EconTalk

Larry White on the Clash of Economic Ideas

Mon, 28 May 2012 06:30:00 -0500

Lawrence H. White of George Mason University and author of The Clash of Economic Ideas talks to EconTalk host Russ Roberts about the economists and their ideas of the past one hundred years. They discuss Keynes and Hayek, monetary policy and the Great Depression, Germany after the Second World War, the economy of India, and the future of monetary policy.

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Readings and Links related to this podcast

Podcast Readings HIDE READINGS
About this week's guest: Larry White's Home page About ideas and people mentioned in this podcast: Books: The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years, by Lawrence H. White. Amazon.com. Articles: Biographies of Economists. Concise Encyclopedia of Economics. Podcasts and Blogs: Larry White on Hayek and Money. EconTalk podcast. Boettke on the Austrian Perspective on Business Cycles and Monetary Policy. EconTalk podcast. Don Boudreaux on Macroeconomics and Austrian Business Cycle Theory. EconTalk podcast. Rauchway on the Great Depression and the New Deal. EconTalk podcast. Shlaes on the Great Depression. EconTalk podcast. Nye on the Great Depression, Political Economy, and the Evolution of the State. EconTalk podcast. Wapshott on Keynes and Hayek. EconTalk podcast. Henderson on Disagreeable Economists. EconTalk podcast. Milton Friedman on Money, two parts. EconTalk podcast. Transcript available on Econlib. Townsend on Development, Poverty, and Financial Institutions. EconTalk podcast. Discussion of India. Papola on the Keynes Hayek Rap Videos. EconTalk podcast. Caldwell on Hayek. EconTalk podcast. Discussion of Socialist Calculation debate. Hitchens on Orwell. EconTalk podcast.

Podcast Readings

About this week's guest:

Larry White's Home page

About ideas and people mentioned in this podcast:

Books:

The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years, by Lawrence H. White. Amazon.com.

Articles:

Biographies of Economists. Concise Encyclopedia of Economics.

Podcasts and Blogs:

Larry White on Hayek and Money. EconTalk podcast.
Boettke on the Austrian Perspective on Business Cycles and Monetary Policy. EconTalk podcast.
Don Boudreaux on Macroeconomics and Austrian Business Cycle Theory. EconTalk podcast.
Rauchway on the Great Depression and the New Deal. EconTalk podcast.
Shlaes on the Great Depression. EconTalk podcast.
Nye on the Great Depression, Political Economy, and the Evolution of the State. EconTalk podcast.
Wapshott on Keynes and Hayek. EconTalk podcast.
Henderson on Disagreeable Economists. EconTalk podcast.
Milton Friedman on Money, two parts. EconTalk podcast. Transcript available on Econlib.
Townsend on Development, Poverty, and Financial Institutions. EconTalk podcast. Discussion of India.
Papola on the Keynes Hayek Rap Videos. EconTalk podcast.
Caldwell on Hayek. EconTalk podcast. Discussion of Socialist Calculation debate.
Hitchens on Orwell. EconTalk podcast.

