s departure for Princeton in 1946, both Knight and Viner taught price theory. Both professors included the theory chapters of Risk, Uncertainty and Profit on their reading lists, but students were quick to spot where both departed from its theoretical contributions. I say both because after 1930, Knight re-thought his way through price theory as he taught it to graduate students, and created new treatments of cost, utility, capital, and interest theory. Chicago’s graduate students, therefore, had a front row seat watching a major theorist in the course of changing his mind. When Knight and Viner were both teaching, graduate students would attend both sets of lectures to see the progress of their debate. Between the early 1930s and the mid-1940s, a new Chicago price theory emerged that assumed the background of Marshall’s Principles and Knight’s Risk, Uncertainty and Profit, but diverged sharply between Viner and Knight. And the tradition continued; Milton Friedman, who replaced Viner, extended the Marshallian tradition in his teaching and research, while George Stigler extended the Knightian tradition. Still, both sides of the Chicago price theory tradition emphasized the importance of being deeply immersed in the theory of perfect competition.

James M. Buchanan, reflecting on his graduate student experience with Chicago price theory as taught by Friedman and Knight, remarked that it converted him from a “soft” socialist to an apostle of laissez-faire in a matter of a few short weeks. The effect was similar on others, and the Chicago tradition grew, but it did not abandon its roots in basic price theory. Between 1930 and 2010—eighty years—five individuals bore primary responsibility for teaching the first price theory course to incoming graduate students in economics: Jacob Viner, Frank Knight, Milton Friedman, Arnold Harberger, and Gary Becker. Two Nobel laureates and two winners of the AEA Francis A. Walker Medal (discontinued after the creation of the economics Nobel). An amazing legacy, built solidly on Marshallian and Knightian roots.

Risk Versus Uncertainty

But what about “Uncertainty,” the other half of the book? The classic interpretation of Knight’s distinction between risk and uncertainty was built on the notion that he linked uncertainty to situations in which we can only form subjective probabilities about events. This distinction was then used to identify an entrepreneur as someone who was willing to bear such uncertainty in particular circumstances. While individuals and firms internalized objective probabilities, entrepreneurs bore the uncertainty associated with subjective probabilities.

Stephen LeRoy and Larry Singell (1987) argued thirty years ago that the classic interpretation of Knight’s distinction may satisfy Austrians who see the economy as constantly out of (and perhaps moving toward) equilibrium, but it does not satisfy Chicago or mainstream theorists.5 Three alternative interpretations thus developed. The first had its roots in Milton Friedman’s (1953) methodological argument for using basic tools until one found it necessary to use something more complicated. Friedman simply assumed that uncertainty could be collapsed into risk analysis unless there was some good reason not to, and he argued that there was almost never a good reason not to.6 The second interpretation emerged from the development of Bayesian statistics, which provided theoretical tools for subjective probability analysis (see Truman Bewley7). But after LeRoy and Singell’s article, the most common means of distinguishing Knightian uncertainty from risk was to refer to Knight’s own suggestion regarding the presence of markets. If one could insure against some unknown outcome, it was risk; if one could not, it was uncertainty. As more and more complicated risk instruments were developed over the years, fewer outcomes could be classified as uncertainty.

But then two events occurred. The first was the 2008 financial crisis, created in part by the very financial risk instruments that economists had been arguing would reduce uncertainty. The second event was the publication of Nassim Taleb’s The Black Swan,8 which resurrected Knightian uncertainty as the “highly improbable.” But Taleb did not suggest that uncertainty could be handled by risk markets. Instead, he made a very Knightian argument: since you cannot protect yourself entirely against uncertainty, you should build robustness into your personal life, your company, your economic theory, and even the institutions of your society, to withstand uncertainty and avoid tragic results. These actions imply costs that may limit other aspects of your business, and even your openness to new opportunity.

Hand-in-hand with robustness as a central message of Knight’s theory of uncertainty has come an emphasis on entrepreneurial judgment. The word “judgment” appears more than once for every two pages in Risk, Uncertainty and Profit, and with good reason. Judging when to take up entrepreneurial actions or not, to hire additional staff as employees or contractors is an art, not a science. Nicolai Foss and Peter Klein have recently launched a Knightian (and Austrian) inspired approach to the firm which focuses on its organization of entrepreneurial judgment.9

Conclusion

For nearly one hundred years, Risk, Uncertainty and Profit has continued to inspire new economic thinking. Initially, its opening chapters on the basic structure of neoclassical economic theory provided the opportunity for theorizing about entrepreneurship that built upon Knight’s theory, even while sometimes criticizing it. For the history of twentieth century economics, it is also important to recognize that the economic theories built in two of the institutions that played important educational roles in the inter-war years—the University of Chicago and the London School of Economics—had Risk, Uncertainty and Profit as their foundation. Even today, in the wake of the shake-up in economic theory that has emerged from the 2008 financial crisis, Knight’s theory of entrepreneurial judgment in the midst of uncertainty is still being taken up for further development.

Great books remain current not because their message is timeless, but because they provide ideas that new generations of scholars and businesses judge to provide value to their intellectual and entrepreneurial objectives. Risk, Uncertainty and Profit has certainly proven to be such a book.

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Footnotes

[1] Frank Knight, Risk, Uncertainty, and Profit, Preface.

[2] Edward H. Chamberlin, The Theory of Monopolistic Competition, Harvard University Press, 1933.

[3] Frank Knight, Risk, Uncertainty and Profit, page 193, footnote 1.

[4] Frank H. Knight, “Imperfect Competition,” Journal of Marketing, vol. 3(4), 1939, pages 360-66.

[5] Stephen LeRoy and Larry Singell Jr., “Knight on Risk and Uncertainty,” Journal of Political Economy, volume 95(2), 1987, pages 394-406.

[6] Milton Friedman, “The Methodology of Positive Economics,” in Essays on Positive Economics, University of Chicago Press, 1953, pages 3-43.

[7] Truman Bewley, “Knightian Decision Theory, Part 1,” Decisions in Economics and Finance, volume 25, 2002, pages 79-110.

[8] Nassim Taleb, The Black Swan: The Impact of the Highly Improbable, Random House, 2007.

[9] Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm. Cambridge University Press, 2012.

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*Ross B. Emmett is Professor of Political Economy, School of Civic and Economic Thought and Leadership, and Director, Center for the Study of Economic Liberty, Arizona State University.

For more articles by Ross Emmett, see the Archive.

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Culture Matters

Libertarian intellectuals and activists know that culture matters. If I had a hundred bucks for every time I’d heard someone chalk up poverty to a black box called “culture” or demand that we “change the culture” or complain that Hollywood or the universities or the media or women in general are culturally biased against markets I could buy a vacation home. And not a cheap one, either.

That culture matters isn’t controversial. The real issue is that most libertarians simply aren’t terribly curious about how culture works. They treat it as an instrument—a tool for promoting or hampering the advancement of their political ideas—rather than a phenomenon worthy of its own careful observation and analysis.

Libertarians and classical liberals know and care about government. They know and care economics. They don’t know or care about culture.

“When faced with cultural outcomes they dislike, people who surely know better fall back on explanations that sound eerily reminiscent of how leftists and populists describe markets.”

One result is that, when faced with cultural outcomes they dislike, people who surely know better fall back on explanations that sound eerily reminiscent of how leftists and populists describe markets. Either a small group of powerful people determine the public’s attitudes and behaviors or somewhere there’s a magic lever and if we could find it and pull it everybody would agree with us. We just need a good documentary film and more celebrities!

But culture is not a tool. It is not a machine. It is an emergent order, as complex, dynamic, and intellectually interesting as the economy—and thoroughly entangled with it.

Here are a couple of useful definitions of culture :

“a way of life of a group of people—the behaviors, beliefs, values, and symbols that they accept, generally without thinking about them, and that are passed along by communication and imitation from one generation to the next.” “the cumulative deposit of knowledge, experience, beliefs, values, attitudes, meanings, hierarchies, religion, notions of time, roles, spatial relations, concepts of the universe, and material objects and possessions acquired by a group of people in the course of generations through individual and group striving.”

Culture includes the topics newspapers put in their “culture” sections—arts and entertainment—and the rest of the newspaper as well. It encompasses how we think and behave. It determines who we trust or fear or censure. Culture shapes who we want to be and who believe we are. It is too important to be treated as an afterthought.

In a liberal order, however imperfect, the competition, criticism, innovation, and open-ended pursuit of better ways of doing things that characterize economic dynamism also give rise to cultural dynamism. Free individuals exercise voice and exit. They use what I’ve called “criticism by expression” and “criticism by example”—otherwise known as complaining and entrepreneurship—to shape new norms and institutions. And since the culture and the economy are not, in fact, separate spheres, the two forms of dynamism affect one another.

I’d like to suggest a few big questions through which classical liberals might make contributions to a better understanding of culture. These questions in no way exhaust the range of possibilities, but they give us somewhere to start.

How do cultural norms shift and why?

The mid-20th century period in which the modern libertarian movement arose is now looked upon with great nostalgia, especially in the United States. As my friend Brink Lindsey puts it, the right wants to live there and the left wants to work there.

When Donald Trump says “Make America Great Again,” the again refers to the world in which he grew up. The war was over, standards of living were rising, and new technologies from vaccines to synthetic fibers promised a better future.

Social critics of the day deplored mass production, mass consumption, and mass media, but the general public enjoyed their fruits. The burgeoning middle class happily replaced tenements with “little boxes made of ticky-tacky.” Snobs might look down on the suburbs, but families were delighted to settle in them. Faith in government was high, and other institutions—universities, churches, corporations, unions, and civic groups—enjoyed widespread respect.

It looked like a satisfactory equilibrium. But it wasn’t. The 1950s, after all, produced the 1960s.

Consider a series of best-selling books: The Lonely Crowd, by David Riesman, published in 1950; Atlas Shrugged by Ayn Rand and The Organization Man by William Whyte, both published in 1957; and The Feminine Mystique by Betty Friedan, published in 1963. All of these books, and undoubtedly others I’ve overlooked, took up the same essential theme: the frustration of the person of talent and integrity in a society demanding conformity and what Riesman called “other-directedness.”

These books succeeded in the economic marketplace, as well as the marketplace of ideas, because they tapped a growing sense of discontent with the prevailing social and business ethos. Their audience might have been a minority of the population, but it was a large, gifted, and ultimately influential one. Despite the era’s prosperity—or perhaps because of it—many people had come to resent social norms that demanded that they keep their heads down, do what was expected of them, and be content to be treated as homogeneous threads in the social fabric. The ensuing cultural upheaval, which peaked in the late 1970s, took many different forms, with unanticipated results.

One of the most paradoxical examples I’ve run across comes from Dana Thomas’s 2015 book Gods and Kings,1 on the fashion designers Alexander McQueen and John Galliano. It’s about Galliano, who was born in Gibraltar and grew up in South London as the son of a plumber. His career, Thomas comments in passing, was made possible by two cultural phenomena: Thatcherism and punk.

How could that be? After all, Thatcherism and punk are usually seen as antagonistic. I asked Thomas about it in an interview. “Both were breaking down British social rules and constraints,” she said. Punk brought together kids of all classes, while Thatcher’s economic reforms encouraged entrepreneurship.

If you had an idea and you had the backing then you could make it happen, no matter what your dad did in life or your mother did in life or where you came from or what your background was, or where you grew up or what your accent sounded like. These were all barriers before. So it double-whammied for Galliano. It was great. Because it allowed him to get out of South London, get into a good art school and be seen as a bona fide talent on his own standing, as opposed to where he came from. And he was also able to get the backing to start his company, because there was more money out there. It gave him more freedom. Before punk and before Thatcherism, chances were the son of a plumber was not going to wind up being the head of a couture house.

If you care about the open society, how could you not be interested in a phenomenon like that? How exactly do such transformations take place, and what are their unexpected ripple effects? What processes of experimentation and feedback are at work? Could a young designer do the same thing today and, if not, why not? Are these moments of cultural and economic opportunity inherently fleeting?

What is the relation between merit and value?

Today’s cultural values and assumptions are as different from those of the mid-20th century as a modern container port is from the harbor in On the Waterfront or a contemporary coffeehouse is from a midcentury diner.

Classical liberals whose intellectual roots are in the mid-20th century often refer to themselves as individualists because, in the middle of the 20th century, their focus on the value, freedom, and agency of the individual made them distinctive.

By the last quarter of the 20th century, that distinctiveness had disappeared. Individualism was no longer a dissenting view. It was the cultural norm, expressed in phrases like “do your own thing” and “follow your bliss.” Social critics began fretting about “expressive individualism” and “bowling alone.”