Highlights

Time	Podcast Highlights HIDE HIGHLIGHTS
0:36	Intro. [Recording date: May 14, 2012.] Russ: Topic is your book, The Clash of Economic Ideas. It's a real tour de force; it covers, as promised, the major debates of the last century, the economists who were involved; and it dips back into the past to talk about those economists' predecessors, including Adam Smith, David Ricardo, Mill, Malthus, Say, and so on. The writing is incredibly clear. You'll learn a lot of you read this book. I learned a lot. You begin, not surprisingly, with John Maynard Keynes and Friedrich A. Hayek. What I found most interesting is your revisionist take on two seemingly true claims--that Keynes was the first macroeconomist and that everyone before Keynes was pretty much laissez faire. You take a different approach to both of those claims. Explain. Guest: Yes. I'm able to use Paul Krugman as the foil, having made both those claims. Russ: He's not the only one, though. Skidelsky. Guest: No, not the only one. I'm sure he learned it from someone else. Right, Robert Skidelsky, Keynes's biographer, suggests that Keynes invented macroeconomics. So, if we define macroeconomics as the study of business cycles, which seems like a natural definition, economists have been discussing business cycles ever since there were business cycles, and the deep theoretical discussions, I think, have to go back at least to the 1830s, when people were arguing about renewal of the Bank of England's charter, and the question of whether the Bank of England was responsible in some way or in some part for the business cycles that were happening in England in those days. So, there were the famous currency and banking schools, and a group I call the free banking school, who were arguing against the Bank of England's privileges. But they all had business cycle theories; they all had theories about what was causing the up and down in the economy and whether the Bank of England was to blame. The banking schools didn't think so, but the currency school and the free banking school thought that the Bank of England and to differing extents the rest of the banking industry were responsible. So there were monetary theories of the business cycle. If you want to talk about macroeconomics in terms of aggregation, in terms of thinking in large concepts like the money supply and total output, I would say you have to go back at least to Irving Fisher. He develops all those concepts--in fact develops index numbers so that he can measure the price level. And so those concepts are already around when Keynes comes on the scene. Russ: Fisher was early part of the 20th century. Guest: That's right. So, Keynes's famous General Theory is 1936, but Fisher is already talking about these things around the turn of the century. Russ: There was also Mises, and other of the Austrian folks who were interested in business cycle theory. That was independent of that earlier discussion. Guest: Absolutely. Well, they are building on the earlier discussion, actually. Mises is explicitly building on the currency school and the debate in the middle of the 19th century. And between the currency school and Mises is the great figure of Wicksell in Sweden, who tries to combine the currency theories of free banking schools with Austrian capital theory, which he learns from Bohm-Bawerk, and actually improves, clarifies, makes a little more rigorous. So, Mises is building on those predecessors. But right, in the 1920s the leading business cycle theory is the Austrian theory, which I talk about in Chapter 3 of the book; and then Keynes's contribution I talk about in Chapter 5. So, disagreements over economists over the role of government in the economy go back well before Keynes, and there are people on both sides. Keynes himself refers back to the debate between Malthus and Ricardo, where Malthus sees a bigger role for government in trying to steer the economy. But the language and the terms in which the argument has been conducted have changed, but there's always been a range of opinion as to whether the government should be larger or smaller.
5:28	Russ: But the part that struck me about the book--and I think in a way--we'll talk more about this as our conversation goes on--but, I think there is sort of this stylized view that, until the Great Depression--forget Keynes--everybody was a laissez faire capitalist, and you throw around names. Like: Look at Adam Smith; or, you know. And yet clearly, with the late part of the 19th century, which brings us Marshall and Pigou, we get the beginnings of a very different, much more interventionist approach that really grows out of the progressive movement that's sweeping the world, a view that we can solve our problems by applying human reason. I often call this, on this program, the engineering perspective. Engineers have called to complain to me that that's unfair to engineers, but it's a confidence in the ability of bringing academic disciplines to bear on social problems, and economics was just another aspect of that. And it was not a minority, tiny opinion. It was growing and increasingly widely held. It seemed to me, based on your book. Guest: Right, and one of the clear indicators of that is the foundation of the American Economics Association (AEA) around the turn of the century. The people involved in that were institutionalists, who had learned their economics in Germany in the era of Bismarck, and came back to the United States with all these ideas about how government can play a larger role in the economy. And in the initial statement of principles of the AEA, drafted by Richard T. Ely and some of his cohorts, there is an explicit statement that: We believe in the positive role of the state in improving the behavior of the economy. I don't remember exactly what words they used but a pretty explicit dismissal of laissez faire as a way of organizing the economy. So, they are bringing the ideas of the 1870s and institutional economics in the United States is a very important input into the progressive movement in the United States. Ely and John Commons and other institutionalists were important in pushing for labor reform regulation and other kinds of federal intervention into the economy. And they play a big role in the policies of the New Deal, as it turns out. Russ: In what way? Guest: The ideas of the National Industrial Recovery Act and the Agricultural Adjustment Act, which are the first New Deal programs, are created by an economist named Rexford Tugwell from Columbia University, who was a member of Roosevelt's brain trust. But Tugwell got his ideas in large part from the institutionalist school. He added a few things into it. But the idea of these acts was to create committees--or cartels, their critics called them--but groups that would regulate industries with participation from big business and labor but with the Federal government as kind of the senior partner, setting prices and quantities and labor-hiring quantities. So, that comes out of a very top down view of government's role in the economy. Russ: I found that part of the book extremely interesting because it wasn't something I was aware of. Especially the early days of the AEA, which I think a lot of economists would just presume were doctrinaire free marketers. Guest: Well, there were of course more free market economists than those who started the AEA. And they joined, eventually, the AEA. And it's become less ideological and more just a professional organization. But the beginning of it, it was modeled after the [?] fur Sociopolitic in Germany, which was the organization of the German historical school for social reform, basically.
9:54	Russ: Now, while we're on the topic of the Great Depression, it comes up later in the book when you are talking about monetarism, you address something that has bothered me for a while, which is an article that Paul Krugman wrote shortly after Milton Friedman's death--which I thought the timing was rather strange. But in that article he accused Friedman of being intellectually dishonest in his claim that the Great Depression was caused by the Fed. It's a legitimate argument; I just don't think its insulting was very appropriate. But the argument was the following: If you go back to Friedman and Schwartz's Monetary History of the United States, they argue that the money supply dropped dramatically--I think by a third--at the beginning of the Great Depression. And the Fed should have intervened to expand liquidity. And instead they felt that monetary policy was actually expansionary and they refused to expand as a result. And some of this is semantics. But Krugman's point is: That's not quite the same as causing the Great Depression; it's a failure to fix the Great Depression. You have an interesting take on that. What is it? Guest: So, Krugman accuses Friedman of something close to intellectual dishonesty, in his scientific writings having the view that the Fed should have done more to restore the size of the money stock, but in his popular writings saying the Fed was to blame for the depth of the Great Depression, leaving the impression that the Fed did too much. Whereas, Krugman says, what they are really saying is the Fed didn't do enough. What Krugman doesn't seem to realize is there's a standard by which to measure whether the Fed did enough, and that is: What did the clearing houses associations do in the earlier financial panics, like the Panic of 1907? The institutions that the Federal Reserve Act in a sense nationalized--their roles were taken over by the Federal Reserve. So, the clearing house associations in those panics, especially 1893 and 1907, had acted as lenders of last resort, had issued more currency--which actually wasn't legal for them to do, but they did it and nobody prosecuted them because it was clearly helping. And the Fed, in the crisis of the early 1930s, 1930-1933, just sat on the sidelines, didn't expand the quantity of currency, didn't try to make loans to illiquid banks. So, the Fed did less than the banking system would have done for itself in the absence of the Federal Reserve Act. So, Friedman and Schwartz's conclusion is the banking system would have been healthier if the Fed had never been created. And Krugman thinks that's inconsistent with saying the Fed did too little. But it's not at all inconsistent with saying the Fed did too little: given that the Fed had been given the roles of the clearing house associations, it was the Fed's duty to behave like a clearing house association and not sit completely on the sidelines, but try to organize some self-help efforts for banks that could use the help. Russ: Now, one of the parts that's interesting about your book is, of course, you put many things into an historical and intellectual context that often are forgotten. A lot of people treat the Great Depression as being a 1929 problem. If you are Keynes--the early Keynes calls it a "magneto problem," a metaphor for a car. Magneto is the British term for the alternator. Somehow the system is out of whack. And Keynes emphasized what he saw as the inability of the system to self-correct without government intervention. That's the Keynesian view, and of course comes to sweep the field. Friedman later says: No, no, no, no, no; it wasn't a magneto problem. It was a collapse in the quantity of money, and the government had the tools to fix that, given that, as you said, they had destroyed the tools that had previously been available; so it was a government problem. It wasn't something inherent in capitalism. But the Austrians--and you--point out the economy didn't start in 1929. It started before, long before; and the period from 1921-1929, the post-1920 depression period, which was a Great Moderation of its day--a time of growth and prosperity, causing many people to think it would last forever, including Irving Fisher. Guest: Yeah, and price stability. Russ: And so, what puzzled me about that view--and you and I have talked on this program before about the Hayekian view of that period and the Austrian view generally--but what I found interesting was just a small note you made about what Friedman would have said about that period, that he didn't think it was problematic. And I'm surprised you said that. Here's why. I think you said that during this period, money supply growth was quite large--it was about 6%. So, you also just mentioned that it was a time of relative price stability--relatively stable prices, I should say. And those seem inconsistent. Did Friedman really suggest that the 1920s was a golden era of monetary policy that could have been sustained? Six percent money growth? Guest: Well, he did say things suggesting that. He also said at one point that if the money supply hadn't collapsed, that there would have been simply a garden variety recession. So, in that way I guess he did recognize that there was going to be a recession; it wasn't that the boom could be sustained indefinitely. But as you say, what I try to emphasize, which is in contrast to the view of Friedman and, it turns out, of Keynes, that everything was pretty peachy in the 1920s and the problems only began in 1929, you have the Austrian view, which is that problems were building up before 1929, and the downturn in the economy and the crash in the stock market were symptoms of problems that were already in the works. But I do give Friedman credit for helping to explain why the Depression was so deep and so long. I don't think the view that the economy was heading for a recession predicts that it would have been a recession of 15 years--an incredible drop, unprecedented drop in output. Russ: True.
17:21	Russ: You have a story in there--I apologize, I have to pull it up from memory--of, I think it's Mises, when he's asked: Surely he wouldn't suggest doing nothing. Do you remember this story? What's this story? Because it's a complaint that those of us who are skeptical of government intervention today to solve the economy painlessly are often confronted with this challenge, that: You wouldn't just sit around and do nothing! What was the story? Guest: Well, it's an apocryphal story; I don't really have a source for it, but I've heard it second hand. So, Mises gives a lecture and talks about how the economy needs to be left alone to recover in a recession. And a woman in the audience raises her hand and says: Professor Mises, surely you are not suggesting that the government should do nothing. And he says: Madam, I'm suggesting that the government should have started doing nothing a long time ago. They had created the boom, and now we had the recession, and we can't avoid going through the recession. Russ: Yeah, there is a certain feeling that we just have to find the right, painless cure. I find it strange--we're recording this in May of 2012--and there was an article in the Washington Post just yesterday that Spain maybe is going to reconsider austerity. As if austerity were a choice, a strategic maneuver on the part of some European nations rather than a reality, when you've spent-- Guest: It's as though a household who've maxed out their credit card have a choice but to moderate their consumption. Russ: Right. Now, in theory, you could go get another card. But when you've asked all the people for a new card and they've turned you down because they don't like your past pattern of behavior, you can either go to jail or you can cut back. It's not like: Well, but cutting back's going to be so painful. Yes, but it's better than going to jail; and there isn't a third alternative if no one will want to lend you money. Of course, there is: you can quit the Eurozone and start printing money of your own. But that's not so pleasant, either. In that sense there's a choice. But it's not like they picked the wrong strategy. To me, the right analogy is a gambler who keeps losing and keeps borrowing money from his friend, and finally his friend says: I don't want to keep lending you money. And he says: No, you don't understand--just give me a little bit more; if I win I'll make it all back. Well, that's always possible. That's the Keynesian: But I'm going to grow so much from this borrowing it's going to pay itself back and then some. But sometimes you just get tired of betting on a loser. Guest: Well, countries that are deeply indebted can go into the international bond market and try to sell their bonds. But they are not going to find many takers at any interest rate they are happy paying. Russ: Yeah, that's right. Guest: In the last chapter of the book I talk about the sovereign debt crisis. Russ: Where do you think we're going? I don't know what I mean by "we're". Where do you think some nations are going? Guest: Well, Greece has already defaulted. It looks like there may be some other partial defaults in Portugal; and I'm not sure about Ireland. I think you're right: they don't have much choice if they want to avoid default but to try to rebuild their credit, which means making a credible commitment to having the wherewithal to service their debts. Which means they can't run large deficits indefinitely. They need a credible plan for bringing enough revenue, minus expenditure, to pay the interest and principal on the debt. Whether they'll be able to do it--well, clearly Greece wasn't able to do it. In the United States we've hit 100% of debt-to-GDP ratio. And the debt keeps growing faster than the economy, so the ratio of debt to GDP keeps rising. And that can't go on forever. And as Herb Stein famously said: If something can't go on forever, it won't. Something needs to change. But if we want to avoid falling into the same kind of debt trap that Greece fell into, where there is no way they can afford to roll over their debt--even if they started running zero deficits tomorrow, when you are paying 12%, 15%, 20% interest on your debt, the debt is growing faster than your ability to repay it. Russ: When you say they've defaulted, you are saying that because they forced their creditors to take a loss. Guest: A very large haircut, yeah.
22:27	Russ: Going back to philosophical issues: I have to say that one of the themes that runs through the book is the refrain from my song with John Papola: Which way should we choose? more bottom up or more top down ...the fight continues... Keynes and Hayek's second round Guest: Yeah. I have suggested in some presentations of the book I've made that people should regard it as a handy compendium to your videos. Russ: Yeah, it definitely--I appreciate the ironic humility there, Larry. Comparing your work as scholarship to what John and I did. Guest: Yeah, but you have 3 million hits. If I can sell 3 million copies. Russ: If you could just sell 10% of that. But what I noticed--you don't highlight this particularly, but you can't help but notice it--is that the debate which Keynes and Hayek started in the 1930s, it's the same debate in Germany after the war; it's the same debate in India after Independence; it's the same debate we're having right now. It's always a question of whether we should have more or less government rather than more or less bottom-up and emergent decision-making. Guest: There is that aspect to it. But I don't want to be seen as treating all of these debates as the same debate. There are different aspects and angles and forms they take. There are different forms of government intervention that are being advocated in different times and places. So, in India, it's 5-year planning but with a privately owned economy. So, it's not quite the same as the Socialist Calculation debate, where people are talking about government owning and running everything directly. Russ: In Germany it's price controls. Guest: That's right. In post-war Britain, it's nationalizations. Russ: I like the story you tell of Erhard comes to Lucius Clay or was on the phone with Lucius Clay, the U.S. army commander in Germany. Tell that story. Guest: So, Ludwig Erhard is a classical liberal economist who has spent the war in Germany and manages to become the economic director of the U.S.-U.K. Occupation Bizone. There's a whole story about how he fortuitously fell into this job. But anyway, he's in charge. And jointly he and the U.S. military have decided to introduce a new currency, the Deutschemark to replace the old war currency, the Reichsmark; and General Clay's office gets wind that Erhard is planning not just to announce the new currency, but to announce decontrol of prices. Now, one of the ironies is that the Nazis had controlled prices and rationed goods all through the war--not surprising--but the U.S. occupation authorities continued the system when they took over. Just inertia, I guess; or they didn't know what else to do. Russ: Or maybe they felt it would enrage the populace and they needed to keep them on their side. Guest: Well, one of their advisors who urged them to keep the price controls and rationing in place was John Kenneth Galbraith, who was seconded by the U.S. State Department. Galbraith of course had been a price controller in the United States during the war; was in the process of writing a book called the Theory of Price Controls defending the practice. So he comes to Germany and says: There's no chance of getting recovery by decontrol. Anyway, against this background, Clay calls up Erhard and says: My people tell me that you're planning to announce a decontrol of prices and elimination of rationing for some goods; and they tell me that would be a big mistake. And Erhard says: That's okay, General Clay; my advisors also tell me it would be a big mistake; but I'm going to do it anyway. Erhard was actually being humorous. I mean, his advisors were actually telling him that it was a good idea, or at least some of them. He had people he was listening to who were telling him that if you want markets to clear, if you want production to revive, you need to decontrol prices and quantities. Russ: He had not joined the Nazi party during the war--is that correct? Guest: That's right. Russ: I just felt compelled to mention that. Guest: There are three heroic German economists I talk about: Erhard, Walter Eucken, who not only didn't join the Nazi party but participated in sort of an underground group which was planning what can we do after the Nazis lose to revive the economy after the war, something that was completely illegal to do. And Eucken was very lucky not to be arrested during the war because he was friends with a politician named Carl Goerdeler, who was involved in the Valkyrie Plot to assassinate Hitler. Goerdeler's character is actually portrayed in the movie Valkyrie with Tom Cruise. And then the third one is Wilhelm Roepke. Roepke is fired from his job at the University of Marburg for giving anti-Nazi speeches. And I start Chapter 6 with Roepke being visited by two members of the SS who suggest to him that if he'd like his job back he should stop criticizing the Nazis. And Roepke just tosses them out of his house. And once he's shut the door behind him, he says to himself: I'd probably better leave the country. And he spends the rest of the war in Instanbul. Russ: You point this out--it's important that people remember that the German words that form the acronym for Nazi were National Socialism, not some free market, right-wing--they were right-wing but they were not free market. So, people who were on the other side, the classical liberals-- Guest: Well, that's one reason the term right-wing is dangerous to use at all. Russ: Yeah, I agree.
28:37	Russ: Let me ask you about Galbraith. Now, to those of us who like prices, us Hayekians who really are big fans of the ability of prices to signal information, steer resources, and do all their magical stuff; then we have people on the other side, and they appear throughout the book--people like Galbraith, who don't trust prices. There are people like Pigou who say there are externalities; we've got to adjust them. There's a lot of folks like that who appear throughout the book. And then we get an episode like this German episode. You could argue it's as close as we could get to a natural experiment: after Erhard removes price controls and is told it will be a disaster, it's not a disaster. Guest: Not at all. Almost immediately shelves fill with goods. The black market activity comes out in the open; the factories go back to work; construction crews start rebuilding the cities; and it's a remarkable recovery. Russ: So, I don't want to pick on John Kenneth Galbraith because he's not alone, and you and I might do the same thing in the face of empirical evidence that shakes our world view; but did he write an article saying he was wrong? Did anybody from that experience say: Wow, we really underappreciated what prices can do? And we should leave them alone. Except sometimes. Guest: Galbraith, I do not think ever wrote that article. And in fact he went from advising post-war Germany to advising post-war India. In fact, he became the Ambassador to post-war India under John F. Kennedy. And India was considering central planning of a sort, and Galbraith said: No question you have to do that; there's no other way for the economy to develop; if you rely on the market, nothing's going to happen. He gives a series of lectures which is published as a book in which he basically gives that advice: You are not going to develop unless you have a central government plan for generating the right amount of investment in heavy industry, and so on. So, I don't think Galbraith ever did learn that lesson. Russ: So, is the glass half full or half empty? One way to look-when I made that remark about the debates, same debate, it's really an ideological debate, a philosophical debate--one view says the glass is half empty; we are arguing about the same things over and over again. The other view says it's actually half full, because there are a bunch of things that are not on the table any more; central planning is not really on the table any more. Guest: That's right--comprehensive central planning is not. Industry by industry, we can debate about that. Russ: That's the half-empty back again. Guest: But price controls are no longer taken very seriously. Except industry by industry. In medicine if we call it something else, we can make price controls work. We call it cost containment. Russ: Although Milton Friedman said on this program in 2006 that the only reason price controls weren't on the table any more is because too many people are alive who lived through them in the 1970s in the United States; and as they start to die off, they become appealing again. I hope he's wrong about that. I suggested naively that it was due to the great job economists have done in explaining how bad they were. But--he had a different view. Given this view of economists, it's hard not to see the role of economists through rent-seeking eyes. The persistent faith in: We can do better than the price system on its own. There's a cynical temptation to say that: Well, economists would say that; it's what gives them power. Guest: I don't try to do that in this point. Russ: I know you don't. Guest: Somebody could write a different book in which we find out what private axes people have to grind. But I treat the economists who have bad ideas as sincere people who have bad ideas. Russ: Yeah; I think they could be sincere. Guest: Well, sincere and disinterested. Russ: Okay. I think that's impossible. But you are kind. But you are right; it's not in the book. The book is very non-judgmental about the motivations of folk; and it should be. I'm just speculating. I have no idea what really motivates people. But I think if you step back outside the profession, what appears to motivate people, based on the evidence, is power. Everybody else is motivated by it. Why wouldn't we be? Not a very attractive thought. Guest: And I'm sure we could both think of examples that would illustrate that. Russ: We'll keep them to ourselves though. It's funny; there's something classless or distasteful about suggesting that; but I think there's some truth to that. Guest: But I think we have to consider the ideas on their own merits: Will it help the economy be more prosperous? Russ: Oh, I agree with that. Otherwise you are in a form of ad hominem. Guest: That's right. Russ: But the point I'm really trying to make--and the other side would make it about us, too--is that the unwillingness to accept new evidence is damning of one's position. So, the left, the interventionists, would look at us and say: Isn't it obvious that 2008 proved that markets don't clear, markets are destructive, capitalism runs amuck now and then and government has to intervene? And the other side looks at that and says: Don't you realize that 1948 proved once and for all that prices are great? I guess we just keep telling our stories, our ex post stories. Guest: The story I tell about the financial crisis is: look, it happened under central banking, it happened under a heavily regulated banking system. It didn't happen under laissez faire; so how can it be an indictment of laissez faire? Russ: Well, the other side has an answer to that. Of course, I'm sympathetic to that view; I would be: that's my view.
35:00	Russ: Let's turn to The Road to Serfdom, which Hayek writes in 1944. It's been treated as a prediction; and Hayek was very clear that it was a warning. What's the distinction? Guest: The distinction is that you can change your ways, or mend your ways, I sometimes put it. If, when central planning fails to deliver the goods you try even harder to centrally plan and eliminate black markets and every way in which people are trying to get around the plan, then you will make things worse. And you will end up throwing people in jail for being in the black market or for saying things you think are encouraging people to be in the black market, or criticizing the plan--you can accuse them of undermining the effectiveness of the plan. So, civil liberties become endangered. So, The Road to Serfdom is not simply a summary of Hayek's criticism of socialism or market socialism as a workable alternative. It's a warning about the political implications of it. If, when it doesn't work, the people trying to implement it don't stop and step back and say, we need to try something else, then you are headed down the road to serfdom. Then you are going to end up limiting people's liberty. But you can always step away from that path. Russ: Do you think it's anything to worry about today? Governments spending a lot of money in the United States relative to what it has in the past. Federal spending as a function of GDP is 25%, which is up dramatically from 19%-ish a couple of years ago. Guest: To be accurate, Hayek isn't really warning about that. In particular he is not warning about government collecting a lot in taxes and then writing a lot of people checks, like Social Security checks, rather than to spend their own money in markets. What he's worried about is government trying to control industry, trying to control output and planning and investment. That's what he's warning about. And we're in danger of that in the way we're treating the health care industry. Russ: And the financial sector perhaps. Guest: Yes. Russ: Education. Guest: Higher education. Special education. Russ: Lower, higher, yeah. It's hard to know how important it is. We're not close to tyranny in the United States; you have to avoid the temptation to get overly worked up about it. At least it seems that way to me. Guest: Right. But there is an important Constitutional issue that has been argued in front of the Supreme Court and we're waiting for their decision on it; which is: is it an infringement on your Constitutionally protected liberties to be told you have to buy health insurance, or you go to--well, I'm not sure what the penalty is. But you have to. Russ: I have to say--and I'm not sure how I feel about that--my first impulse is that I should be free not to buy health insurance. But there are so many other things the Supreme Court has condoned as Constitutional, it's hard to understand why this one is--it's the boiling the frog problem, the idea that you turn the heat up a little bit, a little bit, a little bit, just a little bit hotter; and then when the frog's boiled it's too late. But it's hard to understand why this is a quantum leap in temperature. Guest: Yeah; I'm with you. It's a step. It's not all that much bigger than the step of declaring everything interstate commerce. Russ: Yeah. There you go. Guest: It's where we are now, so if we want to draw a line somewhere, this is where we have. Russ: Yes, that's true. Keynes's reaction to The Road to Serfdom--Keynes as most people know died relatively young relative to Hayek, who lived to a ripe old age of 90-something. 92, 93? Guest: 92, I think. Russ: But Keynes died in the late 1940s. Guest: 1946. Russ: Hayek in 1992. But we do have Keynes's reaction to The Road to Serfdom, and we have Orwell's reaction, which is kind of cool because Orwell had also written 1984, which was a dystopian, apocalyptic vision, sort of his own Road to Serfdom. Describe their reactions. Because the Keynesian one, the full one, is not widely known. Guest: That's right. Keynes writes Hayek a letter and I believe he writes Hayek this letter while he's on a ship crossing the Atlantic from England to the United States to attend the Bretton Woods conference. It has two parts, and people sometimes just quote the first part. In the first part, Keynes says: It's a magnificent book and I'm in wholehearted agreement with it--in fact deeply moved agreement. And then the rest of it says: But, I don't agree with you when you say what we need is less planning; I think we almost certainly want more planning; and it will be safe to have more planning as long as the people in charge of the planning are people who share your and my liberal sensibilities. So, in a community where people think rightly, this is all safe; but yes, we have to worry about a community where people don't share these same ideas. So, he basically missed the point of the book, which is: it's not about the personalities of the people in charge. The very system selects people who will disregard liberal sensibilities or the rights of their fellow citizens. I mean, Hayek has an entire chapter entitled "Why the Worst Get On Top." So, Keynes missed that point. Keynes seemed to think that so long as he and his friends from Cambridge were in charge, everything would be okay. Russ: Well, I think the reason he missed that point--to defend Keynes--was that he was on top. He was the most influential public intellectual during his lifetime, by an enormous amount. He had the ear of the powerful and he occasionally had his hand on the throttle, on the steering wheel--whatever metaphor you want to pick. And I think it was reasonable--talking about casual empirical evidence as we were a few minutes ago, and natural experiments--his view was the Hayek was wrong: the worst don't get on top. Look at me--I'm not the worst. Which was for sure. And it's fine--civilized countries, the people who get power are the decent sorts, not the people Nazi Germany or the Soviet Union. They're not Beria and Himmler. It's people like Keynes and good Cambridge folk. Guest: One of the episodes I learned writing the book and put in the book is that Hayek's Road to Serfdom is reviewed by an economist named Evan Durbin, who was, you might say, the chief theoretician of the Labour Party at this time--the same Labour Party that was doing all the nationalizations just after the war. Russ: In England. Guest: And as he reviews Hayek's book, Durbin says: Well, this idea that it's going to lead to serfdom is way out of line. When we get into charge--we, the Labour Party--we absolutely will not have, say, forced allocation of labor to what jobs we think people ought to take. We'll still have a free market. And when Labour does get into power, this question arises: Do we want to allocate labor by sort of drafting people and telling people what industry they have to work in? And Durbin says: No, we don't want to go down that road. So, I think Hayek's argument may have helped moderate where planning led in England. They never really adopt a kind of ghost-plan system, a kind of Soviet planning system where quantities and transfer prices are dictated to firms. They do nationalize industries, and together the nationalized industries employ about a fifth of the workforce, so it is serious. But they don't try to centrally plan the entire economy, although some within the Labour Party wanted to. That doesn't become the dominant view. I think partly because they were sensitive to the civil liberties issues. Russ: Yeah. Could be. And we do still have--the Constitution here in the United States is pretty good about civil liberties. There's not been the erosion there that there's been in the economic policy area. Although with terrorism there's been some erosion. Obviously. Guest: Yes.
44:29	Russ: Let's go back to India, because you spend a chapter on India, which I think is particularly important given its current situation in the world. And you go back and talk about the post-war planning era that they went through, the influence of Nehru, and Indian economists. There was a lonely voice in India, Shenoy. He stood up and said: This is a mistake, this centralized planning. And he was a very lonely voice in the wilderness. But ultimately a number of Indian economists who had been trained initially in a more interventionist way came around to his view. Is that correct? Guest: That's right. And I particularly focus on Jagdish Bhagwati, who is trained as a sort of planner. He and his whole generation come to Western universities and study with people like Tinbergen and Koopmans and Rosenstein-Rodin--people who are advocating central government planning of industrialization in order to lift poor countries out of poverty. And I quote somewhat extensively from an interesting interview Bhagwati gave, and he said: Look, we were trained by people like Nicky Caldor and Joan Robinson, two very left-wing Keynesians, somewhat influenced by Marxism, at Cambridge University. He says: Amartya Sen and I were trained by these people; and when we came back to India we were always looking for market failures and where we could fix them. And of course we could find them everywhere; and we thought empowering government to fix them would make the economy work better. And Bhagwati was initially rather dismissive toward Shenoy's critique of planning because Shenoy was not writing in the most rigorous mathematical style that the younger economists had been trained in. But Bhagwati comes around when he looks at the actual results of the planning effort. The way it was implemented in India, firms were given quotas and if you wanted to produce more than your quota you had to get permission. You had to get a permit. And if you wanted to enter an industry you weren't already in, you had to get a permit. If you wanted to import foreign equipment, you had to get a permit. So, it was called the Permit Raj, or the Permit Regime. And the economy just stagnated, produced a very weak rate of growth. And Bhagwati looked around the world and said: Other countries are growing faster; we really need to rethink this in India. And that was very influential on his generation of Indian economists, who had been sort of trained in the planner approach to things. Russ: Certainly after the Indian economy was liberalized in the 1980s and 1990s-- Guest: Well, the liberalization began. It isn't finished. Russ: Right, no it isn't finished at all. But certainly it's much more free than it was in the 1950s and 1960s. Guest: Yeah. The permits are gone. Russ: So, the economy is growing well now. But I was surprised at how well it grew then. It challenged my own preconceptions. When you described the Permit Regime and the philosophy of Nehru and others toward planning, you'd think they'd have stagnated. And yet it appeared--my crude calculation from your summary was like 3% a year. Not bad. Guest: That's right. Russ: So, they didn't grow as fast as Korea. Big deal. Korea is a tough standard to match. Is it reasonable to hold them to that? Guest: Well, it's 3%; it's less than that per capita, because the population is growing. So, it's a little over 1% per capita. Russ: Not so good. Fair enough. Guest: The description of it often in the literature is that it was the "Hindu rate of growth", which is actually a joke that a lot of people don't get when they use the term. It was supposed to be a play on the term "secular rate of growth"; in India, there are mostly Hindus, so it's the Hindu rate of growth. Russ: Secular meaning over time, rather than non-religious. Guest: Yes. Russ: That's a bad joke, a pretty obscure joke. Guest: It was considered a pretty meager rate of growth at the time, and it was, in fact, per capita. Russ: That's a pretty good point. I have to say, when I read that passage, it struck me that maybe a better way of understanding it, going back to my public choice view of economists, is that it wasn't so much that India's economists got free market, but that India got more free market and the economists came along. Do you have any feel for how important they were--were they leaders or followers? Guest: That's a very good question. I give some evidence that there was influence from economists running to the government; and of course the current Prime Minister, Manmohan Singh, was one of the leaders of the decontrol movement in the 1980s. So, I'd like to think that ideas helped influence him in changing policy. But of course what made the policy change possible was a crisis--in particular, it was a rupee crisis. There was a devaluation of the rupee. And then suddenly ideas about decontrol as a way of reviving the economy because politically palatable. But the ideas had to be there before they could be taken off the shelf. Russ: Yeah. It's always a question to me whether those are just convenient covers for what they would have done anyway. I don't know. Guest: I think the idea you referred to earlier of Friedman's, that people have to learn from experience that a certain program of control doesn't work, is true. And it was true in the Indian case. And so it's more about learning by doing. But I think somebody has to tell you what you need to learn from what you see. It's easy to learn the wrong lesson from experience. Russ: True. Speaking of which: People who have different ideology from yours want to learn very different things from the current European problems, which we referred to earlier. Would they learn the same thing from India, do you think? Is there anybody who wants to defend the earlier period from India and thinks they are on the wrong path now? Again, this is sort of the half-full version of where we think we are. Guest: I can't think of anybody. I mean, there are Indian politicians and bureaucrats of course who don't want decontrol, deregulation to proceed too far, too fast, because they have their interests and constituencies to look out for. But I can't think of any respectable economists who think the Permit Regime was the way to go, in retrospect. Russ: I think you are right.
52:03	Russ: Let's turn to the United States and monetary policy, which we talked about briefly earlier, and which you talked about at length in your chapter on Bretton Woods, and monetary policy generally. And of course it runs through other parts of the book. We had a rather remarkable time in U.S. monetary policy history, although I don't think there's any likelihood that tomorrow or even in January of 2013 there's going to be an abolition of the Federal Reserve. Guest: Yeah, I'd agree with that. Russ: But it's on the table. On the table is a radical remaking, an impossible reimagining of monetary policy. Are you surprised that that's happened in your lifetime? It's a tribute to your work to some extent. Do you think anything will happen from it? Of course, it goes back to the argument we just had--I don't think you are a follower, but hard to know how much of a leader you are; I like to think you are, that you've had an impact on this debate. Certainly the ideas are there for others to grab. And they are grabbing them. They are actually taking seriously the possibility of a radical change of monetary policy. Guest: Well, yeah, I don't take any credit for that. But I have to say I am surprised that in my lifetime somebody had a bestseller entitled End the Fed. And the author of the book was invited to be on the "Daily Show" and plugged the book and was treated respectfully. Russ: Yeah. That's shocking. Guest: So the climate can change a bit. Russ: What do you think is in the realm of the feasible? Or the imaginable for how things might change? Guest: Well, in the next ten years? Russ: Yeah. Guest: I think it's feasible to put some kind of single mandate on the Federal Reserve System to constrain their freedom of action. I think it's possible to nail down some rules which would make it possible to prevent the ad hoc crony interventions they made during the 2007-2008, where they decided to bail out Firm X but not Firm Y, or they decided to overpay for assets, or they decided we're going to give loans at below-market interest rates to the following list of banks. Those are important reforms. But I agree with you that it's not going to be on the agenda in the next ten years to shut down the Fed. It may be possible to open up alternatives: decriminalize the use of gold and silver coins, decriminalize the use of online gold transfer services or transfer services in other currencies that make it possible for people to have more easy access to an alternative to Federal Reserve currency. Federal-Reserve denominated payments. Russ: That would be good. Those would all be good. When you talk about the single mandate, I assume you would keep the mandate for a low rate of inflation. And you'd get rid of the mandate to keep low employment. Guest: Yes. I would take away any mandate to monkey with a real variable, and just have a mandate for a single nominal target. I would prefer something other than the price level. I would prefer nominal income or an index of producer prices, following Hayek, rather than consumer prices. But something like that. Russ: The irony to me--you and I see totally eye to eye on the crony part and the ad hoc interventions--what's weird to me--we see eye to eye on the next part, too--but what's weird to me is that the Fed is despised not just for that, which is what really upsets me, but also for its grotesque expansion of the money supply. But that hasn't made it out into the real economy. Guest: Well, that's right. It's only the monetary base that's expanded grotesquely. Russ: And when you ask them--Bernanke when he testifies or speaks on what he's done, he always says: Well, I have a mandate to fight inflation and I don't want to do more than this. I've done plenty. We've done enough. If we need to, we'll do more; we could, but we've done enough. Seems to me they've done very little. They've printed a lot of money but made sure--either made sure or for whatever reason--it's stayed in the banks. I don't see monetary policy as being very expansionary. And certainly Scott Sumner, who is in the Hayekian nominal income camp that you just mentioned--he'd trace a different lineage to it, but he'd certainly be in favor of that--he would say the Fed has failed terribly to keep its single mandate. And its second mandate. It's failed both. Guest: Well, yeah. Scott has an article entitled "The Real Problem Was Nominal," where he thinks the reason we have a slow, slow economy is that we are not back up to the nominal income path that we were on before the financial crisis. That the Fed fell asleep at the switch and let nominal income drop; that we had two quarters of actual deflation. And that it needs to get back up to the trend line we were on before. I'm not so sure we need to get back up to the trend line we were on before. Nominal income is currently growing at more than 5%, so Sumner's view is that it should continue to grow at 5% per year. I would rather see it grow at 0% per year. But I do recognize that you need to prepare the public's expectations for a switch to a less inflationary regime. Russ: When you said 0%, you didn't mean nominal income--you meant prices. Guest: I meant nominal income. Russ: You wouldn't want nominal income to grow at zero. Guest: Why not? Russ: You want it to be flat? Guest: So that as real output grows, prices decline. Russ: Hmmm. Guest: We could take another hour to talk about that. Russ: Yeah. I just want to make sure I understand the numerical example. You want to get to a point where real income is growing--I understand. Nominal income is flat but prices are falling. You want steady deflation. You would prefer to see fixed nominal income with steady deflation as productivity grows. Guest: That's right. It's a productivity norm, as George Selgin calls it. Russ: Let's take two minutes to talk about that, since we put it on the table. I know we could take an hour. The standard argument is that that would be very destructive. Partly because of expectations. I would say only because of expectations. Do you worry about those? Guest: Yes. So, like I said, you need to prepare people to expect it. You don't want to continue people raising their prices and raising their reservation wages when they are looking for a job at a 3% rate per year until they find they've priced themselves out of the market. You want them to charge prices and demand wages that are consistent with what they can actually get. But what I'm talking about is approximated by the regime we had under the classical gold standard, where when the world output of goods grew faster than the stock of gold, you had gradually declining prices. And people enjoyed a higher standard of living because everything got cheaper and cheaper. Russ: But that's true because of productivity, not because nominal prices were falling. Guest: That's right. But that's the way the productivity gain was communicated to them. Russ: How long was that regime in place? Guest: Well, basically from 1879 to the eve of WWI. You didn't have falling prices every year, but you had a long patch of prices falling at about 1% a year. Russ: I find it fascinating, the fear of deflation that we live in now. But I do accept the point that in a time when people expect inflation, deflation can be destructive. Guest: So, we do need to distinguish between destructive deflations, like 1930-1932, and benign deflations, that take place because output is growing. How can that be harmful. Russ: Yeah. Well, that will be a subject for another podcast. I'd like to talk some more about that. Guest: A technical footnote--we do need to make adjustments for things like population growth and so on.

Posted by Russell Roberts at http://www.econtalk.org/archives/2012/05/larry_white_on_1.html.

Coase on Externalities, the Firm, and the State of Economics

Mon, 21 May 2012 06:30:00 -0500

Nobel Laureate Ronald Coase of the University of Chicago talks with EconTalk host Russ Roberts about his career, the current state of economics, and the Chinese economy. Coase, born in 1910, reflects on his youth, his two great papers, "The Nature of the Firm" and "The Problem of Social Cost". At the end of conversation he discusses his new book on China, How China Became Capitalist (co-authored with Ning Wang), and the future of the Chinese and world economies.

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Readings and Links related to this podcast

Podcast Readings HIDE READINGS
About this week's guest: Ronald Coase's Home page Ronald Coase's bio page at the Ronald Coase Institute. Ronald Coase's Autobiography, NobelPrize.org. About ideas and people mentioned in this podcast: Books: How China Became Capitalist, by Ronald Coase and Ning Wang at Amazon.com. Risk, Uncertainty, and Profit, by Frank H. Knight. What distinguishes a firm from other economic activities? Free on Econlib. Articles: "The Problem of Social Cost", by Ronald Coase. 1960.Journal of Law and Economics 3 (1): 1-44. "The Nature of the Firm", by Ronald Coase. 1937. Economica 4 (16): 386-405 "The Lighthouse in Economics", by Ronald Coase. 1974. Journal of Law and Economics17 (2): 357-376. Bosses Don't Wear Bunny Slippers: If Markets Are So Great, Why Are There Firms?, by Mike Munger, Library of Economics and Liberty, January 7, 2008. Ronald H. Coase. Biography. Concise Encyclopedia of Economics. Milton Friedman. Biography. Concise Encyclopedia of Economics. George Stigler. Biography. Concise Encyclopedia of Economics. Arthur C. Pigou. Biography. Concise Encyclopedia of Economics. John Maynard Keynes. Biography. Concise Encyclopedia of Economics. Friedrich A. Hayek. Biography. Concise Encyclopedia of Economics. James M. Buchanan. Biography. Concise Encyclopedia of Economics. William Stanley Jevons. Biography. Concise Encyclopedia of Economics. Marginal revolution. Externalities, by Bryan Caplan. Concise Encyclopedia of Economics. Property Rights, by Armen A. Alchian. Concise Encyclopedia of Economics. Law and Economics, by Paul H. Rubin. Concise Encyclopedia of Economics. Tragedy of the Commons, by Garrett Hardin. Concise Encyclopedia of Economics. Game Theory, by Avinash Dixit. Concise Encyclopedia of Economics. Public Choice, by William F. Shughart II. Concise Encyclopedia of Economics. Productivity, by Alexander J. Field. Concise Encyclopedia of Economics. Podcasts and Blogs: Munger on Subsidies and Externalities. EconTalk podcast. Munger on the Nature of the Firm. EconTalk podcast. Shirky on Coase, Collaboration and Here Comes Everybody. EconTalk podcast.

Podcast Readings

About this week's guest:

Ronald Coase's Home page
Ronald Coase's bio page at the Ronald Coase Institute.
Ronald Coase's Autobiography, NobelPrize.org.

About ideas and people mentioned in this podcast:

Books:

How China Became Capitalist, by Ronald Coase and Ning Wang at Amazon.com.
Risk, Uncertainty, and Profit, by Frank H. Knight. What distinguishes a firm from other economic activities? Free on Econlib.

Articles:

"The Problem of Social Cost", by Ronald Coase. 1960.Journal of Law and Economics 3 (1): 1-44.
"The Nature of the Firm", by Ronald Coase. 1937. Economica 4 (16): 386-405
"The Lighthouse in Economics", by Ronald Coase. 1974. Journal of Law and Economics17 (2): 357-376.
Bosses Don't Wear Bunny Slippers: If Markets Are So Great, Why Are There Firms?, by Mike Munger, Library of Economics and Liberty, January 7, 2008.
Ronald H. Coase. Biography. Concise Encyclopedia of Economics.
Milton Friedman. Biography. Concise Encyclopedia of Economics.
George Stigler. Biography. Concise Encyclopedia of Economics.
Arthur C. Pigou. Biography. Concise Encyclopedia of Economics.
John Maynard Keynes. Biography. Concise Encyclopedia of Economics.
Friedrich A. Hayek. Biography. Concise Encyclopedia of Economics.
James M. Buchanan. Biography. Concise Encyclopedia of Economics.
William Stanley Jevons. Biography. Concise Encyclopedia of Economics. Marginal revolution.
Externalities, by Bryan Caplan. Concise Encyclopedia of Economics.
Property Rights, by Armen A. Alchian. Concise Encyclopedia of Economics.
Law and Economics, by Paul H. Rubin. Concise Encyclopedia of Economics.
Tragedy of the Commons, by Garrett Hardin. Concise Encyclopedia of Economics.
Game Theory, by Avinash Dixit. Concise Encyclopedia of Economics.
Public Choice, by William F. Shughart II. Concise Encyclopedia of Economics.
Productivity, by Alexander J. Field. Concise Encyclopedia of Economics.

Podcasts and Blogs:

Munger on Subsidies and Externalities. EconTalk podcast.
Munger on the Nature of the Firm. EconTalk podcast.
Shirky on Coase, Collaboration and Here Comes Everybody. EconTalk podcast.