In both markets and culture, the blue-collar values of loyalty, solidarity, security, and physical production, have largely given way to the creative-class values of creativity, self-expression, risk-taking, and brains. It’s the revenge of the nerds. The winners are symbolic analysts. The losers are guys good with their hands. For those who adhere to the old values, the shift can be infuriating. Many people suddenly feel not merely economically insecure but culturally disrespected.

In The Constitution of Liberty, Friedrich Hayek made the important point that we should not confuse what the market values at a given point in time with what is meritorious. Market value is strictly a matter of relative scarcity—of supply and demand, of the technologies and production functions of the moment. Commanding a higher salary doesn’t demonstrate your intrinsic superiority. Your economic value is historically contingent and separate from your merit.

Naturally people who think their merit should command higher pay don’t appreciate such cold analysis. And economically successful people absolutely hate the idea. I once interviewed a Harvard professor about his experience teaching Hayek.2 Of all Hayek’s ideas, he told me, the merit-value distinction was the one his students found least congenial. “Hard-working, successful, achievement-oriented Harvard students don’t like that idea,” he said. “They’re troubled with the idea that there’s a lot of luck.” So are many libertarians.

As a moral and intellectual point, the merit-value argument is tremendously important. For starters, it is empirically correct. The circumstances of your time and place do determine the potential rewards of your efforts and native gifts. But in treating merit and value as separate phenomena, Hayek’s distinction may be missing how culture (merit) and the economy (value) actually interact. Where do our ideas of merit come from anyway, and how do they relate to economic conditions?

In her account of the Great Enrichment, Deirdre McCloskey argues that a shift in cultural norms about merit led to a vast increase in wealth.3 If she’s right, how did that change come about? The merit ascribed to bourgeois commercial venturing has had its ups and downs over the centuries. Do they track at all with economic value?

Might merit, like value, flow to what is productive but scarce? My husband Steven Postrel argues that “merit tracks value with a lag.” In this formulation, when the economy rewards certain qualities, over time people come to praise those attributes and honor those who exhibit them. I’m not sure Steve’s right, but you can certainly find examples to support his theory.

In 1956, defying the era’s powerful norms of corporate loyalty, a group of engineers dubbed “The Traitorous Eight” left Shockley Semiconductor to start their own company, Fairchild Semiconductor. That startup gave rise to a second generation of companies, including Intel, which gave rise to still others, and on and on. As Silicon Valley grew, employee behavior once deemed traitorous became the new, much-admired norm of high-tech entrepreneurship. Would we admire that behavior if it didn’t produce wealth?

When does value shape ideas of merit or vice versa? Are there any patterns, or these cultural and economic qualities as separate as Hayek suggested?

How does the concept of creative destruction apply to culture?

For more on these topics, see the EconTalk episodes Peter Boettke on Elinor Ostrom, Vincent Ostrom, and the Bloomington School and Deirdre McCloskey on Capitalism and the Bourgeois Virtues. See also Postrel on Progress, by David Henderson, EconLog, December 18, 2012; and Creative Destruction, by Richard Alm and W. Michael Cox in the Concise Encyclopedia of Economics.

Economic dynamism’s trial-and-error learning can look pretty ugly when you’re in the middle of it. Startups fail. Long-standing companies go out of business. People lose their jobs. Cities, regions, or countries decline even as others rise. Investors lose money. Skills developed over a lifetime suddenly become worthless. In the short term, the costs and benefits fall unevenly. In the long run the world is better off—dramatically so, as McCloskey’s work demonstrates.

Is the same thing true of culture? The transitions to new norms can certainly be ugly. We need only look at the emotionally charged hearings on U.S. Supreme Court nominee Brett Kavanaugh’s alleged sexual misconduct as a teenager. Pull back from the specifics of this case and you see cultural dynamism at work. Norms are shifting.

Looking back at the coming-of-age movies popular in the early and mid-1980s, the Scottish journalist Alex Massie observes4:

• At precisely the time when Brett Kavanaugh was a senior at Georgetown Prep and an undergraduate at Yale, movies such as Revenge of the Nerds, Fast Times at Ridgemont High, and Sixteen Candles routinely treated date rape and statutory rape as vehicles for laughs. The kind of boorish, frat-boy behaviour Kavanaugh is accused of was entirely typical of the time and the culture…. None of this means Kavanaugh is guilty. Nor, of course, does it absolve him. But what was more or less mainstream then—particularly in the elite milieu in which he moved—is not considered acceptable now.

The culture is groping toward new standards of behavior. People are trying to find a way to combine sexual liberation and gender equality with gentlemanly propriety and skepticism about drunkenness. It’s the 1970s meets the 1870s, with unpredictable results.

The risk of moral panic and false charges is high. As someone who worries about such things, I’m not entirely comfortable with viewing this process as a cultural dynamic driven by criticism, competition, and feedback. But that’s what’s happening. We’re in the middle of a trial-and-error process, and mistakes are inevitable. The previous equilibrium was unstable and unjust. Finding an alternative is hard.

If classical liberals better understood—or simply were more interested in—how culture evolves, we might have more constructive insights to contribute to the process. What can a liberal analysis tell us about cultural change? Do institutions of experimentation and feedback work to correct errors in cultural systems as they do in economics? Are there significant differences that might affect outcomes? Are the time scales similar or different? Are there institutions that might limit the collateral damage—a worthwhile question in the case of economic dynamism as well?

Each of these three big questions could supply a lifetime’s research agenda for many different people—and they are only a few of the myriad cultural topics that deserve the attention of thinkers who care about the open society. My own work on culture, in fact, largely deals with other topics.

Cultural analysis is psychologically more challenging than economic analysis. We live inside our cultures. Whether we accept or reject prevailing norms, they influence how we think. We have rooting interests. It’s hard to be objective. But it’s worth trying, if only because cultural reality has a way of carrying the day.

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Footnotes

[1] Gods and Kings: The Rise and Fall of Alexander McQueen and John Galliano, by Dana Thomas.

[2] “Friedrich the Great”, by Virginia Postrel. Boston Globe, January 11, 2004.

[3] See, for example, “A conversation with Deirdre McCloskey”. James Pethokoukis interviews Deirdre McCloskey about her work and the Great Enrichment. AEI.org, October 20, 2017.

[4] See, for example, “The Kavanaugh hearings mark a low point in a low era of American politics”, by Alex Massie. CapX.co, September 28, 2018.

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*Virginia Postrel is an author, columnist, and speaker whose work spans a broad range of topics, from social science to fashion, concentrating on the intersection of culture, commerce, and technology. Postrel is the author most recently of The Power of Glamour: Longing and the Art of Visual Persuasion, published by Simon & Schuster. Her previous books are The Substance of Style (2003) and The Future and Its Enemies (1998). She is a regular columnist for Bloomberg View and writes a bimonthly column on history and material culture for Reason Magazine, of which Postrel was the editor from July 1989 to January 2000. Under her leadership, Reason was a finalist for the National Magazine Awards, the industry’s highest honor, for essays in 1993 and public interest journalism in 1996 and in 1998, when Reason had two finalist articles. She founded Reason.com in 1995, establishing Reason as an online pioneer.

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Democracy and Its Discontents

Democracy today receives the general assent of humanity, yet it also suffers from infirmities that make others doubt its very survival. Is democracy mainly the political expression of the principle of individual sovereignty? Or is it rather characterised by the levelling of the rights and condition of the citizens? Or must it be understood as the expression of communal and national feelings?

As regards the procedural side of political arrangements, constitutions are increasingly seen as expressions of class struggle to be set aside as soon as a new popular coalition attains power. Representative democracy, whereby citizens delegate political decisions to deputies, senators, or presidents, is considered elitist. Referenda, which should help the people make their voice heard on questions of great import, often turn into plebiscites and become instruments of confrontation or even oppression. The separation of powers, devised as a barrier to stop precipitous decisions to satisfy short term opinion, is continually side-stepped by demagogues greedy for power.

If we look at the material rather than the formal content of politics, the picture is also dismal. The welfare state, adopted by so many nations after World War II, is a dream that can easily turn into a nightmare. The belief that the state should protect individuals ‘from cradle to grave’, if taken seriously, results in infringements of individual liberty. Art and science must be protected and financed by the state. Education should be principally delivered by the public administration. Health services should be universal and free at the point of service. The ‘precautionary principle’, especially as applied in the European Union, justifies growing regulation. In sum, democracies must try to foster the happiness and well-being of the population by any means at hand or at whatever cost.

My thesis is that the only way to save democracy from the contradictions that cause so much discontent is to take individual liberty as the basic principle and re-interpret the other two elements as subordinate to the principle of individuality.

The individual and democracy

Logically speaking, democracy is a corollary of individual sovereignty. Individualists who see individual freedom as the basis of a well-ordered society will be naturally led to defend the participation of citizens in public affairs. They will want their voice to be heard and their vote to count in communal questions that affect them.

However, classical liberals face two kinds of problems in the practice of democracy. One is that political decisions always have an element of imposition that can lead to the oppression of minorities. The other is that the complexity of political mechanisms allows small groups to exploit the democratic system to their own benefit.

The step from individual private action to collective democratic decision is not an easy one. How different it is to take decisions in the private sphere from decisions in the public field was well expressed by Milton and Rose Friedman in their book Free to Choose (1980)

The ballot box produces conformity without unanimity; the marketplace, unanimity without conformity. That is why it is so desirable to use the vote in as far as possible only for decisions where conformity is essential.

For more on these topics, “Ronald Coase, the Unexpected Economist”, by Pedro Schwartz, Library of Economics and Liberty, Oct. 7, 2013 and Externalities, by Bryan Caplan in the Concise Encyclopedia of Economics. See also “Lessons and Challenges in The Limits of Liberty“, by Pierre Lemieux, Library of Economics and Liberty, Nov. 5, 2018.

Market choices and private contracts are fundamentally different from authoritative decisions and communal agreements. In family life, in personal friendships, and in the marketplace a special kind of unanimity reigns, unanimity ‘nemine discrepante‘, when two agree and the rest abstain. This is to say, in the private field, when two persons or two firms reach a free agreement to their mutual benefit, the rest of society abstains.1 Economists since John Stuart Mill and Arthur Pigou have over-insisted on the idea that all private agreements have ‘externalities’ that must be corrected. One should follow Ronald Coase instead in saying that so-called ‘market defects’ are optimal adaptations by individuals to defects of politics and institutions. As James Buchanan has remarked, the concept of externalities assumes that some authority outside those implied in an agreement can define what the optimal outcome should be. Rather, if those implied find defects in the result they will question the institutional framework in which they function.2

“The essence of politics is that the majority imposes its will on the minority in pursuance of a social objective.”

The essence of politics is that the majority imposes its will on the minority in pursuance of a social objective. Classical liberal constitutions must therefore agree to entrench the respect of human rights, the defence of private property, and the performance of contracts. However, there is always a remnant of questions that demand to be agreed upon by a majority, at least in matters of justice and defence and the taxation needed to finance them. Here is the origin of the defects of public action and of the danger that majority decisions result in the oppression or exploitation of minorities, and even in a populist tyranny.

Saving democracy from itself

What is to be done? We could try to change our electoral laws. Senators and Representatives in the U.S. Congress, for example, could be subject to term limits. Frequent referenda could be tried, along Swiss lines. And while we are at it, we could also decentralise power radically as among the cantons of Switzerland. Or rewrite our constitutions to move them away from the catalogues of rights without duties they have become. And reinforce the checks and balances on executive power that used to be their essence.

I am afraid I must express scepticism regarding these reforms. All electoral laws in their diversity are imperfect and changes satisfy few people. Referenda have been a force for good in Switzerland, a bearable process in Canada, and rather unsuccessful in California. Devolution is positive when not transformed into metaphysical nationalism. Even a Constitution like that of the United States, which appears as an immoveable bulwark of liberty, has changed, sometimes for good, sometimes for ill, by the Supreme Court following the moods of public opinion. Thus, I find Buchanan’s belief in constitutional reform and constitutional limitations perhaps a little naïve.

Three forces for freedom

Democracy plods on thanks to three powerful antitoxins. First, there seem to be automatic political stabilisers at work in the system. I find it striking that the size of the state in even the most interventionist countries is pulled back to an average of 40 or 50 percent of GDP when voters find that going beyond that seriously endangers growth. While still a large proportion of our yearly production, we must be thankful for small mercies: in the long run, competition between democracies with regard to personal freedom, economic progress, and scientific prowess strikes a chord with many voters. When it becomes evident that ‘liberal’ or ‘social democratic’ policies have become an obstacle to prosperity, there frequently arise movements in favour of free market policies. Such reactions against the drift towards the ‘dormant society’ of socialism took place in Britain with Margaret Thatcher, in the United States with Ronald Reagan, in New Zealand with economics ministers Roger Douglas and Ruth Richardson, in Poland thanks to Leszek Balcerowicz, and in Sweden under Carl Bildt. But for a person of democratic convictions and free market beliefs there are another two more powerful reasons for hope: international trade and technological discoveries.