Highlights

Time	Podcast Highlights HIDE HIGHLIGHTS
0:36	Intro. [Recording date: May 8, 2012.] Russ: Ronald Coase, born in 1910. First, I want to ask you about your youth. How did you get interested in economics, and how did you end up in the United States? Guest: Well, I was born in London. I was born to parents who went to work at 12 years old. So they had very little education. So, I had very little education, either. I was very weak in my legs, and I went to a school for physical defectives run by the local council, and we were taught very little. I remember learning how to make a basket, had to weave it. That was the sort of thing I was taught. I had very little education until I went to the secondary school. Russ: How did you get from a school for physical defectives to become a graduate student in economics? Guest: Oh, I got a scholarship from the local council to go to the secondary school, the Kilborn [?] Grammar, and I went there. And while there, I studied, got a scholarship, and--I'm trying to think just what I did. Hard to--I really didn't start studying until I got to a secondary school, where I had a scholarship. Russ: And in your career, when you were younger, which economists had the biggest influence on you? Who have you come to respect as an economist over the decades? Guest: Oh, I didn't really study much at all. I didn't study economics until I got to the London School of Economics, which I went from the secondary school. Russ: And when you were there at the London School of Economics [LSE], which economists did you learn the most from? Guest: Well, Arnold Plant was the economist who taught me sectional [?] economics, and I knew I didn't really know very much then. I just studied with him. I took a degree in commerce. I never studied economics at all. We just studied a whole range of subjects like accounting and industrial law and so on. Or a commerce degree. Not an economics degree. And we really had very little economics at all.
6:31	Russ: Now, that's still can be true in graduate school. Economics has changed a lot since then. And you've been critical of what you call blackboard economics. What does that mean to you? Guest: Blackboard economics is economics which you can put on the blackboard, in which you study an imaginary system. It's not empirically based at all. It's not concerned with what really happens. It's what you imagine could happen and what you imagined didn't happen. So, I've been very critical of modern economics, which is too abstract. That's called blackboard economics. It's something you can put on the blackboard but that doesn't exist. Russ: So, what do you recommend? Guest: I recommend more empirical work. Study what actually happens and start from there. Russ: Modern empirical work in economics is very abstract, as well, though. It has a lot of statistics and aggregates. That's not what you mean by empirical work. I don't think you mean econometrics, right? Guest: Oh, no. I don't mean--the study that people do with a lot of statistics and so on, not finding out what really happens and getting conclusions based on the investigations, not on what actually happens but on bunches of statistics. My view is you should get down and study what actually happens. But economists don't do that, by and large. Russ: No, it's rare.
9:25	Russ: Let's talk about the problem of social cost. There was a famous dinner that took place at Aaron Director's house at the U. of Chicago, where everybody thought you were wrong when the dinner started. Including Milton Friedman, who was--according to George Stigler--your biggest and most frequent adversary at that dinner. He talked the most, according to Stigler. But by the end of the evening, they all came over to your side. What do you remember about that dinner? Guest: Well, it was [?]. As was said, people started off thinking that I was wrong. And I couldn't see why they thought I was wrong. What I'd done was to say two and two equals four. And they had said that isn't right, it's five. It was as simple as that. I don't know why they thought I was wrong, since I didn't say it wasn't obvious. Russ: Well, at least to you. I think that they probably thought it was two plus three. So they thought two plus two equals four, but they thought you were talking about five, I think. Guest: Well, whatever it was, it was a complete misunderstanding. Russ: That must have been a lot of fun, the end of that dinner. Guest: Well, it was. But I couldn't understand why they didn't understand what I was talking about before. It was all a bit of a mystery to me. I thought I was stating the obvious and they couldn't accept it. Russ: But in one evening, they couldn't. Sometimes it takes a lifetime for people to change their minds about such things. It's pretty amazing that that group did it in only a few hours. Guest: Well, it did. It changed their views. It changed their views in a very sensible way, because they went on to talk about something called the Coase Theorem, and I never liked "the Coase Theorem." Russ: It is a common phrase. And I'll tell you why in a minute. But why don't you like it? Guest: I don't like it because it's a proposition about a system in which there were no transaction costs. It's a system which couldn't exist. And therefore it's quite unimaginable. Russ: Yeah. It's a straw man on a blackboard, would I think be the best way to describe it. For those who haven't read the paper, you should. It's accessible to anyone who understands English. That's the only language you have to understand. You don't have to understand the language of mathematics. And the idea of the paper is that you are assigning property rights in the face of an externality, in the face of harm being caused by one to another. The first part of the paper says that if--if transactions costs are zero-- Guest: Well, in a way, it's unfortunate that I did that. I only did this in order to explain my views. I thought, let's talk about a system where there were no transaction costs. But it's an imaginary system. There always are transactions costs. Russ: Well, it's like Galileo assuming there is no friction. But of course there is. So you better plan on it. And it depends on--sometimes that friction is better important, sometimes it's less important. But the idea is that if there were no transactions costs, then when you assign property rights to the two parties, because there are no transactions costs, then it's easy for the parties to reassign rights, making side payments. But I always was taught--and I was taught this by Deirdre McCloskey when I was in Econ 300 at the U. of Chicago--was that the real lesson of your paper was that because transactions costs are not zero, you should assign the property rights very carefully. And ideally you should assign them to the party--you should assign property rights so that the person who has the least cost of bearing the externality does so, because they might not be able to reassign the rights. It might be too expensive to renegotiate. So that the assignment of property rights is very important. That's what he told us the Coase theorem was. I know you don't like the phrase, but it's not so bad if at least he gets the insight right. I think the problem in the literature use the first part--if there are no transactions costs as a straw man, to say that you were wrong. Because of course, if there were transactions costs--but you knew that. It was a terrible, unfortunate turn of events in the literature. Guest: Yes. It was a discussion at cross purposes which the [?] had a completely wrong idea of what I was getting at. It took a whole evening of all these economists to get it right. But then in the end they didn't get it right, because they amended something called the Coase Theorem, which I don't like.
16:16	Russ: So, part of your paper was a reaction to A. C. Pigou, who argued that, in the face of an externality--positive or negative--we need to change the price that people face. If it's a positive externality, we should subsidize it. If it's a negative externality, we should tax it. And your point is that that's not necessarily true; and that in particular, sometimes it's better to do nothing and let the people who are harmed find an alternative way to avoid the externality or pay for reducing the harm by the person whose actions are creating it. And yet, despite your paper, and despite--now it's been over 50 years; and it had a huge influence. Many people say it created the whole field of Law and Economics. It forced economists to look at transactions costs; it forced them to look at externalities in a different way. And yet the Pigou approach remains very much the standard way that people think about these things, even despite the fact that, I think, you did a very good job of calling it into question. Do you think I'm right? Guest: Oh, you are right. Why people make the mistakes they make, I can't understand. But they go on doing it. And economics doesn't progress in the way I'd like to see progress. But a few [?] is very common in all human activities. Russ: Well, it's particularly common when it's hard to experimentally test results in complex systems. So, people can persist believing lots of things that aren't necessarily true. It could be true. But they can't prove that they're true. They can't confirm their suspicions and ideas. In social science, very difficult. If you had your way--which no man does--but if you had your way, what would you like that paper to have achieved? What would you want to have happen in the real world from having written that paper? What policy implication the paper has for legislative and legal systems? Guest: I don't know that you couldn't end up with the policy unless you study how things actually happen in the real world. And that's what I'd like to see people do. Not all this abstract theorizing, all this mathematics. I'd like to see people go study how things actually work. Then you would learn something. Because by and large, that's what economists do. That's why I call it blackboard economics. It's abstract. Russ: And of course, in the policy world, politics plays a big role. It's not just a search for the truth. I think about your 1959 paper on the Federal Communications Commission (FCC), which had some of the ideas of the problem of social cost in it. And you talked about the advantages of assigning property rights and letting people buy and sell access to the air for broadcasting. Which eventually something like that happened. It took about 40 years. Guest: Yes. Russ: Were you surprised at that? Guest: No, not after you've studied how things actually operate. It's a surprise that it took as little time as 40 years. No, it's not possible to study how things are dealt with without realizing the importance of the stupidity of human behavior. It's awful when you think how the war needn't have happened--the First World War, which I lived through, was an absolute tragedy, with millions of men were killed for now apparent reason. And the Second World War, when Hitler started it, needn't have happened at all. It could have been stopped years before. But no one did it. And Chamberlain, if you remember, went and saw Hitler a year or two before the war started, got a peace [?], which he waved in the air. He said this is "peace in our time." And the war started only two years afterwards. Russ: Yeah, it was a bad prediction. And I can't say I remember it the way you do, but I do remember it. Speaking of that time, did you have contact with Keynes and Hayek, two great economists of that era in England? Guest: Yes. I was very friendly with Hayek. I liked him, and he liked me. But we didn't have great contact. He tended to deal with these big questions, and I'm always interested in how the actual system operates. Therefore, in much smaller matters than Hayek. Russ: And how about Keynes? Did you know Keynes? Guest: I can tell you--I was helping when Britain was trying to get a loan from the United States immediately after the war, and I was talking to one of Keynes's assistants. And Keynes came in the room and walked over to us and the man I was talking to us said, "This is Coase, who is helping us with the statistics. I don't think you know him." And Keynes said, "No, I don't." And walked off. And that's my life with Keynes. Russ: That's short. That's very funny.
24:55	Russ: Let's talk about your 1937 paper, "The Nature of the Firm." You were trying to answer a question--an interesting question, remains a good question; it was a good question in 1937, it's still a good question, which is: If capitalism and markets and prices, the Hayekian system of communicating information via price signals, if it works so well, why do firms exist? Because firms are almost by definition top down rather than bottom up. They use command and control rather than purchases within the firm, although there are exceptions to that. Some firms do use price signals for their decision-making inside the firm. But many firms do not. Their decisions are made not by prices but by fiat, by decisions on the top. Now, you wrote that paper when you were very, very young, the first part of it, correct? Guest: That's right. I wrote it while I was an undergraduate. It seems obvious to me. If you go into a firm and you say to someone: Why did you do this? He'd say: Because I was told to do it. He doesn't talk about pricing at all. Almost of all the things you do within a firm are not controlled directly by prices at all. Your boss tells you what to do and you do it. Russ: How did you come to write that paper as an undergraduate. Guest: Oh, I was interested in how firms actually operate, and if you start studying how firms actually operate you find that they are not concerned with prices directly at all. A person who is working in a firm does what he's told. That's the way it operates. Russ: So, a firm is an island of socialism in a capitalist world. Guest: Oh, well, I was a socialist at that time. I had [?] some influence [?]. I didn't start with the views I now have, but I was a socialist; my parents voted for the Labour Party, and one important person that we knew was who was Ernest Bevin [?], General Secretary of the Transport and General Worker's Union, which was the largest union in Britain. So in those early days I was a socialist. And that may have had some effect in leading me to "The Nature of the Firm." Very likely. Russ: So, your insight was that firms act like socialists because it's cheaper. Guest: That's right. Russ: And it's cheaper because it's not free to use the price system. Guest: It's cheaper because the price system is a very expensive system. If you think of all the things you have to know in order to make a bargain it's obvious it's not a cheap system. And a system that avoids negotiations is one that saves a lot of costs. Russ: So, one of the things that I love about that paper is it forces you to think about these costs, which you might not notice. It forces you to notice that some systems that you think might not work so well actually might work better than you think. But it's hard to test those ideas, right? One of the implications of the paper is that when transactions costs are high, you are more likely to use command-and-control. But it's hard to measure transactions costs; it's hard to quantify the theory. Is that correct or is it irrelevant. Guest: It's very relevant. But the state of economics is such that people don't try to measure these things, to study them, and so people can engage in discussions and explanations without any real knowledge of what happens in the real world.
31:47	Russ: So, in modern Industrial Organization, although your paper has had a huge impact and began a whole field within Industrial Organization focused on institutional issues, the new institutional economics, which influenced many, many other scholars, at the same time there was the blackboard part of Industrial Organization, which is Game Theory, and other aspects of Industrial Organization. But Game Theory became the predominant way that people thought about the behavior of the firm. Where Game Theory is focused on strategic interactions between players with significant market power. What was your reaction to that literature and its influence on the study of the firm? Guest: I think the influence was wholly bad, because people developed high theoretical approaches instead of approaches based on what actually happens. And it's only recently really that people have begun to study what really happens as against engaging in what I call blackboard economics. Russ: Do you think we understand--when I look back at the last 70 years of thinking about the firm, I'm not sure we've made much progress. It's true that people do occasionally spend some time at looking at what actually goes on. There's one view that says the people who figure that out keep it to themselves, because it's profitable. But other people than yourself, people like Harold Demsetz, have decried the state of modern theories of the firm. The defenders of Game Theory certainly have remained enthusiastic about it, despite your critique. And it is still a dominant approach, I think, for business students. I think many business students still are taught a great deal of Game Theory. The question is: What would you want them to learn instead? It's one thing to say: Economists should learn more about firms. But have we learned anything in the last 70 years that would be useful to a future executive or manager? Or student of economics? Guest: I don't think so. I think the treatment by economists has by and large got worse, if that's possible. I think the time has come when we should study what actually happens, study firms and how they operate and learn from that. That one thing is going to happen. In that narrow sense, I'm optimistic. Russ: But you could argue that that approach of studying what actually happens at firms, that that's the essence of, say, the Harvard MBA, which is a case study approach, where you look at particular examples of what firms did in different situations. Sometimes it's an issue of strategy or marketing. And rather than make a grand, general theory, you go on a case-by-case basis. The problem with that is that every case is a little bit different, so it's hard to generalize, hard to have a body of knowledge. Maybe all you end up with is a body of cases. Guest: Well, we shouldn't give up an approach because it's hard. Life is hard. We shouldn't be looking for easy ways to do things but for ways to solve the problem. Russ: I agree with that.
36:37	Russ: Let me ask you a little bit about politics. Your paper on the "Problem of Social Cost" and your paper on the lighthouse, "The Lighthouse in Economics," which was published in 1974, which we have yet to talk about. It's a wonderful paper, one of my favorite papers. I remember in graduate school coming across it and being so excited about it. These papers have been used by people who are laissez faire, or free-market oriented, to suggest the obvious case for government intervention in the case of externalities or government intervention with a tax, or in the case of the lighthouse, with public provision of a public good. But that case is not so obvious. What is your feeling about the political implications of those papers? Guest: I'm just a person who thinks that the government should give up everything. How much the government should give up will be found by studying how the government operates. But the assumption that governments always do the right thing is not true. They make lots of errors, and where they are most likely to make errors can be found by studying how governments operate. My approach to the subject of what governments should do is to be based on studies of how governments actually operate. And I've had a lot of experience. I worked for the British government for many years, and I saw how decisions are made. And stupidity is very common. Russ: Well that's why competition and trial-and-error are often a better solution than one size fits all. Guest: In some areas. I wouldn't say that's true in all areas. If you study military and the conduct of war and so on, you find the errors are enormous. I don't know whether you are familiar with what happened leading up to the war [WWII], but it was absolute stupidity. Hitler could have been stopped early on, but no one did it. And the result was a horrible war, the [?] which we still experience today. Russ: No doubt. But we were talking about understanding what government actually does, and you emphasized that it's important to study government. You were at the U. of Virginia when James Buchanan and Gordon Tullock and others were pioneering what came to be called Public Choice. What was it like there and what do you think of that work? Guest: Well, I was there at the time when Buchanan was trying to build up a department, and I went there from Buffalo to be part of that. What we didn't realize was that the Dean at Virginia thought we were all a lot of right-wing extremists, and he opposed everything we were trying to do. And finally succeeded in preventing Buchanan from what he wanted to do, which was to build up a department. And Buchanan left, Tullock left, I left. Warren Nutter didn't leave because when he got an offer of a job at, I think, UCLA, the Vice-Chancellor vetoed it. The reason was that Warren Nutter, who was making estimates of the Russian production ended up with a figure no where near the official figure of the British government. This was thought to be due to his bias. We now know the one that whose own figures were too high. Russ: As if the British government didn't have a bias, either. Going back to Buchanan and Tullock and Nutter--what did you think of their work? And what do you think of it now? Is it the kind of economics you like or not like? Guest: Well, by and large it goes along lines that are not mine, and so I admired them; I didn't necessarily agree with them. I just got on with my own work. Russ: Yeah, you've always listened to your own drummer. Thank God. It's a different drummer, and it's made economics a much more interesting field because of that.
44:43	Russ: Let's turn to your latest work, which is on China. How did you get interested in China? Guest: Well, I've been interested in China very superficially for a long time. I was very impressed by reading Marco Polo; and this was China in the 13th century. And it was a country in many ways ahead of what was going on in Europe or in Britain. And I thought it was a country that had great potential. And I still do. Russ: So, your new book is titled How China Became Capitalist, and is co-authored with Ning Wang: How capitalist is China? Guest: Well, it is very capitalist, but it is not capitalism as we know it. It's capitalism with Chinese characteristics; and this you would expect. But the country is being transformed and it's not being transformed as people in Europe commonly think as a result of the Chinese government's operations, but as the result of what we call the Marginal Revolution--change is taking place despite the Chinese government. There are these village enterprises. Unemployed people who start businesses. It's all going forward in China without the control of the Chinese government. The Chinese government commonly doesn't know what's going on. Russ: But there's still a large government role in the economy, and they steer a lot of resources. As I understand it, the government has done a lot of the building, much of it infrastructure, probably not going to be useful, not productive. You are emphasizing the importance of the things they don't know about; but they do know about some things, and they are very active. Correct? Guest: The government is doing a lot of things, most of them being failures. It's an economy which is under the Chinese Communist Party, but the Chinese Communist Party commonly doesn't know what's going on. Russ: How do you think that happened? There was a point where they had a much tighter control over things. Why did things loosen up to allow things to happen that they didn't know about, and why did those things become so much more important? Guest: Well, I think China is a very big country, and it's very difficult to control. It's very difficult to know what's going on. And so things can happen. There's a Chinese saying, and I don't know that I have it completely correct: The mountain is high and the emperor is far away. Russ: That's a nice expression, even if you have it wrong. It's a very Hayekian expression. It's about the knowledge problem, right? There's local knowledge that only the people in the vicinity have. I would add: The mountain is high, the emperor is far away, and sometimes he has no clothes. Guest: Yes, well. Russ: Do you think Chinese prosperity is--we talked earlier about Warren Nutter's estimates of Russian production and that they were much lower than the official estimates and ended up being lower than what we found out to be actually the case. I wonder if anybody actually has any idea of what's actually going on in China, especially when so much of what is measured is probably government activity that I'm not sure they are measuring it correctly. I'm not sure you can measure it correctly. I'm not sure. The standard of living there has improved--there's no doubt about that. How much, I think is hard to say. Do you think it will persist? Guest: Well, Fogel [?] has made his estimates, which are very great on the future; and I think he's probably right. Whether the growth in China as he has estimated, we don't know. But it could be. It could be higher, because there is a large possibility for further growth in China. The output per capita, the productivity of what is in China, is now very low. Output is great because their population is great. Russ: Right. People, I think on many fronts, misunderstand the impact of China's success and its significance. I believe it's a good thing for the world, and a good thing for the Chinese people, because the Chinese people are part of the world, so I'm happy to see them doing better. But a lot of people think it's bad for the United States, and I don't agree with that. Do you? Guest: No, I don't. Our productivity per head is far greater than that in China. And likely to continue. Russ: What do you think is the state of property rights in China, these days, as someone who has spent much of his life thinking about the importance of property rights and the assignment of property rights and the costs of reassigning property rights. How is China doing on that front? Guest: Very badly. China has a long way to go to catch up with the West in terms of productivity, in terms of the institutions required to make a really good economic system. And that's why I think we are going to see further growth in China. It's got a long way to go. Russ: And of course we don't know if their political system will create the right incentives for that growth. Guest: All it gives are bad incentives. But [?] happens largely outside the government control. The [?] farming, for example, agriculture, has developed opposed by the government or even illegal by the government, but it's gone ahead because the government cannot control everything; and the same is true in many other areas. So, you have an extraordinary situation where under the Chinese Communist Party, you have had a growth of markets and private ownership and so on. Russ: In those private settings, are there contracts? Informal contracts? Are they using the legal system but in the wrong way? Guest: It's a very undeveloped legal system. And things have happened without a proper legal system. That's why it's now being developed; why we can expect the growth in China is going to continue. It's because there is a long way to go. And it's not very innovative. They produce large parts of their stuff on the basis of orders from abroad. What is produced is not determined in China but is determined in Europe and the Americas. Russ: And right now they are the workshop of the world. Whether they will be something different in 25 years, I guess remains to be seen. Guest: That's right. They do things that other people describe and want done. But that won't continue. And as China becomes more innovative, their production will become more valuable and more significant. We know very few Chinese--I'm trying to think what the word is--trademarks. Russ: Patents. Guest: It's all developed in America and Europe. And then the Chinese do the things to order. Russ: That will change. Guest: And these changes in Chinese production will go up and become more valuable. And it's got a long way to go. And it's a big country. A quarter of the world's population.
58:20	Russ: One last question. You've mentioned a few times that there is a lot of stupidity in the world. And having been born in 1910, you've been blessed and unfortunate enough to see a great deal of it. World wars, genocide, bad economics. But there have been lots of good things. And overall since 1910, the world has gotten remarkably more pleasant, if you survived those things. Of course it depends where you were born and where you grow up. But it makes you wonder. I'd like to hear your thoughts on the future, whether you are an optimist or a pessimist about the human enterprise. Guest: Well, I'm an optimist. The opportunities are so great. And I think we will take advantage of them, very slowly of course, and [?] will come further mistakes, but I'm optimistic about the future. And I hope I'm right. Russ: So do I. It's been a great honor to have you on the program and I really appreciate your taking the time to be with us today.

Posted by Russell Roberts at http://www.econtalk.org/archives/2012/05/coase_on_extern.html.

Owen on Parenting, Money, and the First National Bank of Dad

Mon, 14 May 2012 06:30:00 -0500

David Owen, author of The First National Bank of Dad, talks with EconTalk host Russ Roberts about how to educate our children about money and finance. Owen explains how he created his own savings accounts for his kids that gave them an incentive to save and other ways to teach them about postponing gratification, investing, keeping money in perspective and other life lessons. The conversation closes with a discussion of the value of reading to your kids.

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Readings and Links related to this podcast

Podcast Readings HIDE READINGS
About this week's guest: David Owen's Home page About ideas and people mentioned in this podcast: Books: The First National Bank of Dad: A Foolproof Method for Teaching Your Kids About the Value of Money, by David Owen at Amazon.com. Web Pages: "The Rich Man," by Franklin P. Adams ("F.P.A.", 1881-1960). Poem reprinted from Modern American Poetry, Louis Untermeyer, ed., 1919. Bartleby.com. Podcasts and Blogs: The Economics of Parenting with Don Cox. EconTalk podcast. McArdle on Debt and Self-Restraint. EconTalk podcast. Viviana Zelizer on Money and Intimacy. EconTalk podcast. David Owen on the Environment, Unintended Consequences, and The Conundrum. EconTalk podcast.

Podcast Readings

About this week's guest:

David Owen's Home page

About ideas and people mentioned in this podcast:

Books:

The First National Bank of Dad: A Foolproof Method for Teaching Your Kids About the Value of Money, by David Owen at Amazon.com.

Web Pages:

"The Rich Man," by Franklin P. Adams ("F.P.A.", 1881-1960). Poem reprinted from Modern American Poetry, Louis Untermeyer, ed., 1919. Bartleby.com.

Podcasts and Blogs:

The Economics of Parenting with Don Cox. EconTalk podcast.
McArdle on Debt and Self-Restraint. EconTalk podcast.
Viviana Zelizer on Money and Intimacy. EconTalk podcast.
David Owen on the Environment, Unintended Consequences, and The Conundrum. EconTalk podcast.