See “The Bother with Brexit”, by Pedro Schwartz, Library of Economics and Liberty, Aug. 6, 2018.

The first is free trade. In a large country such as the United States or a sizeable area such as the European Union, international trade and migration will, despite the regulators, always be a force for competition. This is even truer of small countries whose size forces them necessarily to be open to the world. In both cases, international trade will be a potent antitoxin against coalitions of rent seekers. It is only in middle sized economies with a national market large enough for established firms to prosper that interest groups with political clout will be able to hold their ground against international competition. Anti-trust will be used as a fig leaf to cover their privy parts against prying eyes. In the same way, these protectionist countries will use international aid to cover up the harm caused to developing countries by their import restrictions. This is one of the reasons why people who defend a ‘hard Brexit’ would like to see Britain leave the European Union with no more ado and open its commercial borders unilaterally to all comers.

The second reason for hope is the immense development of the digital world. The new communication technologies, big data in the cloud, the growing abundance of open information, internet manufacturing, 3D printing, and so on, seem unstoppable. The balance of Joseph Schumpeter’s creative destruction will be positive, despite the efforts of state authorities to control the internet and the people who use it.

Democracy can be learnt

I do not want to sound too pessimistic because it is an observable fact that democracy at higher stages of civilisation is less imperfect than in countries that are just beginning to learn the strange ceremonies of free speech, independent courts, private property, and respect for the dignity of individuals. I unashamedly hold it that it is better, as Karl Popper used to say, to be able to change your government without bloodshed: it is quite an advance in political mores to send your adversaries to the opposition benches rather than to shoot them at dawn, or condemn them to life imprisonment after a spate of torture. Voting is in itself a curious procedure that we have agreed to put in place of the more natural ideology expressed by the dictum that power comes out of the mouth of a gun.

For all its faults, democracy is better than other political arrangements. I would rather live in one of those rickety western commonwealths than in China or Russia, let alone Cuba. It takes a long time and much forbearance to acquire the habits of tolerance and of distaste for oppression, even of one’s political enemies. But these habits can be learnt. Experience and criticism can help countries avoid the worst blemishes of popular governance.

A precondition for the three forces I mentioned to succeed in purging democracy of its worst habits is never to cease in the effort of discovering of new ideas for progress and new arguments for liberty.

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Footnotes

[1] A business deal such as the sale of a house results in the mutual benefit of the parties concerned, which in principle does not affect the rest of society. This is not to deny that such a contract has consequences for third parties, in so far as it (even if minimally) influences real estate prices. But it is a rule to be abided to, that the pecuniary effect of transactions should not be interfered with, because the information gathered in prices is necessary for the correct and rational behaviour of individuals.

[2] See James Buchanan (1984): “Rights, Efficiency, and Exchange: The Irrelevance of Transaction Cost.”

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*This is a revised version of the paper I presented at the September/October Mont Pelerin Society General Meeting at Las Palmas de Gran Canaria.

Pedro Schwartz is “Rafael del Pino” Research Professor of economics at Universidad Camilo José in Madrid. A member of the Royal Academy of Moral and Political Sciences in Madrid, he is a frequent contributor to the European media on the current financial and social scene. He was a past President of the Mont Pelerin Society.

For more articles by Pedro Schwartz, see the Archive.

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William Nordhaus versus the United Nations on Climate Change Economics

William Nordhaus was a co-recipient of this year’s Nobel Prize in economics for his pioneering work on the economics of climate change. On the day of the Nobel announcement, the United Nations’ Intergovernmental Panel on Climate Change (UN IPCC) released a special report1 advising the governments of the world on various steps necessary to limit cumulative global warming to 1.5 degrees Celsius. The major media coverage treated the two events as complementary.2 In fact, they are incompatible. Although Nordhaus favors a carbon tax to slow climate change, his own model shows that the UN’s target would make humanity poorer than doing nothing at all about climate change.

Indeed, we can use Nordhaus’s and other standard models to show that the now-championed 1.5C target is ludicrously expensive, far more costly than the public has been led to believe. This is presumably why the new IPCC special report does not even attempt to justify its policy goals in a cost/benefit framework. Rather, it takes the 1.5C target as a politically “given” constraint and then discusses the pros and cons of various mechanisms to achieve it.

It is ironic that in the context of accusations that opponents of government intervention are “science deniers,” the latest UN report largely ignores the peer-reviewed publications in climate-change economics, including those of the man who just won the Nobel Prize in the field.3

Nordhaus’s “DICE” Model

Nordhaus is arguably the inventor of the modern economics of climate change, with contributions going back at least to his 1979 book.4 Then, in the 1990s, he, along with others, developed the Dynamic Integrated Model of Climate and the Economy (DICE). Nordhaus and co-author Joseph Boyer, in a 2000 book, outlined the DICE model as well as a regional version called RICE and in 2008, Nordhaus published a book summarizing the model as of 2007. He updated his model in 2016 and published technical papers in 2017 based on its latest findings.

Nordhaus subscribes to the standard view that greenhouse gas emissions from human activities constitute a negative externality and, therefore, recommends that the governments of the world implement a carbon tax. One of his major purposes in developing and refining his DICE model is to estimate the “social cost of carbon.” The social cost of carbon is the present value of the net future harms from an additional ton of emissions in a particular year. A related purpose of Nordhaus’s DICE model is to estimate the trajectory of the optimal carbon tax over time. (Note that the “social cost of carbon” trajectory depends on government policy. In the presence of an optimal carbon tax, the volume of future emissions will be lower than otherwise. Thus, on the margin, an additional ton of carbon dioxide emitted in, say, 2050 will be less damaging than it would have been in the laissez-faire baseline.)

I endorse neither Nordhaus’s diagnosis of “market failure” nor his prescription for a carbon tax. Indeed, I have critiqued Nordhaus’s model elsewhere,5 and I have co-authored a study with climate scientists in which we make the case against a generic U.S. carbon tax.6

For the purposes of the present article, however, I stipulate Nordhaus’s work as representative of the state of the art when it comes to the mainstream economics of climate change. That is all we need to show that the UN’s special report on climate change is utterly at odds with the literature.

Nordhaus’s 2007 Results Showed Current UN Target Much Worse Than “Doing Nothing”

As I explain in greater detail in my 2009 journal article, the exposition Nordhaus gave for his 2007 model runs was useful in showing the consequences of various climate policy goals. Below, I reproduce a table from my article, which I adapted from a table in Nordhaus’s 2008 book.

Table 1. Relative Benefits and Costs of Various Climate Policies According to DICE-2007 (Trillions of 2005 US)

figure id"table_1"a href"https://www.econlib.org/wp-content/uploads/2018/11/MurphyNordhausT1.png"img src"https://www.econlib.org/wp-content/uploads/2018/11/MurphyNordhausT1.png" width"100%"/a/figure

Source: Table 4 from Murphy (2009), p. 211.

The first row of the table shows what the DICE model—as of its 2007 calibration—estimated would happen if the governments of the world took no major action to arrest greenhouse gas emissions. There would be significant future environmental damages, which would have a present-discounted value of 22.55 trillion.

In contrast, the second row shows what would happen if the governments implemented an optimal carbon tax. Because emissions would drop, future environmental damages would fall as well; that’s why the PDV of such damage would be only 17.31 trillion. However, even though the gross benefits of the optimal carbon tax would be some 5 trillion as a result (because of the reduction in environmental harms), these gross benefits would have to be offset by the drag on conventional economic growth, or what is called “abatement costs.” Those come in at a hefty 2.20 trillion (in PDV terms), so that the net benefits of even the optimal carbon tax would be “only” 3.07 trillion.

Consider, now, the scenario “Limit temp. to 1.5C.” Recall that this is the IPCC’s current policy goal and that various environmental analysts and pundits also embrace it. Because Nordhaus just won the Nobel Prize for his work on climate change, one might suppose that his model would provide support for the UN’s goal. It doesn’t.

As Table 1 indicates, Nordhaus’s model—at least as of its 2007 calibration—estimated that such a policy goal would make humanity 14 trillion poorer compared to doing nothing at all about climate change. Moreover, the 14 trillion magnitude of the net damages from the wrong policy—including what is now the UN’s goal—dwarfs the 3.07 trillion size of the net benefits from even the best theoretically possible policy.

Notice, also, that two of the other impoverishing policies considered by Nordhaus were not the product of his fanciful imagination but, instead, were proposals that either other economists (Nicholas Stern) or famous political figures (Al Gore) offered. The difference in the two Kyoto scenarios also showcases the sensitivity of the calculations to the participation of the world’s major emitters; the 3.07 trillion net benefits from a carbon tax accrue only if all of the governments enact the textbook carbon tax profile for more than a century.

In light of Nordhaus’s calculations shown above, the apparently urgent need for “climate action” is not so urgent. It now looks more analogous to economists discovering the theoretical possibility of an “optimal tariff” but still understanding that free trade is the safest rule of thumb.

Nordhaus’s 2016 Results Recommend a Ceiling of 3.5C

Over the years, Nordhaus has updated his model, and he now believes, due to developments in the physical sciences, that the potential harms from climate change are worse than he believed back in 2007. In 2009, for example, Nordhaus estimated the social cost of carbon in the year 2025 at 16 per ton of COsub2/sub (measured in 2010 U.S.). In contrast, according to his 2016 projections, Nordhaus puts the 2025 social cost of carbon at 44 per ton (in 2010 )—which means the estimate has almost tripled in less than a decade.

Before proceeding, it’s worth noting that this outcome shows just how fluid the “economics of climate change” literature really is. Imagine physicists inflating their estimates of the charge on an electron, or the mass of the moon, by such a large amount in such a short time span. Rather than justifying aggressive new government policies that would carry a huge price tag, such shifting “consensus science” might understandably make us pause because even the scientists in the area clearly don’t understand the field very well.

But let’s put aside these concerns and take Nordhaus’s 2016 version of his model at face value. Despite the huge increase in the estimated harms of future climate change, Nordhaus still recommends a relatively modest deviation from the laissez-faire baseline, as the following diagram indicates.

Figure 1. Cumulative Global Warming Under Various Policy Options, According to DICE-2016.7

figure id"figure1"a href"https://www.econlib.org/wp-content/uploads/2018/11/MurphyNordhausFig12018.11.png"img src"https://www.econlib.org/wp-content/uploads/2018/11/MurphyNordhausFig1_2018.11.png" width"100%"/a/figure

Source: Figure 4 from Nordhaus (2017).

As Figure 1 indicates, as of 2016, Nordhaus’s model (using the median settings on various parameters) projected that unabated global warming would reach a little above 4C by 2100. In contrast, if the governments of the world implemented an optimal carbon tax, warming would be constrained to 3.5C.

To get a sense of the significance of this temperature gap, consider: Nordhaus calculates that to justify a 2.5C ceiling, the implied social cost (or what is often, though misleadingly, referred to as the “shadow price”) of carbon in 2025 would be 284 per ton, which is more than six times Nordhaus’s own estimate of a social cost of carbon that year of 44 per ton.8 (A carbon tax of 284 per ton of COsub2/sub works out to a gasoline tax of about 2.50 per gallon.) And remember that this chasm in the implied harm of carbon dioxide emissions relates to the difference between a ceiling of 3.5C and one of 2.5C. The gap would be much bigger still for a ceiling of 1.5C. In the next section, we spell out how large the negative externality from carbon dioxide would have to be to justify a 1.5C ceiling.

Estimates of the Social Cost of Carbon versus the UN’s Implied “Shadow Price”

In the previous section, we saw that the latest version of Nordhaus’s model suggests that the “optimal” amount of global warming is far higher than what the UN and many in the media are now recommending as necessary in order to avert catastrophe. In this section, we can use a different approach to illustrate the enormous gulf between the UN’s 1.5C goal and the findings of the literature on the economics of climate change.

In its earlier mentioned special report, the UN stated:

Cross-Chapter Box 5: Economics of 1.5C Pathways and the Social Cost of Carbon

… In CEA [cost-effectiveness analysis], the marginal abatement cost of carbon is determined by the climate goal under consideration. It equals the shadow price of carbon associated with the goal which in turn can be interpreted as the willingness to pay for imposing the goal as a political constraint. Emissions prices are usually expressed in carbon (equivalent) prices…. Since policy goals like the goals of limiting warming to 1.5C or well below 2C do not directly result from a money metric trade-off between mitigation and damages, associated shadow prices can differ from the SCC [social cost of carbon] in a CBA [cost-benefit analysis]. In CEA, value judgments are to a large extent concentrated in the choice of climate goal and related implications, while more explicit assumptions about social values are required to perform CBA. [UN IPCC Special Report, pp. 2-76 and 2-77, citations removed, bold added.]

In other words, the UN’s special report explains that it will not try to quantify the costs and benefits of emissions and then recommend an appropriate carbon tax (or other mitigation policies) in order to equate marginal benefits with marginal costs. Rather, the UN is taking as given that the goal is to limit global warming to 1.5C and, based on that assumption, will consider the costs of various possible means of achieving that goal.

If one wants to relate the UN’s analysis to the published literature on cost-benefit analysis, we can back out the implied “shadow price” of, or implicit tax on, carbon from the various measures. But the text warns the reader that these implied “carbon prices” will not necessarily line up with the published estimates of the social cost of carbon, which, as noted earlier, quantifies the negative externality of emissions.

So just how big is this discrepancy between the optimal tax and the “carbon price” implied by the UN’s desired goal? Consider the following comment from a Resources for the Future (RFF) essay, which is very sympathetic to the UN special report:

By design, the IPCC report is not policy-prescriptive. However, it does present a range of carbon prices necessary to keep emissions on track to meet the 1.5ºC target. The level and significant range of prices— from 135 to 5,500 per ton of carbon dioxide emissions in 2030 —have caught our attention…. [RFF, bold added.]9

To translate this into plain English, the RFF writers are explaining that the measures considered in the latest UN report are going to reduce particular units of emissions at a cost to the conventional economy of up to 5,500 per ton in 2030. (A carbon tax of 5,500 per ton works out to a gasoline tax of 48 per gallon.) In a standard cost-benefit approach, this would be economically efficient only if the estimated social cost of carbon were also in this range.

What does the economics of climate change literature have to say about the social cost of carbon? The Obama Administration established an Interagency Working Group on the Social Cost of Carbon (SCC), in which it used leading models—including Nordhaus’s DICE, along with two others—to estimate the SCC through the middle of the 21st century. According to its last update, published in early 2017, the Obama EPA reported that the SCC in 2030, using the standard 3% discount rate, would be 50 per ton. Thus, the UN’s target of 1.5C is implicitly treating the marginal units of greenhouse gas emissions as being anywhere from 1.6 to 100 times more damaging than the Obama Administration’s team estimated.

Conclusion

Both fans and critics of William Nordhaus’s computer model of the global economy and climate acknowledge that it is a crude approach that omits many crucial real-world considerations. Even so, it is surely significant that the work that won Nordhaus the Nobel Prize says quite plainly that the UN’s special report on climate change is full of proposals that are ludicrously expensive. In an interview after Nordhaus accepted his prize, he diplomatically handled the situation by saying that the 1.5C target is impossible to achieve at this point.10 Yet we can go further. Nordhaus’s work shows that such an aggressive goal would make humanity much worse off than if we simply adapted to climate change with no government measures.

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Footnotes

[1] United Nations Special Report, “Global Warming of 1.5C,” Intergovernmental Panel on Climate Change (IPCC).

[2] See for example Binyamin Appelbaum, “2018 Nobel in Economics Is Awarded to William Nordhaus and Paul Romer,” New York Times, October 8, 2018.

[3] In this article, I focus on the published model results of Nobel laureate William Nordhaus, which are consistent with other models of the global economy and climate. However, the reader should be aware that climate change economists such as Martin Weitzman have developed frameworks that place greater weight on unlikely but catastrophic outcomes. In these approaches, it is efficient to engage in more aggressive government action against climate change than in the more conventional cost/benefit framework used by Nordhaus and others. See for example Martin Weitzman, “Fat-Tailed Uncertainty in the Economics of Catastrophic Climate Change,”.

[4] William Nordhaus. (1979) The Efficient Use of Energy Resources. New Haven, Conn: Yale University Press.

[5] Robert P. Murphy. (2009) “Rolling the DICE: William Nordhaus’ Dubious Case for a Carbon Tax,” The Independent Review, vol. 14, no. 2, Fall 2009, pp. 197-217.

[6] Robert P. Murphy, Patrick J. Michaels, and Paul Knappenberger. (2016) “The Case Against a U.S. Carbon Tax,” Cato Institute Policy Analysis No. 801, October 17, 2016.

[7] The diagram in Figure 1 comes from William Nordhaus, “Projections and Uncertainties About Climate Change in an Era of Minimal Climate Policies,” NBER Working Paper 22933, Revised September 2017.

[8] See Table 1 from William Nordhaus, “Revisiting the social cost of carbon,” Proceedings of the National Academy of Sciences (PNAS), January 30, 2017.

[9] Kevin Rennert and Marc Hafstead, “Latest IPCC Report Sounds New Alarm on Global Climate Policy,” Resources for the Future (RFF) Online Magazine, Issue 199, Fall 2018.

[10] Coral Davenport, “After Nobel in Economics, William Nordhaus Talks About Who’s Getting His Pollution-Tax Ideas Right,” The New York Times, October 13, 2018.

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*Robert P. Murphy is Research Assistant Professor with the Free Market Institute at Texas Tech University. He is the author of Choice: Cooperation, Enterprise, and Human Action (Independent Institute, 2015).

For more articles by Robert P. Murphy, see the Archive.

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Re-Imagining the Economist’s Role in Policy

… if it is to be a contractarian recommendation, it must be addressed to the individuals whom it will affect. —Robert Sugden, The Community of Advantage

In his new book,1 economist Robert Sugden challenges the philosophical underpinnings of conventional economic policy analysis. He takes particular aim at the use of behavioral economics to justify paternalistic intervention, as advocated by Cass Sunstein and Richard Thaler (co-authors of Nudge2), among others.

When writing an article for a professional journal, an economist often will include a section on “policy implications.” This falls within a tradition in neoclassical economics of trying to find policies that improve social welfare. Paul Samuelson and Abram Bergson went so far as to propose that economists think in terms of maximizing a social welfare function, meaning that we would aggregate the utility of all citizens and solve for the optimum. Although the project of calculating aggregate utility was found to be problematic, “welfare economics” still operates as if a social welfare function exists.3

Sugden points out that this neoclassical approach has the economist address his or her recommendations to a hypothetical benevolent autocrat. In effect, the economist plays the game that Kenneth Minogue called “fantasy despot.”4

As an alternative framework, Sugden proposes what he calls contractarianism, which he credits to James M. Buchanan. Instead of thinking in terms of social decisions made by benevolent autocrats, Sugden’s contractarian treats decisions as made by individuals acting voluntarily and in concert. The job of the welfare economist is to act as a mediator, making individuals aware of opportunities for mutually agreeable bargains as suggested by the economist’s research.

See Ronald Coase, biography in the Concise Encyclopedia of Economics. See also Ronald Coase on Externalities, the Firm, and the State of Economics, an interview with Ronald Coase, EconTalk, May 2012.

For example, consider the social problem of reducing carbon emissions. Using the standard neoclassical approach, many economists suggest that the benevolent despot should impose a carbon tax. Using the contractarian approach, we would instead suggest bargains to which everyone might agree. This might mean a bargain in which everyone agrees to pay a carbon tax, but some of the money raised goes to compensate those who are adversely affected, such as workers in the coal industry. The economist’s calculations would assist people in undertaking the Coasian bargaining required to get everyone to agree to a carbon-emission reduction plan.

“Whatever the philosophical shortcomings of the benevolent-autocrat model, it seems much simpler to implement public policy by fiat rather than through multi-person bargaining.”

It is fair to ask whether this contractarian approach is really feasible in practice. Whatever the philosophical shortcomings of the benevolent-autocrat model, it seems much simpler to implement public policy by fiat rather than through multi-person bargaining.

As a behavioral economist, Sugden is concerned with less complex bargaining situations. An example that he frequently discusses is Sunstein and Thaler’s cafeteria manager, who they argue should influence patrons’ food choices by placing healthy foods at the front of the line. That way, patrons may fill their trays with salads and fruits before they get to fattening desserts. Patrons are then presumably more likely to pass on the unhealthy foods; whereas if they arrive at the cake section with room on their trays, then they are likely to take the food that is bad for them.

See Richard Thaler on Libertarian Paternalism, EconTalk, November 2006.

Sugden argues that this paternalistic approach assumes that the cafeteria manager knows something about the “true” preferences of the patrons that the patrons themselves do not know. The patron does not “really” want a rich dessert. Knowing this, Thaler and Sunstein’s cafeteria manager sets up the food in order to minimize temptation.

Sugden says that this concept of “true” or “rational” preferences is embedded in most of behavioral economics. The intervention is justified on the basis that a rational individual would prefer the outcome that is influenced by the “nudge” to the outcome that would result otherwise from the individual’s choice.

But Sugden points out that the idea of “nudging” based on the assumption that you know others’ true preferences is problematic.

If the scenario is one in which Robert Sugden is in a roadside restaurant and a morbidly obese stranger is sitting at another table ordering a huge all-day breakfast as a mid-afternoon snack, the answer is that I would do nothing. I would think that it is not my business as a diner in a restaurant to make gratuitous interventions into other diners’ decisions about what to eat. (page 50)

A different scenario would be one in which someone says that they really would prefer to avoid eating unhealthy foods, and they ask for help based on the insights of behavioral economics. In that case, we have been given permission to do the nudging. We should not tie Odysseus to the mast without his permission, but it is fine if he asks us to tie him to the mast so that he can hear the sirens while resisting their temptation.

Sugden’s book exposes standard welfare economics as based on the assumption that a benevolent autocrat knows, when informed by the economist, what is best for the autocrat’s subjects. But instead it is possible for economists to convey their insights to individuals while still leaving them to make their own choices and bargains. In theory, if the outcomes suggested by behavioral economics and welfare economics are truly desirable, then people can arrive at those outcomes without being commanded, or even nudged, by a benevolent autocrat.

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Footnotes

[1]RobertSugden, The Community of Advantage: A Behavioural Economist’s Defence of the Market, p. 47. Oxford University Press, 2018.

[2]Cass Sunstein and Richard Thaler, Nudge: Improving Decisions About Health, Wealth, and Happiness. Yale University Press, 2008.

[3]See Pedro Schwartz, “The Poverty of Social Choice.” Library of Economics and Liberty, Nov. 2, 2015.

[4]See my essay, “Kenneth Minogue on the Servile Mind.” Library of Economics and Liberty, Nov. 4, 2013.

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*Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is the author of several books, including Crisis of Abundance: Rethinking How We Pay for Health Care; Invisible Wealth: The Hidden Story of How Markets Work; Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy; and Specialization and Trade: A Re-introduction to Economics. He contributed to EconLog from January 2003 through August 2012.

Read more of what Arnold Kling’s been reading. For more book reviews and articles by Arnold Kling, see the Archive.

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Lessons and Challenges in The Limits of Liberty

James Buchanan is not easy to categorize. Is he a libertarian? A classical liberal? A conservative? Or perhaps even a “liberal” in the modern American sense of “progressive” or “social democrat”? Is he an economist or a philosopher? It is paradoxical but not totally wrong to answer “all of the above,” so complex and rich is his contractarian theory of the state. His 1975 book, The Limits of Liberty: Between Anarchy and Leviathan,1 has become a classic exposition of individualist contractarianism.

Buchanan was awarded the 1986 Nobel prize in economics for “his development of the contractual and constitutional bases for the theory of economic and political decision-making.” The Royal Swedish Academy of Sciences cited The Limits of Liberty as one of the two books in which he presents his “visionary approach.”2

Buchanan repeatedly states he does not want to impose his own values, except for individualism as the starting point of his analysis. A “good society” cannot be “defined independently of the choices of its members, all members” (emphasis by Buchanan). “My approach,” he writes at the beginning of the book, “is profoundly individualistic, in an ontological-methodological sense” (emphasis in original); “[e]ach man counts for one, and that is that.” It follows that individual liberty is a value and that the social system should be based on unanimous consent. Any limit to liberty must thus be consented to by each and every individual.

The Constitutional Contract

In Buchanan’s view, anarchy, or the absence of organized political power, does not work, for the reasons explained by Thomas Hobbes and because public goods can only be produced (or financed) by government. Hobbes famously argued that anarchy is characterized by “a War of every man against every man” and that “the life of man [is] solitary, poore, nasty, brutish, and short.”3 In the terms of game theory, anarchy leads individuals in the worst case of a prisoners’ dilemma.

Given this, what would be an efficient state, that is, one that responds to individual preferences? Buchanan answers that it should be based on a unanimous “constitutional contract” or “social contract” (he uses both expressions) establishing the basic rules of life in society.

Start with the equilibrium that would obtain in an anarchic society. It would be an inefficient equilibrium as individuals waste resources (including life) in predation and defense. (As for an anarchy regulated by stifling tribal rules and superstitions, Buchanan reckons that it would be even more inefficient.) This starting point provides a “natural distribution,” that is, some assignment of rights and behavior boundaries, from which a “constitutional contract” may be negotiated.