Highlights

Time	Podcast Highlights HIDE HIGHLIGHTS
0:36	Intro. [Recording date: May 1, 2012.] Russ: To discuss: Owen's book, First National Bank of Dad. People tend to think about economics as being about money. It's something that frustrates me as an economist, that people on an airplane if I tell them I'm an economist will ask me for advice about the stock market or tell me that must be handy during tax time. And of course, I don't know a lot about the stock market; and I pay someone to do my taxes. But there is a part of economics that is about money. Obviously transactions and investing and saving are also about money, and those have to do with economics. What I also like about money, and about your book, is that it reminds me of what a student told me, that she had heard from a former professor: that economics is the study of how to get the most out of life. And this book, while about money, is really about helping our children get the most out of life. And that would help us, too, as parents. The National Bank of Dad, which the title of your book comes from, is your way to encourage your children postpone pleasure and to learn about savings, which is a very valuable skill. So, how does the National Bank of Dad work? Guest: Well, what happened, the story was that when my daughter was very little, I did the thing that parents always do, and when she was about 3 I took her down to the bank and made a big show of opening a savings account for her, with a check for $100 and then explained how the banking system worked. And, uh, essentially explaining that if you leave this $100 there for a year, but basically until you are in kindergarten, it will yield enough interest for you to buy a pack of gum. She wasn't very interested. Russ: Blew her away. Guest: And she was even less interested when she discovered that though this $100 was technically hers, I wasn't going to let her put her hands on it. And I attributed her lack of interest to, you know, to youthful immaturity and irresponsibility and all the things that parents usually accuse our children of. It was only later--unfortunately it was only several years later--that I realized that her disappointment was not about her ignorance about money but about her acute understanding of it. And that she was getting a raw deal; and it didn't make any sense. Russ: And that was because the interest rate was remarkably low? Guest: Remarkably low, even if you are a grown-up. If you are three years old, and a year is a thousand years away; and most of the things we tell our kids: you have to save money so that you can go to college when you are older. So that you can leave your mother and father and live in a faraway place with people you don't know and go and study very hard things, much harder than kindergarten. None of these things-- Russ: It's a real turn-on Guest: --work for children like an incentive. I think the underlying lesson economics is that people are rewarded for doing, even if we want to use economics for doing things, there have to be rewards. Seem like rewarding them, even rewards for them. I think that was the insight that I ultimately had after years of thinking about it: The reason my kids weren't interested in the banking system as I presented it was that there was nothing in it for them. And where that led me was to think: How would I do this in a way--how would I give them incentives that would seem like incentives to them? What I ultimately decided was that their money had to grow at a rate that they noticed it growing. Things had to happen on a time scale that seemed reasonable to them. And what I ultimately did was create a bank account in my house, a savings bank, in my house, in which I paid them an interest rate of 5% a month on their deposits. That works out to an annual percentage rate of something like 70%. And, I sat them down; they were 6 and 10, and roughly explained this idea. My son was 6. He wasn't even doing arithmetic really yet, and yet he immediately grasped the idea of interest, and compound interest. He gathered up all his change and put it on my desk and said he wanted me to credit him today. Because what I had explained to them-- Russ: Get it working. Guest: Get it working. Money in there. What he called charging up. He wanted to leave his money in his account for a while because he spent any of it. And, the basic idea was that if we give children incentives that seem like incentives to them, they will do what human nature tells them to do. I think the general lesson is that it's better to harness human nature than to change it; and I think most of what parents do when they try to teach their kids about money has to do with changing, thwarting human nature, bending our children to our will rather than doing what we claim we are doing, which is just to teach them about how money works.
6:31	Russ: And how did the Bank of Dad work out? Guest: It worked extremely well. They both caught on. And what I would do was put both their allowances in in Quicken each month. And then at the end of the month I would apply my 5% interest rate. And their balances would increase. Russ: As long as they didn't withdraw. Guest: Whatever the balance was--the 5% would apply to whatever it was at the end of the month. And they understood that if they left that money or some of that money in, that the 5% the next month would apply to that as well. This was my son's intuitive understanding of compound interest. He decided that what he would do is he drew a picture in which he said that he was going to invent a potion, a great-flavored potion that would make him live for a very, very long time, and he would deposit his money, and then after the end of this very long time he would have a trillion dollars or something like that. He had a line of trucks hauling off his fortune. It had built up over that time. And, uh, they understood it; and immediately they both became savers. I think what we usually do with kids--I know my kids felt this way--that if a kid gets $5 in a Christmas stocking, say--they view that as real money. If they get a check for $100, they know their parents are going to grab it and stick it in some account someplace that they won't have any access to. So, $5 is real money; $100 is not. To receive cash, you either have to hide it from your parents, or do what my kids used to do, which is to say: I want to be taken to the mall right now. I want to convert this into something you can't confiscate. Russ: Get it into hard form. Guest: And once the Bank of Dad was in place, their feelings changed about it. The other element in addition to the high percentage rate, was that they had to have control over their money. So, when they came to me and said, I want to take $20 out of my account in your bank, there was no question to ask. I would give it to them. That didn't mean that the rules of the family had been suspended; they couldn't go out and spend it on firearms or drugs, and they couldn't, just because they could afford it, eat candy whenever they wanted to. All the family rules still applied. But if they wanted to spend their money on something foolish, as they sometimes did, that was their decision. And I think that was an important part of it, too, because I think we learn about money the way we learn about anything, which is by making a series of gradually less catastrophic mistakes, and eventually by trial and error seeing what works and what doesn't. In families where kids really don't have their own money or where they have to beg for every dollar they spend and ask for it, they have no incentive to think about the consequences of buying something dumb, because they have no control. Money magically appears and disappears; when they have it, they should get rid of it, because the only way to get more is to be out of it. And so, I think once my children had their own money-- Russ: Like running a government agency. Guest: Yeah. Russ: Don't leave any for next year. Guest: Or being the CEO of a public corporation where if you just skim a tiny bit off the shareholders' equity, nobody will notice; you can fly around to your golf game in a corporate jet. We tend to be very careful when we spend our own money; we're much less careful when we spend other people's money. And that applies to kids too. My kids, when they were young, couldn't have been more reckless when they were spending my money, but when they were spending theirs, they were very thoughtful. When we went on vacation, I used to give the kids souvenir money--here's some extra money for the vacation; here's $20--but I would give it to them before we left, and I would just add it to their bank account. And I would say: Here's $20; it's your extra vacation money; you can spend it on anything you like--souvenirs. Or you can spend it now; you can save it till later, anything, whatever you want. But while we are on vacation, I don't want you to ask me for money for junky tee-shirts or anything like that. And then, because it was theirs, they were far less likely than the average kid to want to do something dumb with it. There was a situation where we went with some friends to a souvenir store and one of the other children, who was a close friend of my son, made a big scene. There was a rubber tomahawk. Russ: Some hideous thing that they had to have. Until they have to pay for it. Then it's-- Guest: Exactly. And he got it. He made enough of a scene that his father decided that the simplest thing would be to cave; the thrill of the hunt was over and the child lost interest in the tomahawk, which then immediately broke. But my son knew that it was futile to get into that sort of conversation with me because he had his own money, and he slowly and carefully studied the very unpromising merchandise in this store, and then he actually decided that he wanted to buy an unopened geode for $.33. Russ: A stone. Guest: Right. So he could crack it open. A stone with jewel-like crystals inside it. The geodes were actually selling 3 for a dollar, but he actually negotiated with the woman who ran the store; he wanted her to break up a set and sell him just one of them for $.33, because he thought the two extras were superfluous. And I didn't take any part in that negotiation. And he succeeded. She sold him one geode for $.33, and that was what he spent. I'm sure that if I'd been willing to buy him a tomahawk he would have been happy to have one of those, too. But because it was his money he was much more thoughtful. I think the interesting thing about that was we didn't have to have any discussion about this. We didn't have to talk about the value or the lack of value of cheesy merchandise or the importance of judging your purchases. It's obvious. Kids understand it intuitively, from a very young age. They understand how money works. That's why they don't like the systems we put in place for them. And left on his own he did very well, even though he was extremely young.
13:54	Russ: The part I like about it especially is the lack of debating. One of the things that distresses me sometimes when I am watching people is they are negotiating with their children; and they start off saying no and then end up saying yes. You are better off saying yes right away, it seems to me; or no the whole time; but the no-yes encourages the future debating session. Maybe the parents like it. I dislike it; I think most parents do. Our very first podcast episode that we did on EconTalk was with my friend Don Cox at Boston College on the economics of parenting; it may amuse some of you who haven't heard it to go back and hear, Number 1, Don, who is a great, insightful parent; but also my interviewing style, which has changed over the years. But he had a similar insight about letting children do what they want when it wasn't very harmful; and they learned lessons and he didn't have to negotiate constantly. So, I think that's one of the great advantages of this approach. Guest: Yeah; and you still have to be careful. I think if you know that disaster lies ahead--if I 5-year-old wants to buy something that is really beyond her ability to care for. Russ: Enjoy. Guest: I think you have to step in. But I think it's better if we resist our urge, to spare our children these educational experiences. My son at one point bought--he was interested in trading cards and he bought a big box of basketball cards, like $50 or something like that. It was crazy. But he didn't realize it was crazy until after he'd done it, and sort of weighed the satisfaction he had received from opening these umpteen packages of basketball cards. Which is a very short-lived little thrill compared to what he could have done with the $50 if he still had it. But you can't teach that lesson in the abstract. It's something you have to do yourself. And then it sticks with you for a long time. I remember when my kids got their drivers' licenses. I hoped, the way parents always do--you want your kids to have a frightening but not dangerous accident of some kind, because they don't pay attention until they have some kind of a fender-bender. You don't want anybody to get hurt. But you need to--it was certainly true in the case of both my kids that they didn't understand the complexity of driving until they had screwed up. Russ: Yeah, I try to contain that by the screaming and the clutching of the dashboard and the writhing to suggest they are in the wrong lane. It's a subtle signal. The body language I think is particularly effective, you are screwing around in the seat to suggest that maybe you shouldn't be driving on the curb, as you are yelling. Guest: Check the mirror before you change lanes.
17:05	Russ: I'm going to give a counterpoint to your position. I want to say, before I do: This is a lovely book. It's beautifully written; it's amusing; and it's full of insight about parenting and money. I had the privilege or lack of privilege of reading it after--I have four kids, all now 12 and older, 12, 14, 17, and 19--so many of them, their attitudes toward money have been set in place in some dimension, at least. Although I think when you go out and work for the first time, earn a real paycheck, pay taxes, other educational lessons do kick in. My wife and I treat money and our children very differently than you did. What I'm going to say now, even though we do it differently, I think what you did was glorious. I would have been happy to have done it with my children; I'm not sure my wife would have gone along with it. In a way, the fact that we did something radically different and got similar results, or results we're happy with--could be confirmation bias; I'm just fooling myself--but I think the more important point is: You have to have a consistent attitude at a minimum toward how you treat money with your children. This attitude of negotiating is really the single worst thing you can do. So, in our house, our kids had very little control over their money. We did squirrel away, as you said; we lectured them a lot about how money worked, or I did, being the econ teacher, and told them a lot of things that probably didn't sink in because they weren't experienced. Just told them about diversification and other issues we might talk about in a few minutes. But what I found interesting was that when we proposed that we might go see Wicked as a family, my kids said: Well, how much do the tickets cost? And I said it's expensive. But I'm thinking to myself: Well, they're not paying for it. Some of my children have a lot of interest in the level of things; I thought they were just curious. They wanted to find out about the world. I said: They're about $90 apiece. Well, let's not go. And I said: You're going to really like it; it's a great musical, and I think it's worth it. Oh, but if we go, then the next thing you're going to say: No, we just went to Wicked. So, they understood it was our money and they would pay some price. In fact sometimes when we give our kids money to go buy stuff--they go out to a baseball game with their friends, they come home and return our money and say it just wasn't worth it; the soda was too expensive or whatever it was. So, maybe I'm lucky, but we've had a consistent attitude toward money, and our kids are not spendthrifts. And they like to squirrel their money away, too. Makes me wonder whether it's all genetic. Guest: It may very well be. And I think you are right that consistency is critical. And also that, I'm sure there is a genetic component, a luck component, and there's also, if you love your children, you can screw up in all kinds of ways. Or you can do things differently in lots of ways and end up in the same boat. And I know that if you have a dysfunctional household, no matter what you do, it's not clear that anything is going to work. There are issues that are deep below. Russ: And I think your method of an artificially high rate of interest to teach the value of saving really teaches the deeper message I mentioned at the start, which is delaying of pleasure, gratification--the urge to take your money, which adults have as well, and buy something pretty and shiny and satisfying for a brief period of time that may not last as a true source of satisfaction, is very important. Guest: I think when we tell kids about saving we tend to stress the deprivation side of it and not really explain that there's something on the other end, too, and not really explain to the kids that behind that high rate of return, was something they could see--that if they delayed that gratification they could actually increase their satisfaction. And that's the way you and I think about it. We're not saving for retirement--assuming that we are--just because we want to make things hard on ourselves now. We're doing it because we think that in the long run we'll have more net pleasure from our lives than if we didn't. Russ: Yeah; it's not only about building character. Elusive value that is not so obvious, certainly when you are 13 or 14. This is good for you. I don't like it! This is good for you. I don't like it ! So, if you say: Because you are going to like it even more later, you have a shot, at least. Guest: There's a downside to success, too, which is as my kids got older and became successful savers, and especially as my daughter got to be babysitting age, 5% a month became unrealistic, and I had to explain to them that the law of supply and demand applied to the law of supply of money as well. And announced that I was reducing my monthly interest rate to 3%. They squawked at first, but then they understood the need for it. Russ: They didn't have a better alternative, either. Guest: No, they did not. And by that time they had seen how it worked, and they had accumulated significant balances. I think it should be said that it's easiest to teach kids about money obviously when there's money in the family, but not when there's too much and not when there's too little. I think money is the hardest where money is very tight; and in situations where money is essentially boundless. I think it's hardest for the poor and the rich to teach their kids about money. The first because poverty is not much of a teacher. There's not much to learn; it's all necessity. And at the rich end, it's hard to create the kind of artificial scarcity that you need to make decisions seem as though they mean anything. It's easier in the middle. Russ: Where most of us are. Guest: Even if we dream about winning the lottery.
23:45	Russ: Let's talk about the stock market. You did an interesting--there are many pages of the book that I found more inspiring and moving than the one I'm going to mention, but my favorite intellectual part of the book was the critique of the way that modern schools teach their students about the stock market. Tell us what's wrong with that--which I confess to agree with about 173%--and then talk about what you did instead. Guest: Well, remind me if I forget anything, but at the time I wrote the book, the stock market was all that anybody talked about, because the stock market was raging. Everybody was getting rich. And what schools tended to do was have a pretend stock market, where kids would make imaginary investments and then you would gauge it a month later or at the end of the marking period and see who was ahead. Russ: A contest. Guest: Exactly. And that kind of contest teaches everything wrong about investing. It is not the way Warren Buffett does it. And it encourages a sort of all-or-nothing gamble, where you want extreme volatility; you are only worried about a month from now; it encourages you to roll the dice. I guess if you have the right set of nerves for it, there are people who make a living doing that. But it's not really a very good lesson to teach children about life skills, investing in the stock market. Russ: It's the worst lesson. Guest: The worst possible lesson. I think the other difficulty is when you try to do it a different way, and say: Make a real investment in the stock market, but have $10. And I don't know what fraction of a share of Apple that is today, but it's a very small one, and it leads to complexity. So, I was thinking: How do I talk to my children about the stock market and let them take part in this without either creating a worthless fantasy, and counterproductive game, or annihilating any possible returns. Even a $5 commission on the purchase of a single share of stock would wipe out any gain they could expect over a reasonable period of time. And so what I did was create a kind of shadow market, where you used real stock prices but converted dollars into pennies. So, if a share of stock on the NY Stock Exchange was selling for $40, it sold for $.40 on my stock exchange. And the kids could invest what they wanted to. I took the other side of every transaction. There were no actual orders going in to the desk at Charles Schwab. It was all just a paper stock market. But it was all based on actual prices. It seemed like a simple way to let them get involved in buying stocks or mutual funds or whatever they wanted to buy. Russ: I like the way you said--describe how you started it, which was kind of cool. You had a $250 seed fund from grandparents, right? Guest: Right. Russ: Tell us what you did with it. Guest: I have to see if I can remember, but I thought they really had to be pushed into doing this. You may need to tell the story, because it's been a while. Then I'll give you a caveat at the end. Russ: Okay. So, you went out, if I remember, and you took 6 stocks you thought they'd have some awareness of--one was Intel, because that was inside their computer; one was Microsoft; the Gap, where some of their clothes were from; McDonald's where they'd eaten a hamburger. So, they had some familiarity with the companies. And you endowed them with $250 worth of those six companies. That was interesting; you could have just given them a free start--it was kind of a free lunch--but you realized that there are so many stocks, so many bonds, that it would be overwhelming. So, you start with these six. And then you said: You can exchange among the six or if you want, sell them all back, start anew if you want. But you gave them something that they had some connection to. Guest: Good memory. The sort of psychological barrier to entry would be too high. It was easier to have something that they had to react to. And if they were not going to do it, they had to actively sell these things. Now, as it turned out--and this is a real caveat--they never really were real interested in it. I think the reason was it's too complex, and in a way, even though this brought it down to their scale, for them at least it didn't really work. And we didn't keep that going for very long. When they got to be old enough, where they were no longer interested in having their savings monitored on my computer and wanted their own debit cards and accounts at the bank, which happened when they turned 12, what I did was I started a money market fund that paid 6% a year, and let them keep excess money in that. So, they had a better return than they could get at the bank, so they still had an incentive to save; but it was a little closer to what the market rate was then; and that they were okay with. The stock market never really appealed to them. Russ: It probably varies by kids. Guest: I think it does. Russ: Some kids would find it very interesting. And I think, going back to your earlier discussion of what's wrong with the current system, you made some reference to doing it for a living or investing as a grownup; but of course a lot of these stock market competitions are sponsored by brokerage houses who profit from having people buy individual shares of stock. And so what these competitions do is encourage people to put all their eggs in one basket--the opposite of what you want. It encourages individual stock purchases. I don't think you can buy a mutual fund and if you did you are unlikely to win because somebody's going to take a shot at the one-month--there's no downside--so you might as well take a shot at the high flyer and hope you can win. That's your best shot of winning. Anything that gets them away from that. Your scheme was a little bit elaborate, and though I think some kids would be more interested than your kids were, it's still a lot of work for the parent to keep track of dividends and capital gains and all that. But anything that teaches them the value--and to me, there's only one thing you want to teach your children about the stock market, that you don't put all your eggs in one basket. Actually, I'd say two things: Don't put all your eggs in one basket and don't listen to Uncle Ned who's got a great stock that he thinks is going to go through the roof. That you can lose money. Those are the two, really, I think, crucial lessons. And you really don't want to learn those as an adult with lots of money. You want to learn them when you are younger. And so I think whether you do it through a mock stock exchange like you did, even if they weren't so interested, or if you lecture them relentlessly, as I do, about the virtues of diversification and indexed mutual funds, which I think on average do pretty well, although this is not investment advice. Returns can vary, and consult your investment advisor before making any decisions. This is not an investment show. But I do think diversification is a really good idea. I think the other key lesson, which unfortunately our children are learning, is humility. That things don't just keep going up. I always think about my parents who grew up--my Dad was born in 1930 and my Mom was born in 1932, so they were children of the Great Depression. Their parents struggled, as did their relatives, most of them. Some people moved in with the one relative who was doing pretty well. And my Dad got a lifelong aversion to equities, to stocks, that I don't think was particularly healthy. But that's what he learned, and it stuck with him. Because he heard his parents and uncles and aunts moaning their stock losses. And our kids right now are growing up in the time of this so-called Great Recession, and they are learning a lesson that markets don't always go up. Now, whether they remember that 40 years from now after 15 years of golden returns, who knows. But I think if I had to teach my kids one important lesson it would be the dangers of hubris--oh, I know what's going to happen and this portfolio has always done well so it will continue to do well. Those kind of lessons, being aware of the dangers of that I think are the most important things.
33:12	Guest: Exactly. And the place where my son learned the most valuable lesson about the stock market didn't involve the stock market at all. It involved beanie babies. Russ: Yeah, tell that story. It's a great story. Guest: Little collectable toys became an extraordinary fad when my son was in about 4th grade. And the boys and girls were collecting them. The girls collected them sort of as adorable things. The boys all were very market oriented in their beanie baby collecting. Russ: They were evil speculators. Guest: They were. And they had these investors' guides to the market value, beanie babies, could calculate their net worth from day to day. And I would give them the standard lecture, saying: These are not scarce; they are making more of them every second. And there's no intrinsic value here; this is all mania and you are not, they are not even worth the $6 or $7 dollars that you paid for each one, and so forth. All on deaf ears, because they had these books and they were looking at them. And then a day came when my son felt he needed some money and he told me he was going to sell a couple of his more valuable beanie babies on e-bay; and I thought: Ah, this is perfect. He will learn now what I've been telling him; hypothetically he'll see for himself how foolish this is. And so he put a pair of beanie baby bears for sale on e-bay. And these are ones he'd been throwing around the house and the yard even. He described their condition as "mint." Russ: Fraud. Guest: Fraud. And put them for sale on e-bay. Seven days later they sold for $120.50. To my horror. But I was still thinking there's a lesson here that we are going to learn very soon, and I helped him box them up, warning him not to be disappointed if the buyer angrily demanded her money back, which was what I was pretty sure was going to happen. Russ: Because of their condition. Guest: And just buyer's remorse; their condition. I would have by then thought that. But a few days later the buyer sent my son an effusive email saying she was thrilled with her purchase. So, I said to him I wasn't going to give you any more financial advice. I'm going to give you one more, and that is: Sell your entire collection immediately. And he didn't because they were too valuable and markets can go only up. And he's 24 now; he still regrets this thi ng that happened when he was 8, that he hadn't sold his entire collection. Russ: Yeah. He's still waiting. Guest: He's still waiting for them to be worth $.05. But I think that's a--he learned the same lesson that grownups did in the late 1990s, which is that the stock market doesn't always go up. But he learned it at a very low cost. He saw both ends of a bubble that had basically no effect on his life except to make this permanent lesson that this doesn't happen. In fact, one of my favorite lines in "The Onion" a number of years later was something like: Americans Demand New Bubble to Invest In. But that was an enduring lesson that came from this sort of, evolved all by itself, and came from what I initially thought was a foolish activity. And was a good example of why kids should have some flak to do things that you think are stupid, not only because they might turn out in the end not to be as stupid as you think it is, and then fortunately turn out after that to be every bit as stupid as you thought it was. It gives them the responsibility of, the possibility of seeing this. E-bay was useful, I think, and it still is a useful teaching tool for kids, because one of the things our kids can learn is their possessions have value. They have capital. They have this bicycle. These toys have value. They didn't really have them before. On e-bay, though, you can sell something. Here's this game I had that was given to me; but if I take good care of it, I may be able to get some money back by selling it on e-bay. I think that was a valuable lesson, too. It changed my kids' ideas about their possessions. Suddenly their things began to look like assets to them rather than just sort of the litter in their room. And they were more careful with their stuff.
38:17	Russ: Yeah; that's very cool. You mentioned how they would take the packaging and instead of just trashing it they'd save it in case they wanted to sell later. Not a bad lesson in life. Although it does require a larger house as you get older. The first part of that story, to your horror--your son received a check for over $100--reminds me of a really wonderful Somerset Maugham short story called "The Facts of Life." If you haven't read it out there, go Google it or find it. The second part reminds me, along with the first part, about the role of supply and demand. It seems that supply and demand are very useful things for children to understand; in particular, about the supply and demand of labor and how wages get determined. As I was reading your book I was thinking of a story I read recently, where a woman, tired of being a waitress, decides she's sick of people demanding stuff of her; she wasn't making a lot of money, she wanted to be a writer, it wasn't happening. And she decided she didn't want to be in the service business any more. So, she's taken yoga all her adult or semi-adult life, and so she decides: Well, she looks at the yoga instructor and thinks, Well, this is a good job. You get to come to work in your pajamas. It's not that hard. And it's kind of spiritual, and you probably make good money. And so she went and took a training class in being a yoga instructor, only to find that after finishing the class she couldn't find much work. And when she did, it didn't pay very well. And that she was still in the service business; and she was still catering to people. And those lessons really are important lessons to learn about how the world works. If something is relatively easy to do and pleasant, it's not going to pay very much. It's just the way of the world. If you want to make a lot of money, which is by itself maybe not the best of all, but if you want a certain level of comfort, you've got to have a skill, and it has to be acquired with some effort. Otherwise lots of other people will acquire it and they won't pay very well. And if you are like a lot of other people, you have to stand out. You have to cater better than the other ones, do something extra, a way to deliver the yoga class other than the way people just do it like everybody else. Otherwise you'll just earn what everybody else earns. So, those kind of lessons seem to me--those are pretty useful. Guest: Yes, those are very useful. If I could have become an introduction to economists, I would have. I took Introductory Economics in college when I was a freshman. I just felt as though it explained everything. Introductory Economics is really psychology. It's a course in psychology. Russ: The way people behave. Guest: Exactly. Human behavior. Unfortunately, economics goes beyond introductory economics, in that as soon as it got to the statistics part I realized that I wasn't cut out for it. In fact, I wouldn't mind majoring in the introductory level of almost anything. Those were always my favorite courses in college. But I think that a good beginning, a good college economics textbook explains much of what you need to know about human nature. Geopolitics, and everything. It seems, I thought--I still think that was the most valuable course I took and the one that made the most dramatic change in the way I thought about things. And I ended up as an English major. Russ: The late, great Paul Heyne, a wonderful teacher, writer, and economist, made a distinction between the poetry and prose of economy. The principles is the poetry. That's what makes you fall in love with economics. It's the art of it, the magic of it, the way of looking at the world in the way you haven't thought about it before. It hooks you. Th en you get into the prose, you get into the math, you get into the graphs; and I think most of the value is in the poetry, myself. What I find interesting is how many introductory classes I took in college that didn't have any poetry. They were just dumbed-down versions of the most prosaic graduate level stuff, then spoon-fed to us as undergraduates. But the stuff that changed your life, the stuff that changed your world--those classes, yeah, take that introductory philosophy class, poetry class, economics class. Those were phenomenal. And they are well taught. But they can be badly taught, too.
42:35	Russ: Let's move to the last part of the book, which is a discussion of what gives life its meaning, and what's of true value, and where does true wealth come from. What role does money play in those things? You have some interesting ideas about what children should start to think about. Guest: Well, I think the main thing is that money is not unimportant, as people sometimes say when they talk about enjoyment of life, or about what's meaningful about life. Money is extraordinarily useful. It's a tool you can use to finance your wonderful life. Money leaves people and their problems--there isn't enough of it, you spend time in a panic when you buy medicine for your children, whether there is too little to allow you to think about anything else. And then also when it becomes an end in itself, when it becomes all-consuming. Greed is not good. Greed is like an addiction; it's like a drug. Because you can never satisfy it. So, I think that the healthy attitude about money is that it's a tool, it's a necessary tool, that you use to make yourself happy. And I began thinking about the difference, an idea different from net worth--which is the way we usually think about ourselves or often think about ourselves--and something that I think I called true net value, or something like that. True net worth. Which has to do with your satisfaction in life. And the thought that occurred to me was: We're never going to have as much money as Bill Gates does, but on an hour-for-hour basis it's entirely possible to take as much satisfaction from life as Bill Gates does. If you think of your life in that way. Russ: And maybe a lot more. Guest: And maybe a lot more. Certainly when he's being grilled by government officials or angry shareholders or just involved in all the challenges he gets stuck in. If we can be sort of clear-eyed about what we get stuck in in our lives, that makes us satisfied, makes us happy, and figure out what it takes to do those things, it's a much simpler problem. You see it when this rational behavior takes place, whenever there is a huge national lottery--I don't know what the threshold is that makes people think they should be driving across state lines to buy a lottery ticket. $500 million or $300 million. I think that's the crazy way to think about money. Even though I think we'd all be happy if we had our own jet, there are different ways to think about it and to make our lives better for ourselves. Russ: And you talk about the different skills and attributes that we think are also true, and our connections to other people--those are our true measures of wealth and happiness, and where we get our deepest satisfactions that endure, that are not short-lived, that don't just vanish when the tomahawk breaks or when your latest device doesn't sink. Or whatever it is. Guest: One way to think about that is what you would imagine a fire or some other disaster destroying the kind of physical manifestations of your life. What would you save if you could save a boxful? And not just objects, but what would you put in your box from your life, what makes you happy? And my own is not very imaginative: it's probably that life is things that make you the happiest. Aside from family, the obligatory children, life, dog, etc., it's playing golf; when I think about staying healthy it's because I want to keep playing golf as long as I can. When I think about earning money, it's often because I can do this; then I can take this golf trip with my friends. If you think of things that way, it's a very simple thing, but it's a useful way to think about your life and to focus on what's actually important. I think for me it was this idea of how do I maximize my satisfaction not on an hourly basis, on an income basis. Russ: I would say it's the scarcest thing we own, is our time. We often use it so badly. No one on his deathbed wishes he'd spent more time at the office. And it's just very hard to do that balance.
47:50	Russ: I'm going to interrupt for a second; I'm going to read a very short poem. Which, you don't allude to the poem, but you allude to the sentiment. It's by Franklin P. A dams; it's called "The Rich Man". Franklin P. Adams wrote I think two poems that were noteworthy. One was one that immortalized Tinkers to Evers to Chance, double-play combination; but the other was this poem, "The Rich Man." It's short. The rich man has his motor-car, His country and his town estate. He smokes a fifty-cent cigar And jeers at Fate. He frivols through the livelong day, He knows not Poverty, her pinch. His lot seems light, his heart seems gay; He has a cinch. Yet though my lamp burns low and dim, Though I must slave for livelihood-- Think you that I would change with him? You bet I would! Yeah, so, we have that urge to swap. We wish, we think if we were like Bill Gates we'd be happy all the time. And most of us do try to acquire more money rather than less. But we do also find out that it's not the source of happiness. But without it, it's tough. And I think that balance is really what you talk about in the book and that we are talking about right now. Guest: Right. It's, uh, somehow making yourself have an understanding, a clear understanding, of sufficiency. And I think that sufficiency is often the key to maximizing happiness. I don't think, you don't want to be, well, over my life and my family's life up to the time I'm 65. People get struck down at the age of 64. And so you don't necessarily want to put all your chips on a square that you may not get to. It's better to think about these things as you go along. It's an impossible balance no matter how much you think about it. It's hard to do the right thing; and then life has a way of throwing things at you that you didn't count on and that you didn't calculate. Russ: But certainly we treat our own careers, and how we talk about them, and how we treat money in our families, affects our kids. Our kids are watching all the time. And that's how we talk and what we do, are the two things that educate them. Guest: Very true. We talk about teaching our kids about money constantly. And not necessarily the lessons we want them to learn. When you sweat over credit card balances; when you are afraid to answer the phone because you think it might be a collection card agency; when you come home from work and you are angry or pour yourself a big drink or complain about what happens--all these things, we are teaching kids about money. And so, it's worth it--valuable to ourselves to step outside and look at these things and think about how we are doing. There was an interesting study recently--I'll probably get it wrong, but people made more intelligent decisions about their retirement savings when they were looking at a picture of themselves, artificially aged--looked like they were retirement age. It became tangible to them. It's probably not a bad way to think about all kinds of things in your life, if you can really force yourself to suspend your disbelief in immortality and realize that time eventually runs out and think that is this the way to allocate my time during this extraordinary gift of being alive. Russ: Couldn't agree with you more.
51:36	Russ: The book ends with a rather, what seems to be a little bit of a change of pace, a little bit off the topic; but I saw it as you did, very much in the same theme. I would describe it as the best investment you can make in your kids and for your kids. I think modern parents are obsessed with their kids' getting into college, and the best college. As someone who works in the kitchen I'm not as enamored as brand names as some of my friends are. But, we spend, modern parents who are financially comfortable, spend a lot of time and those who aren't even spend a lot of time: How am I going to get my kids to have as good a life as I have, ideally better? We love our children; we want them to do well; and we've been talking about what we might do to help them understand money. Which is a very useful thing to do. But at the end of the book, you talk about a very different investment, which is reading to your kids. This was one part of the book which I agreed with 100 or more percent. About practice and ideals. So, talk about why you think that's important and how to do it. Guest: Well, I think it's important because the easiest way to give kids a solid intellectual education in school is to help them become good readers, and the easiest way to help them become good readers from when they are very young and as long as they can stand it. It gets them--you get them addicted to books. And I think it lasts for the whole life. Russ: Now, I like this especially, "as long as they can stand it." Because I think most people feel you read them a few picture books when they are 3 or 4 and you've done your time; but some of the most satisfying reading I've done to my kids was when they were 10 and 12 and older. I love reading to my kids. They don't always want to hear it. Guest: If you start young, I think they tolerate it for longer than if you suddenly started when they were 12 or 13. But if you started when they were very little, before they had any comprehension of what you were saying to them, they see it. And actually nowadays we are much better at understanding the value just because audio books have become a part of our lives. Anybody who commutes in the car--we enjoy being read to. And it's valuable, I think, for this practical reason. You turn kids, it helps them become good readers on their own. But I think it also, it's just an easy, kind of satisfying kind of family glue, reading to kids. It's therapeutic. I saw this with friends of my children when they were young, who were unmanageable until you started reading to them. They calmed down, they put their thumb in their mouth. Kids like being read to. And if you do it, you create this sort of very strong bond that they respond. That you respond to. It's one of the things I loved about kids. I discovered that here was this opportunity to re-read these books that I had loved as a child, and also discover new ones that I hadn't. That children's literature, especially as you get older, beats almost anything on the adult shelf. There are huge benefits to the parents, too. And what my wife and found was it becomes a family activity. Going off hitting all the libraries in our region so that we could, once we'd exhausted all the nearest libraries. There's always something you could do. And then when we traveled, our kids were always well-behaved on the plane, big canvas bean bags full of books. People were always asking us: Are you teachers? There could be no other explanation for doing this. And you see, I just came back from Scotland and from Ireland, and I'm always amazed to see parents get on a plane with a 4-year-old with nothing, expecting the child to entertain himself, in his mind, I guess, for a six or seven hour flight. It's not possible. They are not going to be happy looking at the SkyMall catalog. Reading is better. Russ: The other you did mention, that I'd encourage people who are listening is to read your kids hard books. Not just easy ones. When they are little you read them easy ones and they learn them by heart. They are the most glorious and sometimes the most frustrating parts of being a parent, is the 700th reading of The Dot and the Line or Harold and the Purple Crayon, my kids loved Curious George, which my wife didn't, and I always ended up being the Curious George reader. And it's funny I mentioned The Dot and the Line--it's not really a children's book, but I thought of it when I was trying to think of Harold and the Purple Crayon. But when they get older, I would read them harder books that they couldn't always understand. And sometimes I would explain them, and sometimes I wouldn't. We read, I think I probably mentioned before--we read P. G. Wodehouse, Joy in the Morning, which I think is an entertaining book that I would recommend. I read it to my 9, 11, and 10-year old sons before we went to bed every night. It shocked me that we got through it. It held their attention. We talked about it. The characters became vivid. And I also read my kids sometimes Homer's The Odyssey, in the Fagles translation, which is very hard. But if you pick the juicy parts, where they poke his eye out with a burning log or the scene where Ulysses returns home confronted by Penelope's suitors and unmasks himself and reveals he's Ulysses, and they are scared out their minds; and he takes this bow that no one in the room could bend and he bends it, strings it, fires away--it's straight out of a modern movie. And my kids just ate it up. They didn't understand every word. I'm sure I didn't understand every word. But the cadence was good. And while I'm on this soapbox, poetry is just a really great thing to read to kids. Especially poets like Kipling, and Robert Service, who had great rhythms and rhymes. Kids wouldn't remember those poems otherwise. Guest: Extremely. Very true. I a million percent agree with reading hard books. Even when 2 or 3. Maybe not quite that young. Three or four, say. I read Treasure Island, Robert Louis Stevenson. It's very hard. Seemingly confusing. But I could see, he was playing. Kids often need to be doing something while you are reading to them. And if you say: Get back over here on the couch!--they can't necessarily always do that. Some of my favorite times with the kids were when they were doing something else. When he was building something with Lego. And I remember reading him Treasure Island when he was seemingly completely too young to understand it. And I would see him pause, Lego pieces in the air, as he was listening to some tense moment. And so, he was listening all the time. My daughter used to--she began reading very early. I was reading a book to my son, and she was lying in the bed reading a different book herself but was listening and would comment occasionally. Russ: Stevenson's prose style. Guest: I think that's another value of reading to kids--they become good listeners. And I think the reason your kids could understand books that were way over reading level for them is that they learnt to--by listening all along. I think it's a huge skill. It makes them better readers and better writers. We learn to write by absorbing the language by listening. Writing is a huge skill. I've sure you've seen it in economics. It's huge and not necessarily a common skill. And it underlies almost everything. One of my early books had to do with a sort of an expose of a testing service--SAT and other standardized tests. One of the little-known facts was the math SAT is very much a verbal test, too, because you have to be able to read. It's a language test, a vocabulary test, in addition. And that's true in every subject. You don't get a pass on reading just because you are going to go into the sciences. All the same literary skills are just as important there. Russ: Reading is everything. I don't really think of it anymore as reading. The world has changed so much it's really a--growth as a human being is about absorbing new information and learning, and reading is the most common way it's been done in the past. People used to tell stories. Now we tell stories--for a while we called them through the printed page, and then it's became the audio book and now it's the Internet; and iPad, and everything is exploding. But it's all about slowing your life down so you can absorb information. And if you can't do that, your life is going to be hard. It's really important. Guest: Yeah. Your most important software is your language ability, what distinguishes us from who knows what. It's very true. There are lots of different ways to cultivate that. If we think of: How do I invest in my children, things like that, it's more important to do something like that than to think about building your estate so they can go off and squander it somewhere. You want to-- Russ: Teach them how to learn. Guest: Teach them how to learn. How to enjoy. How to be content within themselves, to entertain themselves. A powerful tool, especially if you have young children. I remember when there was this great breakthrough--it just felt like the most extraordinary thing. My wife and I were driving on a trip with our kids, and our daughter, in our back seat, was reading to her brother. It was like we had invented a perpetual motion machine. After an investment of a few years, now they could read to each other. There we were in the front seat quietly having a conversation to ourselves.