Think of the social contract as a set of constraints that everybody accepts in order to obtain guaranteed rights and to avoid the violence and waste of anarchy. Only unanimous agreement is necessary; there is no need to invoke “natural law.”

A constitutional contract between self-interested individuals contains four elements: 1. A “disarmament contract,” whereby individuals unanimously commit to avoid predatory behavior. 2. A definition of rights. 3. The limits of a “protective state” established to enforce the social contract. 4. The rules of collective decision-making for the “productive state,” charged with producing the other public goods that individuals may want.

Contrary to other contractarian theorists, Buchanan does not assume that individuals come to the negotiating table as equals in terms of resources or capabilities. As in ordinary exchange, individuals are only equal—but really equal—with regard their status in the exchange: each one is equally free to say yes or no.

A corollary follows. The Rambos who are more efficient at predation than at production might have to be bought off before they consent. When I first read The Limits of Liberty circa 1984, I was certainly not the only libertarian to be disturbed by the justification this could provide for the welfare state. Meet the “liberal” Buchanan. (I put “liberal” in quotation marks when I want to emphasize the ambiguity of the label as it was adopted by American progressives.) Even if disturbing, the idea is certainly widely shared in the public (even in the United States) that helping the poor is a bargain for the taxpayer as it prevents theft and violence. The logic of Buchanan’s argument, within this theoretical framework, seems unassailable.

Postconstitutional Exchange

After this social or constitutional contract is agreed on, Buchanan conceives of a “second, or postconstitutional, stage of negotiation,” which involves trade in public goods (agreement on their production, financing, and consumption): such things as dams, roads, parks, perhaps schools (if a minimum of education is necessary in a free society), and so forth. Buchanan’s social contract thus involves two stages: the basic rules at the constitutional stage; and postconstitutional contracts on public goods.

Trades in private goods don’t require any general agreement once the constitutional contract has defined individual rights. But such a preliminary definition of rights—which economists before Buchanan just assumed to exist—is necessary.

Another intriguing idea is that “[t]he dividing line between private and public goods depends, in part, on how the property rights of persons are defined.” To illustrate Buchanan’s brief remark, the social contract may exclude some land from private appropriation, which transforms these public lands into a public good. Similarly, the social contract could define a restaurant owner’s property rights as including the ambient air, which would allow him to welcome smokers if he chooses to.

A requirement of unanimity in decisions related to specific public goods would give a veto to every citizen. Anyone would thus gain holdout power and an incentive to sell his consent for lower taxes or for some transfer. This free-rider problem, argues Buchanan, is much more pressing at the post-constitutional stage than at the constitutional stage: in the latter case, an individual cannot obtain the benefits of the social contract without consenting to the whole package, while he can always consume a pure public good once it is financed by others (by definition of a public good). Recognizing this, rational adherents to the social contract will establish some voting rule granting the right of decision to some majority (simple or qualified) at the postconstitutional stage.

In order to embody unanimous consent, that is, to be efficient, the exchange of public goods requires constitutional limits on the state. “The operation of an unconstrained collectivity,” Buchanan supposes, “could scarcely emerge from rational constitutional contracting among persons.”

But note that the contract also limits the liberty of individuals. Once these limits are unanimously accepted at the constitutional level, “it becomes inconsistent and self-contradictory for a person to claim that his ‘rights’ are violated in the mere working out of the collective decision rules that are constitutionally authorized.”

This contractual setup allows individuals “to attain maximum liberty within the constraints of acceptable order.”

Problems of Unanimity

Buchanan is of course aware of the objection that a social contract could at best bind only those who signed it, presumably generations ago.4 The social contract, he answers, is an implicit contract that is continually renegotiated: “The formation of constitutional contract is continuous.” This insures that the social contract remains consistent with everybody’s “renegotiation expectations”—the net benefits one could obtain if the contract were renegotiated now, starting from a new anarchic equilibrium—or, in other words, that it remains Pareto-superior.

The adjustments that become necessary when renegotiation expectations change are often proposed by overly advantaged individuals who realize that it is in their preventive interest to embrace reform. They implicitly offer a new bargain to those who intuitively realize that their position in anarchy would now be better than the status quo. To understand what Buchanan is saying, think about rich coastal “liberals” who are often at the forefront of “social justice” and redistribution movements.

Like all forms of imagined unanimous social contract, the Buchanan sort raises questions. Unanimity is a clear concept when applied to private arrangements, but what does a unanimous social contract mean? Can we hope for literal unanimity or is quasi-unanimity sufficient? Buchanan opens a Pandora’s box when he says without elaboration that adjustments to the social contract are to be “agreed on by all or substantially all of the members of the community.” How much is “substantially all”? How do we know that near-unanimity has been reached?

Problems of Government

The state issued from the social contract is a delicate institution. What Buchanan calls “the paradox of being governed” comes from the dual roles of the state, “protective” and “productive,” corresponding to the two stages of social contracting. On the one hand, rational parties to the constitutional contract want the protective state to enforce the rules agreed on, no more and no less. The protective state is neutral and as “external” as possible. The productive state, on the other hand, is “internal”: it is “us”; its decisions are subjective and participatory.

“The state is, at the same time, both us and non-us.”

The state is, at the same time, both us and non-us. This idea may seem to solve a conundrum of any liberal theory of the state, but perhaps it only emphasizes the problem. If the two corresponding roles are confused—if the protective state becomes us and the productive state changes the terms of the contract—people will become dissatisfied with the constitutional order, and the social contract will be threatened. Buchanan saw signs of this in the 1960s and 1970s.

It is easy to agree with Buchanan that the paradox of being governed, as many other problems, increases with the size of government. The larger the scope of the state, the more likely it will violate the individual rights that have been agreed on.

Buchanan was worried about the decline of private ethical norms. “Ordered anarchy,” he argued, is assisted by “privately imposed constraints on behavior, through adherence to basic norms of mutual tolerance and mutual respect for acknowledged rights.” As an example of this sort of informal law, he mentions respect for free speech on university campuses, which was starting to be undermined at the time he was writing. When these informal rules weaken, more state-imposed constraints are required.

Law (both formal and informal) is a public good and public capital. Depreciation of this capital carries a high cost in terms of the future returns of social stability. It will often be preferable to maintain existing legal capital than to scrap it and rebuild it anew, which lends support to “the basic mystique of orthodox conservatism.” The author of The Limits of Liberty also believes that ethical constraints include “obedience to and respect for formalized law.” Meet the more conservative Buchanan.

A chapter titled “The Punishment Dilemma” looks puzzling. It argues that punishments for transgression of the constitutional contract can be dangerously watered down over time, leading to an erosion of law. Ex ante, punishment is an essential deterrent. But ex post, its application gives disutility to officials and voters.

Buchanan admits that constitutionally-decided, deterrence-oriented punishments will not be watered down “if the average or representative person in the community should actually enjoy seeing others punished,” but he discounts this possibility. From our vantage point, he turned out to be wrong. Since he wrote The Limits of Liberty, punishments have become more and more severe in response (at least partly) to the inflation of laws. One indication is that 8% of American adults have a felony record, that is, are “convicted felons” for life, and their number has been growing rapidly since the mid-1980s.5 Another indication is that America is the country with the highest rate of incarceration in the world (even if it has been decreasing since 2008).6 The real problem appears to be the growth of the punishing state in America, not its undermining.

This being said, Buchanan correctly saw that when people are dissatisfied with the erosion of formal and informal constraints, their demands for “law and order” mean “increased rather than decreased collectivization of society.”

The Threat of Leviathan

Besides the necessary limits to liberty, the threat of Leviathan is the second broad thread in the book, and what perhaps makes it more libertarian. A non-limited democratic state gives free rein to the self-interest of politicians and bureaucrats in expanding government and overturning constitutional rights. A majoritarian government can also fail to maximize citizens’ benefits by expanding government too much. Its fiscal policies can benefit the majority at the expense of the minority, or the other way around. Majorities must be constrained by constitutional rules, just as an individual creates his own rules (setting an alarm clock, for example) to control his temptations.

In reply to people’s dissatisfaction, both “liberals” and libertarians propose top-down solutions, Buchanan argues. He sees the solution neither in pragmatic politics nor in a choice between the laissez-faire model (even if it was based on the principle of ordered anarchy) and the socialist model, but in a “constitutional revolution” based on consent. “[G]ood,” he repeats, “is that which emerges from agreement among free men, independent of intrinsic evaluation of the outcome itself.”

A constitutional revolution means that individual rights and claims will be redefined and new rights created, including those related to the environment or congestion, as Buchanan mentions, perhaps influenced by the environmental scares of the 1970s.7 A new redistribution will be negotiated, and new limits imposed on Leviathan. Here, we find a mix of both the “liberal” and the libertarian Buchanan. In other places, Buchanan explained how he favored “equality of opportunity” and opposed “inherited wealth.”8

In a Nutshell

The basic idea of Buchanan’s contractarianism is that, in order to live in society, individuals have to agree on their rights and on the limits of their liberty. They have to discuss and exchange until they agree. The alternative is violent Hobbesian anarchy, and nobody wants that if he can have better. Buchanan tries to prove that individuals can agree. He also argues that rational self-interest leads individuals at the constitutional stage to limit the state, a crucial idea. The whole exercise aims at having as much (ordered) anarchy as possible: “the ideal society is anarchy, “he writes, “in which no man or group of men coerces another.”

For more on these topics, see Is Leviathan Required for a Peaceful Order? by Anthony de Jasay, Library of Economics and Liberty, March 7, 2016. See also A Conversation with James M. Buchanan, Parts I and II, Econlib Videos, 2013.

But does the contractual state require too much loyalty and obedience to law, which can fuel the growth of Leviathan? How can a unanimous social contract between unequal individuals lead to anything other than laissez-faire? Is it actually possible to limit the state? As Anthony de Jasay suggests, isn’t any state a Leviathan-to-be?9 And is the state really necessary? Do the two conditions for its necessity—the nastiness of Hobbesian anarchy and the impossibility of efficient private production of public goods—obtain?

It is difficult to think about these fundamental questions without reading The Limits of Liberty.

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Footnotes

[1] James M. Buchanan, The Limits of Liberty: Between Anarchy and Leviathan (1975) (Indianapolis: Liberty Fund, 2000). Available online at https://www.econlib.org/library/Buchanan/buchCv7.html and in the Liberty Fund Book Catalog at https://libertyfund.org/books/the-limits-of-liberty.

[2] Royal Swedish Academy of Sciences, The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1986, at https://www.nobelprize.org/prizes/economic-sciences/1986/press-release/ (accessed September 12, 2018).

[3] Thomas Hobbes, Leviathan (1751) (Oxford: Clarendon Press, 1909), at http://oll.libertyfund.org/titles/hobbes-leviathan-1909-ed (accessed September 12, 2018).

[4] That was one of the objections of Lysander Spooner in his “The Constitution of No Authority,” No Treason 6 (1870), at http://www.gutenberg.org/ebooks/36145 (accessed September 15, 2018).

[5] Sarah K.S. Shannon et al., “The Growth, Scope, and Spatial Distribution of People with Felony Records in the United States, 1948-2010,” Demography 54 (2017).

[6] World Prison Brief, at http://www.prisonstudies.org (accessed September 13, 2018).

[7] A sense of the climate of the times can be gathered from my review “Running Out of Everything,” Liberty and Law, at https://www.lawliberty.org/book-review/running-out-of-everything/ (accessed September 16, 2018).

[8] For example, see James M. Buchanan, The Intellectual Portrait Series: A Conversation with James M. Buchanan (Part 2) (Indianapolis: Liberty Fund, 2011), at http://oll.libertyfund.org/titles/buchanan-the-intellectual-portrait-series-a-conversation-with-james-m-buchanan-part-2 (accessed September 24, 2018).

[9] See my review of de Jasay’s The State in “An Unavoidable Theory of the State?” Library of Economics and Liberty, June 4, 2018, at https://www.econlib.org/library/Columns/y2018/Lemieuxstate.html (accessed September 15, 2018).

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*Pierre Lemieux is an economist affiliated with the Department of Management Sciences of the Université du Québec en Outaouais. His latest book is What’s Wrong with Protectionism? Answering Common Objections to Free Trade (Rowman & Littlefield, 2018). He blogs on EconLog. He lives in Maine. E-mail: PL@pierrelemieux.com.

For more articles by Pierre Lemieux, see the Archive.

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Predictable Irrationality and the Crisis of 2008

A decade after the financial crisis of 2008 and its aftermath, economists are still grappling with its nature and significance. An important recent contribution is A Crisis of Beliefs, by Nicola Gennaioli and Andrei Shleifer (henceforth GS).1 They tell the story this way (page 7):

Homebuyers were unrealistically optimistic about future home price growth. Investors in mortgages and in securities backed by these mortgages, including financial institutions, considered the possibility that home prices might fall but did not fully appreciate how much and what havoc those declines would wreak. And macroeconomic forecasters from both the private sector and the Federal Reserve did not, in forming their expectations, recognize the risks facing the U.S. financial sector and the economy as late as the summer of 2008… they did not fully appreciate tail risks until the Lehman collapse [the investment bank went bankrupt in September of 2008] laid them bare.

Explanations of the financial crisis tend to fall into two broad categories. One category is “moral failure,” in which actors took bad risks because they faced perverse incentives that encouraged them to do so. This included bankers with the status of “too big to fail.” The other category is “cognitive failure,” in which actors took bad risks unintentionally based on poorly specified forecasting models.2

For example, Susan Gates tells the story of the collapse of Freddie Mac, the housing finance giant, as a moral failure. Its top executives saw little or no personal risk from lowering underwriting standards for mortgage loans.3

On the other hand, I would put Jeffrey Friedman and Wladimir Kraus in the camp of arguing for cognitive failure.4 They point out that if banks had truly wished to exploit “too big to fail” status, they could have employed even lower ratios of capital to assets. In fact, banks exceeded required capital ratios—it was the regulators who under-estimated the prudent capital requirements for mortgage securities.

Most economists seem to prefer the “moral failure” explanations. But GS argue, and I agree, that cognitive failure was the primary factor.

Against “rational expectations”

GS directly attack the hypothesis of “rational expectations,” which has dominated the economics profession for forty years. The rational-expectations doctrine holds that when economic actors make decisions that require forecasts, they make optimal use of the available information. They are not guilty of predictable irrationality.

As an alternative to rational expectations, GS propose what they call “diagnostic expectations.” Unfortunately, the modifier “diagnostic” gives no hint to what they have in mind. For me, a better (but still imperfect) term would be “recency-biased” expectations.

Think of a forecast as employing two types of information about a variable being forecast. One is a “base rate,” which is a very generic property of the variable. The other is “recent information” about that variable or about factors that could affect that variable. Recency-biased forecasting over-weights the recent information and under-weights the base rate.5

GS use the example of estimating the probability that an Irish person will have red hair. Many people will over-estimate that probability, giving an estimate of fifty percent or more. The “diagnostic” or “recent” information is that the person is Irish, and it is true that red hair is more prevalent among Irish than elsewhere in the population. But the base rate of red hair in the population is so low that even for an Irish person the incidence of red hair is only 10 percent.

Consider the average of inflation-adjusted house prices. In the long run, the average tends to remain constant. Thus the long-run base rate for inflation-adjusted home price appreciation is zero. But in the short run, inflation-adjusted home prices can be high or low. A recency-biased forecast of home prices in the near term would put too little weight on the base rate and too much weight on the expectation of continuation of recent trends.

Compound errors

Until 2007, recency-biased forecasting suggested that:

1. House prices would continue to rise;

2. Financial institutions with large holdings of mortgage-backed securities were safe; investors under-estimated “tail risk,” meaning the chance of an extreme adverse event.

3. The economy would avoid a bad recession, because the Federal Reserve could maintain what was then called “The Great Moderation.”

What caused people to change these forecasts? GS focus on the Lehman bankruptcy, but this at most explains only number (2). The change in people’s outlook for house prices took place earlier, and the depth of the recession only became evident later.

The expectations for house prices were bound to change once people saw the problems that emerged in the sub-prime mortgage sector. For example, New Century Mortgage, a high-flying sub-prime mortgage lender, went bankrupt in April of 2007, and this clearly signaled that the era of ever-surging house prices had ended. GS do agree that belief in (1) had changed well before the Lehman bankruptcy, which came 18 months later.

I am not sure that the expectation (3) changed when Lehman went bankrupt. Instead, the severity of the recession is something that became clear only in hindsight.

Macroeconomic forecasts even six months later suggested that the unemployment rate would remain below 8.5 percent, incorporating the (correct) assumption that a large fiscal stimulus package would be enacted.6 In fact, the unemployment rate soared over 10 percent.

“There was little in the way of economic theory that would have predicted such a deep recession.”

Moreover, there was little in the way of economic theory that would have predicted such a deep recession. There were no mainstream economic models incorporating a direct linkage between banking-sector distress and economic activity. Even today, some economists prefer to blame the recession on the decline in household wealth due to lower home prices. GS mention the work of Atif Mian and Amir Sufi, who

… suggest that the United States would have had a major recession even without the financial crisis, since the households lost so much wealth after the housing price collapse. (page 43)

GS do also point out that a reduction in bank lending could be a factor that caused the recession to be as deep as it was. But if Mian and Sufi are correct, then GS are overstating the impact of the Lehman bankruptcy and other developments that affected Wall Street more than Main Street.

Personally, I find it difficult to have confidence in any explanation for the sharp rise in unemployment that took place in 2009. It might just be that the economy was subject to a secular decline in business dynamism, and this became unsustainable in 2009.7

Lately, I have been wondering about the effects of the regulatory zeal of the administration that took office in 2009, which may have impeded the creation and growth of new firms. I came to this hypothesis because the reversal of this regulatory zeal by the administration that took office in 2017 seems to have prolonged and strengthened the economic expansion beyond what some forecasters saw as likely.

Strengths and Weaknesses

Overall, I see GS as having the following strengths:

1. They make a convincing case for taking seriously the evidence provided by surveys and anecdotes that characterize the beliefs held at the time by households, investors, and policy makers. Too many economists instead have had the arrogance to impose “rational expectations” as a modeling assumption, ignoring actual expectations of market participants.

2. This in turn opens up consideration of the possibility of cognitive failure as an explanation for the crisis. It is important to give this possibility due consideration.

3. As GS point out, their “diagnostic” (or recency-biased) expectations can explain various puzzling phenomena, not just the financial crisis.

But I also see the following weaknesses.

1. Like most mainstream economists, they prefer analytical mathematical models that overlook institutional detail. I have more admiration for Richard Bookstaber’s willingness to dive into the complexity of the modern financial system.8

Indeed, even though it does not affect their analysis, GS seem to me to be quite mistaken on at least one institutional point. On page 27, they speak of “AAA-rated senior tranches of MBS,” confusing a mortgage-backed security with a collateralized debt obligation (CDO). CDOs have tranches, while MBS do not. GS proceed to describe as a CDO a re-securitized tranched security, which on Wall Street was known instead as a “CDO squared.”

1. Although the hypothesis of “diagnostic expectations” may be more realistic than “rational expectations,” both share the weakness of ignoring heterogeneity of expectations. In either case, diversity of beliefs is replaced by a “representative agent.” But the surveys GS justifiably use to study expectations exhibit differences in beliefs, which GS override by taking averages.

I think it is likely that market dynamics are affected by the evolution of diverse beliefs. Over time, investors whose beliefs turn out to be correct will accumulate more resources and have more influence on prices. Even if individual forecasts were not recency-biased, the market as a whole could show recency bias because of this mechanism, in which those who have been correct recently are rewarded.

This in turn potentially gives rise to a connection between moral failure and cognitive failure. If firms that ignore tail risk are bailed out rather than allowed to go bankrupt, then this aborts the evolutionary mechanism for weeding out executives who ignore tail risk. The moral failure of “too big to fail” leads to the cognitive failure of overly aggressive market forecasts, because the overly aggressive participants stay in the game.

The financial crisis of 2008 may be fading into economic history. But like other complex historical events, including the Industrial Revolution and the Great Depression, it is likely to continue to provide a basis for thought and debate for a long time.

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Footnotes

[1] Nicola Gennaioli and Andrei Shleifer, A Crisis of Beliefs: Investor Psychology and Financial Fragility. Princeton University Press, 2018. [2] See my essay, “The financial crisis: Moral failure or cognitive failure?” Harvard journal of law and public policy, March 2010. [3] See “Present at the Destruction”, by Arnold Kling. Library of Economics and Liberty, April 3, 2017. [4] See “The Regulator’s Calculation Problem”, by Arnold Kling. Library of Economics and Liberty, April 6, 2015. [5] See “Philip Tetlock on Superforecasting”. EconTalk, December 2015. [6] See for example, the Congressional Budget Office forecast in table 3 of this memo: https://www.cbo.gov/sites/default/files/111th-congress-2009-2010/reports/03-02-macro_effects_of_arra.pdf. [7] See Ryan A. Decker, et al, Declining Business Dynamism: Implications for Productivity?. Brookings, Sep. 19, 2016. [8] See “The Practitioner’s Challenge”, by Arnold Kling. Library of Economics and Liberty, July 3, 2017.

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*Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is the author of several books, including Crisis of Abundance: Rethinking How We Pay for Health Care; Invisible Wealth: The Hidden Story of How Markets Work; Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy; and Specialization and Trade: A Re-introduction to Economics. He contributed to EconLog from January 2003 through August 2012.

Read more of what Arnold Kling’s been reading. For more book reviews and articles by Arnold Kling, see the Archive.

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A Cure for Our Health Care Ills: The Supply Side

In our previous article, “A Cure for Our Health Care Ills,”1 we debunked some persistent myths and discussed some key regulatory, spending, and insurance changes on the demand side that would make health care more affordable while not cutting, and possibly increasing, quality. But the demand side is only half the story. Important reforms on the supply side would also make health care cheaper and more accessible. All of them involve some form of deregulation.

We often hear that governments in the United States should regulate health care more because free markets have made it more expensive than in other countries. It’s true that medical care in the United States is usually more expensive than in other countries, even after accounting for differences in wealth. But the cause is not the free market. For more than half a century, there hasn’t been a free market in health care because governments at both the federal and state levels have heavily regulated doctors, hospitals, and drugs. We propose abolishing virtually all of this regulation so that doctors’ and hospitals’ services and drugs would be more plentiful and cheaper.

Further, governments and commercial third-party payers often make payments for health care, thus encouraging the ultimate consumers—patients—to spend “other people’s money.” This spawns restrictions, opaque prices, queues, and distortionary behavior that negatively affect both the demand and supply sides. Segments of the health care market in which customers pay suppliers directly have largely avoided these problems.

The Supply of Doctors

In a free market, if one person desires another’s services and the two parties reach mutually agreeable terms, they make an exchange. That’s not the system we have in medicine, as willing providers are often not allowed to sell to willing buyers. The outward rationale for governmental and quasi-governmental control of physicians’ services is consumers’ supposed incompetence: how can we know what good care is? The result is reduced competition, which leads to higher prices for doctors’ services.

To provide medical services as a doctor, one must be licensed, and to be licensed, one must have completed a four-year undergraduate degree and a four-year medical degree, plus four to six years of residency training.2 There are only 141 accredited medical schools in the United States, and Congress anchors the number of residency positions to the level of Medicare funding, resulting in 110,000 residency positions currently filled.3, 4 Want to unlock more residency positions? Talk to Congress. Want to start a new medical school? It would cost an estimated 150 million, due to the necessity of linking medical education with medical research, and would take eight years for the Liaison Committee on Medical Education, under the authority of the U.S. Department of Education, to accredit your school.5 That’s a daunting prospect. One small bright spot is that, despite these challenges, new medical schools are, in fact, cutting ribbons.6

While the majority of physicians are not members of the American Medical Association, the AMA has successfully persuaded the government to limit the freedom of nurse practitioners, midwifes, chiropractors, foreign doctors, and retail clinics to provide economical medical care.7 Foreign medical graduates fill about 15 percent of residency positions. Many more trained foreigners would prefer to practice medicine in this country but are not allowed to under laws that have little or nothing to do with professional competence.8 Even if foreign physicians are allowed to immigrate here, to scale the imposing wall of rules facing them—verifying their credentials, proving English proficiency, passing the United States Medical Licensing Examination, working or volunteering with the purpose of acquiring letters of recommendation, and winning a coveted residency position—takes about a decade. Many simply give up.

The resulting reduction in the supply of medical services has rewarded American physicians with incomes that are, relative to per capita GDP, fifty percent higher than those of their OECD contemporaries.9, 10 By implicitly assuming an elasticity of demand of zero, McKinsey estimated this “extra” cost of physician compensation at 64 billion in 2008.11

While customers certainly benefit from knowing beforehand the quality of the services and products they may purchase, occupational licensing is merely one way to address that objective. Private rating organizations can also achieve the same goal, usually with fewer untoward consequences. There are other ways to ensure quality. Kaiser Permanente and your local hospital certify that the physician helping you is, indeed, qualified to treat you. In addition, the medical school that the doctor attended, self-policing actions by professional medical societies, peer review procedures, and the use of second opinions can help us ascertain and ensure physician quality.