Posted by Russell Roberts at http://www.econtalk.org/archives/2012/05/owen_on_parenti.html.

Schmidtz on Rawls, Nozick, and Justice

Mon, 07 May 2012 06:30:00 -0500

David Schmidtz of the University of Arizona talks with EconTalk host Russ Roberts about the work of John Rawls and Robert Nozick. The conversation covers the basic ideas of Rawls and Nozick on inequality and justice and the appropriate role of the state in taxation and property rights.

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Readings and Links related to this podcast

Podcast Readings HIDE READINGS
About this week's guest: David Schmidtz's Home page "The Meanings of Life," by David Schmidtz. First presented at the Boston University Institute for Philosophy and Religion in December, 1999. About ideas and people mentioned in this podcast: Books: A Theory of Justice, by John Rawls at Amazon.com. Anarchy, State, and Utopia, by Robert Nozick at Amazon.com. The Uneasy Case for Progressive Taxation, by Walter Blum and Harry Kalven. Used copies at Amazon.com. Articles: "Order Defined in the Process of Its Emergence," by James Buchanan from Literature of Liberty. vol. v, no. 4, pp. 5-18. Arlington, VA: Institute for Humane Studies. Free online at the Library of Economics and Liberty. The Tale of the Slave, from Anarchy, State, and Utopia, pp. 290-292. Game Theory, by Avinash Dixit and Barry Nalebuff. Concise Encyclopedia of Economics. Rent Control, by Walter Block. Concise Encyclopedia of Economics. John C. Harsanyi. Biography. Concise Encyclopedia of Economics. James M. Buchanan. Biography. Concise Encyclopedia of Economics. John Locke. Biography. Concise Encyclopedia of Economics. Kenneth Arrow. Biography. Concise Encyclopedia of Economics. Amartya Sen. Biography. Concise Encyclopedia of Economics. John R. Hicks. Biography. Concise Encyclopedia of Economics. Compensation test. Web Pages: "Ressentiment". Wikipedia. Podcasts, Videos, and Blogs: "How Bad Do You Want It (Success)" a video created by GreysKale Multimedia. "Nozick's Apartment," from Julian Sanchez's blog, April 8, 2003. Klein on The Theory of Moral Sentiments, Episode 4--A Discussion of Part III. EconTalk podcast, part of 6-part series on The Theory of Moral Sentiments, by Adam Smith. Impartial spectator. Robert Frank on Inequality. EconTalk podcast. The Political Economy of Power, with Bruce Bueno de Mesquita. EconTalk podcast. Satz on Markets. EconTalk podcast. Debra Satz argues that some markets are noxious and should not be allowed to operate freely. Topics discussed include organ sales.

Podcast Readings

About this week's guest:

David Schmidtz's Home page
"The Meanings of Life," by David Schmidtz. First presented at the Boston University Institute for Philosophy and Religion in December, 1999.

About ideas and people mentioned in this podcast:

Books:

A Theory of Justice, by John Rawls at Amazon.com.
Anarchy, State, and Utopia, by Robert Nozick at Amazon.com.
The Uneasy Case for Progressive Taxation, by Walter Blum and Harry Kalven. Used copies at Amazon.com.

Articles:

"Order Defined in the Process of Its Emergence," by James Buchanan from Literature of Liberty. vol. v, no. 4, pp. 5-18. Arlington, VA: Institute for Humane Studies. Free online at the Library of Economics and Liberty.
The Tale of the Slave, from Anarchy, State, and Utopia, pp. 290-292.
Game Theory, by Avinash Dixit and Barry Nalebuff. Concise Encyclopedia of Economics.
Rent Control, by Walter Block. Concise Encyclopedia of Economics.
John C. Harsanyi. Biography. Concise Encyclopedia of Economics.
James M. Buchanan. Biography. Concise Encyclopedia of Economics.
John Locke. Biography. Concise Encyclopedia of Economics.
Kenneth Arrow. Biography. Concise Encyclopedia of Economics.
Amartya Sen. Biography. Concise Encyclopedia of Economics.
John R. Hicks. Biography. Concise Encyclopedia of Economics. Compensation test.

Web Pages:

"Ressentiment". Wikipedia.

Podcasts, Videos, and Blogs:

"How Bad Do You Want It (Success)" a video created by GreysKale Multimedia.
"Nozick's Apartment," from Julian Sanchez's blog, April 8, 2003.
Klein on The Theory of Moral Sentiments, Episode 4--A Discussion of Part III. EconTalk podcast, part of 6-part series on The Theory of Moral Sentiments, by Adam Smith. Impartial spectator.
Robert Frank on Inequality. EconTalk podcast.
The Political Economy of Power, with Bruce Bueno de Mesquita. EconTalk podcast.
Satz on Markets. EconTalk podcast. Debra Satz argues that some markets are noxious and should not be allowed to operate freely. Topics discussed include organ sales.