The Supply of Hospitals

Public health professor Milton Roemer, while teaching at Cornell University in 1961, wrote an article laying out what has been termed Roemer’s Law: whenever hospitals add beds, those beds fill up. Or, in Field of Dreams terms, “if you build it, they will come.”12 Roemer’s Law caused people to question whether doctors had a financial incentive to fill hospital beds, which led to the hypothesis that a limitation on hospital expansions would limit overall health care expenditures.

Regardless of the veracity of Roemer’s Law—more a localized observation than a validated law—it inspired “certificate of need” (CON) rules that threatened serious penalties for hospitals that built without a CON in hand. CON requirements put facility planning firmly in the hands of central planners, and hospitals reacted accordingly by acting politically and gaming the system.

Consider Cedar Rapids physician Lee Birchansky, who, after performing cataract surgeries for six years at his clinic, was forced to stop because a change of ownership required him to get his own CON, independent of the local hospital under whose umbrella he had operated. That was 2004, and his expensive equipment sits unused today because the state government turned down his request—four times. “The established health care provider uses this as a way to keep out competition,” says Iowa governor Terry Branstad. And not just new competition—Birchansky had operated for six years without problems.13

In a review of the literature, Michael Morrisey concluded that “rather than controlling costs, if anything, CON programs tended to increase costs.”14 When President Ronald Reagan and Congress repealed the federal CON laws in 1986, about one third of the states followed suit. Not surprisingly, given Morrisey’s findings, economists found no subsequent increase in total health care spending as a result of the repeal.15

“We tend to find sprawling hospitals where people lived years ago, not necessarily new hospitals where they live today.”

CON laws are anti-competitive, as they make it relatively easier to expand existing hospitals than to build new, competitive ones. We tend to find sprawling hospitals where people lived years ago, not necessarily new hospitals where they live today. Another result has been corruption. Some states haven’t followed the federal lead, and Illinois has some of the toughest CON laws in the nation. In one prominent case of corruption, a hospital CEO wore an FBI wire to record warnings from developers and bankers that the planning board would deny the hospital’s CON request if she didn’t use their services.16

Whether or not Roemer’s Law is actually a law, and whether or not filling hospital beds is truly a problem, CON rules aren’t a viable solution.

The Supply of Drugs

Pharmaceuticals are one of the most regulated products, and this regulation has limited their supply.

There have been two noteworthy pieces of legislation. The Food, Drug, and Cosmetic Act of 1938 required pharmaceutical companies to test their drugs for safety before marketing. After the Kefauver-Harris Amendments of 1962, pharmaceutical companies were required to test their drugs for both safety and efficacy. The net result, especially for the efficacy requirement, has been a steep increase in the time and cost of getting a new drug approved.

Capitalized drug development and approval costs have increased at 7.5 percent per year in real terms: 179 million in the 1970s, 413 million in the 1980s, 1,044 million in the 1990s through early 2000s, and 2,558 million in the 2000s through early 2010s (in 2013 dollars).17 If this 7.5 percent annual growth rate were to persist, costs would more than double every ten years.18 To get one new drug now, pony up 3 billion; in ten years, come up with 6 billion.

When the cost of developing a drug increases, we would expect the number of new drugs developed to decline. The empirical data show exactly that.

In 1973, economist Sam Peltzman analyzed the effect of the Kefauver-Harris Amendments by comparing the number of new chemical entities (i.e., not just reformulations) approved by the FDA before the law changed—from 1948 through 1962—with the number approved after the law changed—from 1963 to 1972—as well as econometrically projected values for that same 1963-1972 period.19

For the drug approvals from 1948 through 1962, Peltzman used actual, historical values. He then built a model to project the number of approved drugs from 1963 through 1972 to see how many approvals would have been expected had the law not changed. His model was based on three variables, most notably the size of the prescription drug market lagged by two years. Why two years? Prior to 1962, it took just two years to develop a new drug; it now takes 12 to 14 years.20, 21

That statistic alone should give us pause because it indicates how drastically things have changed since 1962. Using his projections, Peltzman looked at the actual number of new chemical entities approved and found that it was a shocking 60 percent below his model’s projections.22

According to his model, there should have been about 40 new approvals each year, but, instead, there were just 16, which is 60 percent lower than the predicted value. Multiple researchers have concluded that it wasn’t just inferior drugs that were weeded out by the FDA’s process. Two researchers wrote, “In sum, the hypothesis that the observed decline in new product introductions has largely been concentrated in marginal or ineffective drugs is not generally supported by empirical analyses.”23

Peltzman, himself, came to this same conclusion, seeing the culling “as… if an arbitrary marketing quota… had been placed on new drugs after 1962.”24 The Kefauver-Harris Amendments, designed to improve the safety and efficacy of new drugs, resulted in 60 percent fewer new drugs—a total of approximately 1,300 fewer since 1962—and no clear evidence that today’s drugs are safer or more efficacious than they would have been absent the new rule.

Peltzman wrote, “The penalties imposed by the marketplace on sellers of ineffective drugs before 1962 seem to have been sufficient to have left little room for improvement by a regulatory agency.”25 Repealing the Kefauver-Harris Amendments would give us more drugs and cheaper drugs. Why cheaper? Because new drugs apply competitive pressures on existing drugs and help hold down prices.

Third-Party Payers

In our previous article,26 we noted the simultaneous technological improvements and cost reductions in eye surgery, a corner of the health care market largely free from governmental and commercial third-party interference.27 While third-party payment does offer some advantages, it tends to increase the cost of health care and reduce its availability. Canada’s socialized health care system and the advent of medical tourism provide two examples of this principle.

Consider Canada, whose single-payer system is called Medicare. In Canada, people must often wait many weeks for various procedures and doctors’ visits. The Fraser Institute, a think tank in Vancouver, has reported wait times since 1993, and, after years of increases, wait times between referral from a general practitioner and receipt of treatment hit a record 21.2 weeks in 2017.28

Canadian pets don’t wait. Veterinarian Danny Joffe explains the discrepancy between humans and animals receiving MRI scans. “For [humans] it might be a several-month process. We get it done [with pets] in a week or less.”29 While CT scans for pets are nearly identical to those done for humans,30 “[a] Canadian newspaper reported that in Toronto in 1991, dogs could get CT scans for 300 with less than 24 hours notice, whereas people had to wait up to three months for the same CT scanner. Why couldn’t people get scans as easily? Because, explained the news story, only the provincial health service could legally pay for a human CT scan.”31 This service is available immediately for pets because customers pay out-of-pocket. When the government pays and patients pay a zero price, patients have to queue. This causes some Canadian patients to travel across the border for scans.32, 33 According to Canadian Medical Association President Brian Day, “People can and do spend money on their pets—but if it’s their own body, they have to join a lineup and wait for that care unless they leave home and go to another province or country.”34

Medical tourism provides an example of how third-party payment makes medical care pricier. Medical tourism refers to patients traveling to other countries for medical care, especially when that care is so inexpensive that the amount saved covers all the medical and travel expenses. Look at American and overseas prices and you’ll notice a key difference between surgical procedures with substantial third-party coverage and those with substantial out-of-pocket payments: procedures for which patients pay a considerable portion of costs have smaller U.S. to ex-U.S. differentials.

Consider costs in the United States versus in Singapore. The costs for heart bypass and heart value replacement—both paid for largely by third parties in this country—are over 750 percent higher in the United States, while the costs for a tummy tuck and LASIK—both paid for largely out-of-pocket by patients in this country—are only about 40 percent higher in the United States.35 The same relationship largely holds for other countries compared, such as Colombia, India, Jordan, Thailand, and Turkey. American costs are closer to those in other countries when the final consumer pays than when a third party pays.

Conclusion

Freeing the supply of health care is beneficial due to enhanced price competition, improved access, and new technology.36

The solution in all the cases explored above is deregulation, such as removing anti-competitive licensure and CON laws. The way to improve the health care system—both the supply and demand sides—is to make health care more like other goods and services that we purchase directly, while still providing financial protection for those unlucky enough to need expensive care.

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Footnotes

[1] Charles L. Hooper and David R. Henderson, “A Cure for Our Health Care Ills,” Library of Economics and Liberty, June 4, 2018. [2] David Dranove, Code Red, An Economist Explains How to Revive the Healthcare System Without Destroying it, Princeton University Press, 2008. [3] Logan Albright, “How Government Helped Create the Coming Doctor Shortage,” Mises Institute, 3 February 2015. [4] Roger Stark, “The Looming Doctor Shortage,” Washington Policy Center, Policy Note, November 2011. PDF file. [5] Stark, “Looming Doctor Shortage.” [6] Anemona Hartocollis, “Expecting a Surge in U.S. Medical Schools,” The New York Times, 14 February 2010. [7] Sue A. Blevins, Cato Institute Policy Analysis No. 246: “The Medical Monopoly: Protecting Consumers or Limiting Competition?,” 15 December 1995. [8] Dean Baker, “The Post’s Protectionism Strikes Again: It Never Heard of Foreign Doctors,” The American Prospect, 5 December 2009. [9] “Accounting for the cost of US health care: A new look at why Americans spend more,” Exhibit 14, McKinsey Global Institute, December 2008. PDF file. [10] Carolyn McClanahan, “Physician Pay: A Big Driver of Health Care Costs?” Forbes, 19 January 2012. [11] “Accounting for the cost of US health care: A new look at why Americans spend more,” Exhibit 15, McKinsey Global Institute, December 2008. PDF file. [12] David Dranove, Code Red, An Economist Explains How to Revive the Healthcare System Without Destroying it, Princeton University Press, 2008, p. 32. [13] Erin Jordan, “Iowa hospitals use state law to stifle competition, critics say,” The Gazette, 14 August 2016. [14] Dranove, Code Red, p. 69. [15] Dranove, Code Red, p. 70. [16] Dranove, Code Red, p. 70. [17] Joseph A. DiMasi, “R&D Cost Study Briefing,” Boston, MA, November 18, 2014. PDF file. [18] Charles L. Hooper, “Hooper’s Law of Drug Development,” Library of Economics and Liberty, August 7, 2017. [19] Sam Peltzman, Regulation of Pharmaceutical Innovation, University of Chicago, 1974. [20] Gail Van Norman, “Drugs, Devices, and the FDA: Part 1: An Overview of Approval Processes for Drugs,” JACC: Back to Translational Science, Volume 1, Issue 3, April 2016. [21] Deloitte’s Center for Health Solutions annual report, 2016. [22] Peltzman, Regulation, University of Chicago, 1974. [23] Grabowski, Henry G., and John M. Vernon, 1983. The Regulation of Pharmaceuticals: Balancing the Benefits and Risks. Washington D.C.: American Enterprise Institute for Public Policy Research. [24] Peltzman, Regulation, 1974. [25] Peltzman, 1974. [26] Hooper and Henderson, “Cure for Health Care Ills.” [27] Hooper and Henderson, “Cure for Health Care Ills.” [28] “Waiting Your Turn: Wait Times for Health Care in Canada, 2017 Report,” The Fraser Institute, 7 December 2017. [29] “Veterinary Care Faster Than Health Care for Humans,” by Barbara Righton and Nicholas Köhler. The Canadian Encyclopedia, May 25, 2008; edited December 16, 2013. Historica Canada, from Macleans, 12 May 2008. [30] know” target”new”\”CT Scans in Pets: Everything You Need to Know,” PetMD.com. [31] David R. Henderson, The Joy of Freedom, An Economist’s Odyssey, Prentice Hall, 2002, p. 269. [32] Canadian Patients. WindsongRadiology.com. [33] “Leaving Canada for Medical Care, 2017,” The Fraser Institute, 29 June 2017. [34] ““Veterinary Care Faster Than Health Care for Humans,” by Barbara Righton and Nicholas Köhler. The Canadian Encyclopedia, May 25, 2008; edited December 16, 2013. Historica Canada, from Macleans, 12 May 2008. [35] Medical Tourism, Compare Prices for 2018. [36] David Cutler and his colleagues have found that the benefits of new health care technology generally outweigh their costs by five to one. David Cutler, Your Money or Your Life: Strong Medicine for America’s Health Care System, Oxford University Press, 2005. Also see Dranove, Code Red, p. 231.

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*Charles L. Hooper is president of Objective Insights, a company that consults for pharmaceutical and biotech companies.

For more articles by Charles L. Hooper, see the Archive.

David R. Henderson is a research fellow with Stanford University’s Hoover Institution and an emeritus professor of economics at the Graduate School of Business and Public Policy at the Naval Postgraduate School in Monterey, California. He blogs at EconLog.

For more articles by David R. Henderson, see the Archive.

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Ludwig von Mises’s Socialism: A Still Timely Case Against Marx

Revisiting classic texts in economics normally needs no justification beyond the benefits that come from looking at old ideas through new eyes. As we learn and grow as readers, we see new things, are more skeptical of old things, and make connections that we never did before. Some of my favorite books in my collection are those with layers of marginal notes from the multiple passes I’ve made through the book. Socialism by Ludwig von Mises is an excellent example of a book for which multiple reads have been greatly beneficial. However, there’s one more reason why it’s an opportune time to take another look at Socialism. As it approaches its hundredth anniversary in 2022, it has fresh relevance in a world where socialism is making something of a comeback among young progressives.

The sheer length and breadth of Socialism makes it challenging to cover in a format like this, so one must pick and choose. In what follows, I will emphasize three areas the book covers. I will spend the most time on the economics of socialism and what the book has to say about the contemporary debate over the viability of various forms of socialism. But I also want to talk about two of the lesser known pieces of the book. One of those is the chapter on love and the family, where Mises was quite a bit ahead of his time in his analysis of the ways in which capitalism and liberalism had transformed marriage and the family. The other is the section on “social evolution,” in which he offers an alternative to the Marxian reading of history.

Socialism was published in 1922 on the heels of Mises’s famous article “Economic Calculation in the Socialist Commonwealth,” which appeared two years earlier. Mises offered an economic case for why a socialist economic order could not determine how to use resources rationally and would be unable to generate the wealth that markets did, much less the abundance that socialists promised. That article launched what came to be known as the “Socialist Calculation Debate” which lasted until roughly World War II. The argument of that paper forms the core of Socialism, but the book covers much more ground, as its subtitle of “An Economic and Sociological Analysis” suggests. Mises thought that socialism needed a comprehensive refutation, covering not just the failures of economic planning, but socialism’s analysis of history, its theory of monopoly, the relevance of classes, and its ethics. The book covers all that ground and more. Those arguments are also applied to a variety of forms of socialism, making it comprehensive not only in the range of arguments he raises but also how widely he applies them. Despite the fact that a fair number of his references and the particular topics he’s concerned with are specific to the period in which it was written, it still remains very much a timeless work, and probably the single best book to read for a sustained critical engagement with socialist ideas.

At the center of his criticism is Mises’s claim that rational economic calculation under socialism is impossible. Mises begins his argument by taking socialists at their word, assuming that socialism will substitute conscious planning for the “anarchy of production” (to use Karl Marx’s term) of the marketplace. That means that rather than relying on prices and profits to tell us what we should produce and how we should produce it, socialism would abolish private property, exchange, markets, prices, and profits and substitute collective ownership and decision-making to answer those questions. Under capitalism, we allow private owners of the means of production to experiment with alternatives and discover only after the fact which ones were best. Marx and other socialists believed not only that this was wasteful, but that it could be improved on by collectively deciding before the fact what should be produced and how, then just executing that plan, including who should receive which goods in the end. Socialism, they claimed, would be more rational and more efficient, as well as more just.

In his 1920 article, and at greater length in the book, Mises asks whether it is possible to know what people want and how best to produce it in the absence of markets and private property in the means of production. While there might be a number of technologically feasible ways of producing a particular good, only one of those ways uses the least valuable resources possible and is therefore the most economically efficient. The challenge of rational economic calculation is having a process for figuring out which of the technologically feasible options is the least wasteful one. For a society to answer that question, it must have some means of comparison. Mises offers a variety of reasons why using a measure of labor time, as the Marxists suggested, will not work, including the differences in quality of labor. What needs to be determined is how much alternative inputs are valued, and after the marginalist revolution of the 1870s, economic theory treated economic value as based on the subjective valuations of individual choosers. So how best to access and aggregate those valuations in a form that allowed for comparisons among alternatives? Mises argues that only market prices can perform that function adequately, if imperfectly.

But in order to have market prices, a society needs to have markets. And markets, in turn, require that people engage in exchange. One cannot exchange what one does not own, and Mises argues that if rational economic calculation requires prices that reflect the valuations of individuals, then ownership of the means of production has to be private. Only with private property in the means of production could capital goods have genuine market prices that reflect the valuations of owners, and consumers (indirectly). Those prices are necessary for determining how best to produce what people want, therefore private property in the means of production is necessary for answering the question of economic calculation. As he summarized it (page 123)1:

In any social order, even under Socialism, it can very easily be decided which kind and what number of consumption goods should be produced. No one has ever denied that. But once this decision has been made, there still remains the problem of ascertaining how the existing means of production can be used most effectively to produce these goods in question. In order to solve this problem it is necessary that there should be economic calculation. And economic calculation can only take place by means of money prices established in the market for production goods in a society resting on private property in the means of production. That is to say, there must exist money prices of land, raw materials, semimanufactures; that is to say, there must be money wages and interest rates.

“Too often in contemporary discussions of socialism, those making the case against the market argue on ethical grounds, never considering the set of questions Mises poses here.”

Too often in contemporary discussions of socialism, those making the case against the market argue on ethical grounds, never considering the set of questions Mises poses here. Asserting that government-provided health care should be a right does not answer the questions of what government should produce and how it will know how to produce it in something close to a rational way. All decisions about production require the ability to engage in economic calculation, and that requires prices, profits, and private property. Without market prices, producers are just groping in the dark. This lesson applies with varied degrees of force to all proposals to substitute government ownership and planning for the market.

Socialism also contains two chapters that discuss “Particular Forms of Socialism” and “Pseudo-Socialist Systems.” In those chapters, Mises deploys the calculation argument, along with other ideas from economics and elsewhere, to show why these systems will face the same sorts of problems, though perhaps less intensely, as would full-fledged socialism. He does not really discuss what today goes under the name “democratic socialism,” because he was writing before socialism had fully revealed its inherent, if unintended, tendency toward totalitarianism. It is the decades of failures of economic planning that left institutions of power to be taken over by those with a comparative advantage in exercising it that necessitated putting the adjective “democratic” before socialism. Even a socialism that rejects totalitarianism and intends to allow democratic processes to make the decisions previously made through the market must confront the calculation problem. Moving from a central planning board or a dictator with a five-year plan to bottom-up democratic processes does not solve the problem of rational economic calculation in the absence of private ownership of the means of production and the market prices it produces. The problem with democratic socialism, Mises might have said today in response, is that, democratic or not, it’s still socialism.

The sociological parts of Mises’s analysis of socialism can be read in the context of the fact that he followed this book with another, Liberalism, in 1927. The contrast between the liberalism of the 19th century and the socialism emerging in the 20th century was, I believe, central to Mises’s worldview. We see that in Socialism from the very start, as the first section of the book is titled “Liberalism and Socialism.” Here Mises broadly describes the long evolutionary process that produced the liberal order as a movement from violence to contract as the basis of social interaction. Mises argues that, in the economic realm, the rule of law and the development of property rights and contract overcame the use of violence as the predominant way of determining and changing ownership. The emergence of market institutions was a move away from violence toward contract. Similarly in the political realm, the development of democratic processes and institutions offered a peaceful form of political change to contrast with the violence associated with monarchy and other pre-democratic forms. For Mises, the great advantage of democracy is the peaceful passing of power when obeying the contract-like rules of a liberal constitutional order.

This theme of the evolution from violence to contract is nicely illustrated in his chapter on “The Social Order and the Family.” There he contrasts the nature of marriage in “the age of violence” to marriage in “the age of contract.” Where marriage was a reflection of male power and where women were essentially the property of the men they married, marriage was a relationship characterized by both inequality and unhappiness, especially for women. Mises argues that the love and sexual components of marriage that we take for granted in the age of contract were not possible in an age of violence. Romantic love and marriage were largely distinct during this period, and only when marriage became about consent and contract between equals could loved-based marriage become a reality. Mises (page 78) puts it this way:

The characteristic of love, the overvaluing of the object, cannot exist when women occupy the position of contempt which they occupy under the principle of violence. For under this system she is merely a slave, but it is the nature of love to conceive her as a queen.

One of liberalism’s greatest accomplishments was the gradual extension of equal rights to all humans, and in treating women as equals under the law, liberalism advanced the feminist cause. Feminism understood as equality before the law is, he argues, “nothing more than a branch of the great liberal movement, which advocates peaceful and free evolution” (page 87). As women became the legal equals of men, and as marriage became contractual like so much else, love and sexual desire took their modern place in marriage.2 What is most striking about this argument is how far ahead of its time it was. Sociologists into the early 21st century were still making the argument that it was the liberal and market orders that enabled love to conquer marriage as if it were news.3 Mises saw this point almost a century earlier. This discussion has two purposes in Mises’s larger argument. First, it shows that capitalism and liberalism were responsible for many of the social advances of the modern era, rather than being the cause of any number of social problems. Second, it sets up his fear that socialism will return us to an age of violence and undo all of that progress.

The discussion of marriage is also an application of an argument he develops more fully later in the book. In his section on the alleged inevitability of socialism, he offers a theory of social evolution that tells a very different story than Marx’s. At the center of this theory is the division of labor, which he calls “a fundamental principle of all forms of life” (page 258). For Mises, “society” is human cooperation, and such cooperation can only develop when humans recognize the benefits that come from the division of labor and the expansion of exchange that results. The “diversity of nature” seen in the differences in human aptitudes and the variety of natural conditions facilitates the division of labor by driving the process of differential costs of production that leads to specialization and exchange. Exchange creates the bonds of peaceful interdependence that begin the transition from the age of violence to the age of contract. This process is, for Mises (page 261) a “unifying influence.” He continues:

• It leads men to regard each other as comrades in a joint struggle for welfare, rather than competitors in a struggle for existence. It makes friends out of enemies, peace out of war, society out of individuals.

4The story of human social evolution is the story of the deepening and widening of the division of labor and the extension of peaceful exchange as the fundamental human interaction. In his later book Human Action, Mises would refer to this process as the “Law of Association.”

For more on these topics, see the EconTalk episode Pete Boettke on Mises. See also the Library of Economics and Liberty articles “What Makes Capitalism Tick,” by Arnold Kling, April 2, 2018; and “An Unavoidable Theory of the State,” by Pierre Lemiuex, June 4, 2018.

For background information, see Socialism, by Robert Heilbroner in the Concise Encyclopedia of Economics.

First, he can offer a theory of social evolution that is truly consistent with Darwinian insights, especially the idea that no designer was necessary to create the modern world. Though he does not use the term, Mises’s theory of social evolution in Socialism is very much a spontaneous order story. There is a grand vision here: humanity evolved undesigned out of nature and, having acquired a brain capable of reason, has now extended that process of undesigned order to the social world. We are products of undesigned evolution through and through. Second, by refuting Marxist accounts of class struggle and warfare as being the driving force of history, Mises undermines the alleged inevitability of socialism that is at the core of Marxist thought. Unlike Marx’s very teleological theory, Mises’s theory of social evolution has no end point. It simply explains how the liberal order arose and will continue to create progress if we allow liberal institutions to do their job. Read in combination with the impossibility of economic calculation, Mises’s theory of social evolution offers the liberal case for what Friedrich Hayek would later call “the creative powers of a free civilization” and “the common sense of progress.”5

As the core institutions of the liberal order are being increasingly attacked by the populist-nationalist right and the socialist left, it is worth revisiting a text that causes us to grapple with the fundamental questions raised by the emergence of liberalism and its tragic eclipse in so many places by 20th century socialism. Mises’s Socialism, written well before most of the bloodshed and poverty caused by socialism unfolded, remains a timely and deep exploration of both the errors of socialism and the virtues of liberalism. Despite socialism’s record of failure, or perhaps because of it, the socialists of the 21st century have yet to grapple with the fundamental issue of economic calculation outside of the market and how the absence of private ownership of the means of production, no matter how democratic the alternative is, will inevitably lead to poverty and chaos. The arguments raised in Socialism remain as central as ever to the defense of the liberal order against its critics, both old and new, and left and right.

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Footnotes

[1] Page numbers are from Socialism: An Economic and Sociciological Analysis, by Ludwig von Mises. Translated by J. Kahane, Foreword by F. A. Hayek. Liberty Fund. Online at https://www.econlib.org/library/Mises/msS.html.

[2] For more on this process, see my Hayek’s Modern Family: Classical Liberalism and the Evolution of Social Institutions, New York: Palgrave Macmillan, 2015.

[3] See, for example, the excellent book by Stephanie Coontz, Marriage, A History: How Love Conquered Marriage, New York: Penguin, 2006.

[4] Compare this to Hayek’s observation in Law, Legislation, and Liberty Volume II (page 108) where he notes that his use of “catallaxy” to describe the exchange-based market economy comes from a Greek verb that meant “not only ‘to exchange’ but also ‘to admit into the community’ and ‘to change from enemy into friend.”

[5] Both are chapter titles from Hayek’s The Constitution of Liberty, which Hayek saw as a restatement of the great principles of liberalism.

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*Steven Horwitz is the 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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