Highlights

Time	Podcast Highlights HIDE HIGHLIGHTS
0:36	Intro. [Recording date: April 25, 2012.] Russ: Economic justice: We are going to talk about John Rawls, Robert Nozick and the notion of economic justice generally. Let's start with John Rawls. His book, Theory of Justice, was published in 1971. Talk about that book. Guest: It begins with Rawls trying to set out a theory of justice, and he sees theorizing about justice as a project of modeling a kind of fairness, like different things can be fair, and evaluation can be fair or not, and shares can be fair or not. So, Rawls is giving us a theory about what would make shares fair. And the obvious first thing to say, which is the first thing he says is that the fair way to divide a pie would be into equal shares. But he said, there is in some theoretical way another alternative; so suppose that the pie's size is variable and that how large the pie would be, would be in part a function of how we decided to divide it. So, different ways of dividing it, possibly unequal ways of dividing it, would lead to a larger pie. And could conceivably lead to larger or smaller shares, but a pie so large that even the smallest share is something that is a larger slice than an equal share would have been of the smaller pie. And so that's the original driving motivation of that theory. So, he comes up with a principle of maximizing, maximum equal liberties for all; but there's also a principle for distributing--it's interpreted as a principle for distributing goods. But that's not literally what it says. It says you distribute inequalities in such a way that even the least advantaged ends up more advantaged than would be possible under a more egalitarian scheme. That principle is called the difference principle--distribute inequalities so as to be to the greatest advantage of the least advantaged. Russ: So, the idea would be, if it didn't affect the size of the pie, equal shares. But we are willing to tolerate inequality as long as it improves the well-being of the worst off. Guest: Improves the well-being of everyone, including the worst off. Russ: Oh, including. Guest: Yes. Well, interestingly, the first two statements of that difference principle, before 1971, actually said it in that open-ended way: make sure that the inequalities are to everyone's advantage, including the least-advantaged. Now, by 1971, he's actually changing his story, in a seemingly subtle but in fact momentous way. He says: Well, actually there are indefinitely numerous solutions out on that frontier of welfare that would be compatible with that principle, innumerously different, unequal distributions that would be good for everyone; so he said: So, what we've got here at best is an incomplete ordering principle, and we need something that's complete. And so we have to define a principle that picks out a definite spot on that frontier. So he says: Well, let's pick the spot on the frontier that is to the greatest advantage of the least advantage, so that the smallest share is as large as it possibly can be. Now, that is an intuitively obviously principle to pick. Russ: If you thought it was crucial to have a solution. It's not clear that that is ideal, per se. Guest: Well, that's a good point. And in fact, what I would say is, it isn't the job of a--this is a basic structure we are talking about defining, and it isn't a basic structure's job to pick out a particular outcome. I mean, the reason we want a set of traffic-management tools and policies, the reason we want to agree that red means stop and green means go, is that we want to minimize the cost for everyone, including the least advantaged, of getting to their destinations. So, the point isn't to be maximally advantageous; the point isn't to get everyone to the same destination. And you'd think Rawls would not have said that either; he would agree with that. But yet this idea that we need to pick a specific outcome is, I think, a subtle but major turn in a wrong direction, I have to say; that the point of basic structures is to put us in a position where we can pursue our own plans in a way that isn't threatening to each other. But to do this, it put, as Nozick is going to come along and say, in 1974--that puts people in a position where the rest of us are supposed to think our job in life as people committed to justice, or the job of our basic structure, anyway, is to make sure that those other folks out there are made so well off that if the system tried to do anything better for them, tried to do more for them, it would end up being less. Russ: Couldn't do it. Guest: Nozick says that is just an amazing thing to expect of a system of justice in forming basic structure that is supposed to respect us all as reciprocators and is supposed to treat us all as inviolate separate persons who come to the community with hopes and dreams of our own. Russ: Of course, not everyone accepts that; but I happen to like that one. And obviously Nozick thought that was crucial. Guest: Rawls did, too. Russ: We'll come to Nozick in more detail in a little bit, but let's still stick with Rawls. Tell us a little bit about Rawls--his background and interests. You mentioned before we started the interview that he hung out with a lot of economists. Which I didn't realize. Guest: Yeah. Among his friends were James Buchanan, Ken Arrow, William Riker, Amartya Sen. And these folks were different generations, too. But that was a group of people that formed--these were Rawls's friends and mentors, his discussion group. These were the people that he bounced ideas off of. And so the young Rawls was very much conversant with this developing field, rapidly developing at the time, field of political economy. Very much versed in the game theory and the welfare economics of the time. Very much educated in this and very sensitive to it; and very keen to bring the insights of that field to philosophy. And very successful at bringing those insights to philosophy. He lifted the profession out of a state--I think single-handed would be, well, historically inaccurate, I suppose--but I think it would be fair to say that Rawls more than anyone else kind of broke the equilibrium in which moral and political philosophers were basically saying: Well, there's some kind of dialectic of historical materialism and it doesn't really matter; we can't do much about that anyway as philosophers; it's not our job. Our job is to define terms. Or better yet, get somebody else to define terms and then we can poke holes in their definitions. He who defines a term first loses the game, basically. That was the game at the time, to just think about consistency; not worry about truth , not worry about empirical correlation. So, in effect, not worry about practicality. So, philosophy had almost proudly come to a state where it had nothing to say about politics. Or ethics, for that matter.
10:00	Russ: Now, one idea that I think people have heard of from Rawls--I'm looking, I'm sitting in my office doing this interview face to face--and I can't quite see the full section of the Rs on my bookshelf, but I once owned a copy of The Theory of Justice. I may still own it. I have read maybe half of it. It's a hard, fat book. It's not easy going, so I appreciate the help. But one idea that I remember, and I think many people have heard of, is the Veil of Ignorance. Describe what that is and how it entered Rawls's formulation of justice. Guest: It's a hard book for anyone. It's a long book, and it's a very sophisticated book. He's pulling together a very large number of threads of philosophy and political economy, trying to pull them in and weave a fabric out of them. So, it's not your fault. Everybody who takes the book seriously has trouble with it. It's just full of insight. But if you think about how we get to that task of dividing the pie and really the prior task of getting the pie to the table in the first place--which I don't think he does enough to talk about that. He's talking about people as separate agents, separate persons, separate producers, and respecting their separateness in a way that utilitarianism fails to do. And part of my problem is--he goes on later, as he's divorcing himself from the political economists that formed his early discussion group--he's going on to talk about, say, the distribution of talent, and saying: Well, here's why we would originally go for that semi-egalitarian distribution that we'd only want to depart from egalitarianism--strictly equal sha res--if we could do so in a mutually advantageous direction; the obvious answer would be: well, I've got talent. I've got something in me; I've got something I want to bring to the table and I want to bring to society. But I want to be the first person who makes money from it. I want to--Adam Smith would say--I want to be esteemed for this. And I want to make money for it. But the point is, some people say, actually, I have premium talent. As a matter of respecting me as a separate person, I want to be paid a premium price for my premium talent. And Rawls would say: Well, that's a problem; I understand the intuition that people deserve to be paid what they are worth. They deserve the marginal product of their creative output and so on. But Rawls says: That's not the direction we are going to go in. We are going to go in the direction of this difference principle that starts with equality and only departs from it for the sake of giving everyone a larger bundle of primary goods. So, it's not about giving people what they deserve. It's about giving people somewhat better than an equal share. So, he says, this would be more intuitive if we imagine ourselves in a fair situation, where we don't come with our biases about how talented we are and how much more we should get paid than the Joneses and so on, so the thing to think about is to imagine ourselves bargaining in a situation where we don't really know where our personal interests lie. So, for example, we may think: Shouldn't someone who can throw a baseball 100 miles an hour get paid more than someone who can't? Shouldn't they in fact be paid millions of dollars? And you say: That isn't obvious. But however we decide that question, let's not let the pitchers decide it, and let's not let even the fans decide it. Let's have people decide it without knowing whether they are pitchers or people completely indifferent to the whole sport and would not watch an inning of that game to save their lives. So, get everybody in the room, get all the people representing, anyway, every perspective in the room; and have them make that decision in a truly impartial way. So the point of the Veil of Ignorance is to say to people what you are supposed to be imagining is, if you don't know who you are. So, there's x, y, and z; there's some guy out there named Russ Roberts, but you don't know that you are Russ Roberts. How much do you think Russ Roberts should get? And if you decide here's what Russ Roberts should get and you don't know that you are Russ Roberts, well then the answer you come up with will be a lot more impartial than if you do know that you are Russ Roberts. So pretend you don't know who you are. Russ: Yeah; it's actually--using the word impartial reminds me of Adam Smith's Theory of Moral Sentiments, where he often invokes the impartial spectator, a person who is impartial in, say, a dispute where two parties are angry at each other, or one who is seeking vengeance or one who has been offended. And since that impartial spectator doesn't have the emotional baggage and the bias of the participants, that's the exemplar we should turn to for how to behave in that situation. There's something of that in Rawls, right? Guest: Uh, yeah, absolutely. These are certainly fellow travelers in a tradition. Rawls belongs in more than one tradition; but the contract carrying tradition is something he has links to, and the moral sympathy tradition is something that he has links to. Russ: Now, of course, one of the problems with the Veil of Ignorance--your mentioning James Buchanan brings it to mind--is that there's no such thing as Russ Roberts when you are behind the Veil of Ignorance. There's no such thing as baseball behind the Veil of Ignorance. It's an interesting, perhaps, intellectual experiment to say how much should a bricklayer or a blacksmith or an auto worker earn if I don't know if I'm going to be that person. We take those as given in the exercise, but of course they emerge through the choices people make and the skills they have; and they all depend on the skills of the other people. So you can't even say how much should a bricklayer earn. How much should a blacksmith earn? Well, there aren't any blacksmiths any more. How does that affect our calculus? Or, we could ask the question: Well, how much a blacksmith might earn might depend on a thousand, millions of other people in the society in 1850, and what their skills are. It's an interesting suspension of disbelief, I guess, and requirement of knowledge you can't have. Guest: Yes. I guess, so James Buchanan would say we start from here. Russ: Where's here? Guest: Well, here is in the world of Russ Roberts and baseball. Russ: Yeah. Guest: And in a way I think Rawls would say: That's my theory, too; I don't disagree with that. But he would say: We don't want to start off with our epistemology situated in that world. We still want to come out of this with conclusions that are relevant to the world of people actually living. But in a way we don't start our theorizing from here. We say: Suppose we were starting from nothing; what would we build? Now, if you think about the kind of theorizing we are doing there, that will not have had at any point at the end of the day, it will just have been an idle exercise, if we don't come out of it with stuff that applies to the real world of baseball and Russ Roberts. So, when we say we are behind a Veil of Ignorance, we are not supposed to be imagining that nothing exists, that we are making a decision in a void. Russ: We are in some kind of shrouds, or togas. Guest: But at the end of the day I'm going to walk out of the door being Dave Schmidtz. But I'm trying to say to myself: If I didn't know that I was who I am and I didn't know that talents were getting rewarded like that, or I didn't know that I would have talents like that, or I didn't even know that I was particularly willing to take on risk--I knew the general facts of human society, I knew principles of economics and sociology and psychology. But I wouldn't really know anything that had a bearing on making my payoff, the particular payoff that it did. So, it really is a thought-experiment. It's not meant to be theorizing about a different world. It's meant to be theorizing about our world, but meant to make us kind of envision what it would be like to be looking at our world impartially.
19:37	Russ: I think it's a powerful, really thought-provoking idea. Guest: Probably in philosophy it was the most provocative idea of the 20th century. Russ: And the book itself, the rest of the ideas, what were its impact? One of its impacts was that it encouraged Robert Nozick to write a different book than Rawls had written. But before we talk about Nozick specifically, what's been the impact of The Theory of Justice, Rawls's book? Guest: Well, it's hard to say. It's certainly changed the profession of philosophy. It probably changed the Academy--the social sciences--quite generally. As to what has had a larger impact outside of the Academy, there probably hasn't been anything more influential than Peter Singer's conversations about animal welfare, and so on, animal experimentation and factory farming. Whereas Singer has had relatively little influence within the Academy. But Rawls has been much more influential inside the Academy, I think, by far, than any other philosopher in the 20th century. But I think he's really shaped thinking. I mean, the thinking was going to really change anyway, to what we don't know, but he's taken a profession that had really gone into navel-gazing mode and started talking about: We're going to define terms and come up with consistent definitions of terms. And he took that and dragged it into, instead, a state where philosophers were talking hard about what to do about practical affairs. What's the right thing to do? What can we at least single out as what can be condemned or something like that? So, Rawls, had, in a way, relatively little to say about global justice, for example; but he's had many, many students who have gone on to say: Well, given that this idea is as striking, intuitive, compelling as it is, that we should be trying to do as much as possible for the least advantaged, given that the least advantaged are actually on the other side of the world, like do they count? Are they part of this equation? Are they part of the group we are talking about? Are their advantages on a par with the disadvantages and advantages of the poor in New York? Peoria? Tucson? Russ: Yeah. It's a good question. Guest: Some people are working on that now. They are working on it to some degree because of Rawls.
22:46	Russ: Let's turn to Nozick. 1974, he's a colleague of Rawls at Harvard, and he publishes Anarchy, State, and Utopia. A book I also once owned. I don't see it on my shelf. You see it? Guest: Yes. Russ: Well, that's a relief. It's still here. And I have read the whole thing. I read it I think when I was 20--or 21?--20. Guest: The kind of person who would steal that book probably has an inordinate respect for property rights. Russ: Why do you mention that? Guest: Well, that's why it's still there. Russ: I'm not sure what you mean. You are wondering why no one has wandered in and stolen it. I don't think anyone stole my Theory of Justice. It may have, I don't know--hang on; let me just eyeball it. I get your joke now. Slow on the uptake, being the non-philosopher in the room. So, you are suggesting my copy of Rawls has walked. I suspect I lent it foolishly. And there is some moral complication to that issue. Guest: It was assisted walking. Russ: Yeah. Anyway, I was electrified by Nozick, when I read it. Of course, I wanted to be. Guest: It's a great book. Russ: I was on his side. It bristles with creative and interesting ideas. And it is not, in my view, as systematic as Rawls. Which makes it a more entertaining read, but a harder take-away sometimes, as a whole. So, what did Nozick try to do in that book, and how does it relate to Rawls? Guest: I think it's a little bit unclear, might have been a little unclear even to Nozick, what he was trying to do. But there are three parts of it. And the biggest second part of the book was more than anything else a response to Rawls. And so there he is setting out an alternative perspective on justice and distributive justice. People say that Nozick didn't have any premises or foundations, and that's just not true. But what is true is that he borrowed his foundations from Rawls, to a large degree. He said: Well, suppose Rawls is right, that people are separate persons with lives of their own to live and that their utility, it isn't up to somebody else to decide how their utility trades off against someone else's. They have rights. And the aggregate isn't a trump. So, maybe that's question-begging. But if that's question-begging, then Rawls is question-begging, because that's Rawls's premise; and Nozick said: Suppose that's right. Suppose we took that on board and really believed it. I don't think we are going to get Rawls's conclusions if we do that. I think if we take that premise on board, what we are going to actually end up with is a puzzle about how to justify the emergence and enforcement of a state-imposed rule of law in the first place; but also in an ongoing way. So, he comes up with different categorizations of principles of justice and with the tasks of forming an order out of principles of justice. He distinguishes between historical and patterned principles, and he says that Rawls's theory is actually a patterned principle, based on a patterned principle, the difference principle, and that is, Nozick wants us to consider an historical alternative. Russ: Which is? Guest: Well, let me set out the distinction from the ground, then. So, you might say, a principle, say--he distinguishes between the idea of current time-slice principles, where he says you would evaluate the justice of a situation by looking at a snapshot of the situation and saying: Are the shares the right size in that situation? You don't care how the shares got to be that way. You don't care who produced what. You just look at the shares and you say, for example: Well, if the shares are unequal size, then that's that. That determines that the distribution is unjust, is illegitimate. Russ: That's Nozick describing Rawls. Guest: Yeah. In effect. Russ: Because Rawls ignores how they got there.
28:06	Guest: But he's [Nozick's] saying: Here are the possibilities, basically. So, the two basic categories he wants to talk about are historical and time-slice. But it's actually a little bit harder and more complicated than that. So, you could also distinguish between a more time-sensitive or context-sensitive principle, which, call it an end-state principle--that's what Nozick calls it--where you might not exactly take a snapshot and say unequal shares entails injustice ; you might say: Actually we should be looking at lifetime income, say. And if the Joneses and Smiths have the same lifetime income, then that is equal in the way that justice requires the outcome to be equal. And so even if the Joneses and Smiths have different incomes at a particular time or different net wealth at a particular time--because, after all, Jones is 20 and Smith is 50 and Smith has been accumulating both talents and skills and connections and wealth for 30 more years than the other has--then that would be inequality and injustice by the lights of current time-slice principle, but the end-state principle says: No, that's not the point. The snapshot isn't the point. The whole picture is the point. Now, pattern principles, then, are principles that say we have to look we have to look at a particular pattern. And the pattern might not actually be like slices of a pie. It might be a pattern of treatment. So, you might say: Are those people doing worse than others because there is a prejudice against hiring people of their minority group or their religious group or people of their sex? And so you might say: That might be where we'd locate injustice. You'd say there's a systematic pattern of inequality here. Even if people actually had the same income, you might say: Well, those people had to work twice as hard for it; or, those people had to wait twice as long for it. So there can be a pattern of justice that's a more subtle thing. And Nozick says: Okay, that's more plausible; but it's still not my theory. It's still not a historical theory. Historical theory: there are rules about how you come to own something. And the main question is going to be: Did you acquire that by using force? Or did you acquire it by voluntary consent? If anybody who had a claim to that baseball ticket said: Hey, give that to Russ. For whatever reason. Maybe he paid for it; maybe he's just more of a baseball fan or something like that. Maybe it's your birthday. Something like that. Russ: Or the current holder is not a nice person. Guest: Well, could be. Lots of different transfer principles we could talk about, too. But basically, Nozick said: No matter what the result is, the result isn't where the rubber hits the road. The result isn't where the justice question gets resolved. The justice question gets resolved when we look at how the transfer actually occurred; and did the transfer occur legitimately. And Nozick says the pre-eminent principle of legitimate transfer is consent. Russ: So, if you have the ticket and I ask you for it and you give it to me voluntarily, versus I hold you up at gunpoint for the ticket, the second case even if I'm the bigger baseball fan, is irrelevant because, is unjust because I used force. And the first case, even if I'm the smaller baseball fan, is just because you gave it to me. Guest: Yep. Russ: Or I bought it from you. But it was voluntary.
32:15	Russ: So, the problem with that, which I'm sure people--I can't remember, Nozick talks about it in the book--is that many of our advantages in life, and of course this has become a huge study in economics recently , are given to us. We don't earn them. My children are born in the United States. They are born in the United States of a certain parental endowment of genetics and environment. The odds are good they are going to be above the median in material well-being. They may not. They may choose a path that's less rewarding materially. But it's certainly open to them to be well above the median if they choose to be. Is that fair? Just because it's voluntary--they didn't steal it from anybody? What's Nozick's answer to that? Put the stress on voluntary exchange, versus expropriation. Guest: Let me kind of start at the start, if you don't mind. Nozick is working in a Lockean tradition, trying to develop an alternative to Rawls's theory. And so Locke is starting out responding to a fellow named Lord Filmer, who basically said all the earth was given to mankind in common. But, no, that can't be right; because if it were the case that we all were common owners, then nobody could do anything. We'd all be paralyzed. We wouldn't have the right to take a breath or to stand, even just to simply stand our ground without getting the permission of everybody else in the human race to stand there. So, Filmer says that can't be right, and therefore it can't be the case that God gave the world to all mankind; God gave the world to Adam and then Adam passed it on to his children. And that's how it ended up in the hands of Adam's distant descendants--namely today's kings. Russ: Us. Guest: No, the kings. Russ: Not us. Guest: So, Locke made fun of that; he mocked that. But he also came up with a pretty sustained argument against that. Now, Locke didn't talk about us appropriating our talents, per se. What he talked about is appropriating land. But Nozick comes in understanding that we need to have some kind of theory about how we originally become the owners of anything at all. Now, there's this principle which we already talked about, a principle of just transfer; so if that ticket belongs to me, the way you acquire property in that ticket is by doing justice to the claim that I have prior to yours; and so you do justice to my claim by asking me if you can have it. And I say: Well, what are you proposing? And then you make an offer of some kind; and I say: Yeah, that'll work for me; and then we make an exchange. And now you are the owner of the ticket. I've relinquished ownership. But if we suppose then that my talents--either my talents came into the world as my property or my talents came into the world as the world's property as it were--the human race's property--which actually is more or less like Rawls's theory in the end; but that's what Nozick wants to repudiate. Russ: Rawls's being that it's the world's property. Guest: Yes. So, Nozick basically says: What Locke says there's got to be some way in which we can do things with the world. That is, if this is supposed to be a theory that has something to do with respecting separate persons, then it's got to have something to do with separate persons having the right to sustain themselves, to feed themselves--with the emphasis on themselves, that if they can't even put food in their mouths, well then there's nothing respectful about that. Nothing individualistic about that. That's taking a theory to an extreme that prevents it from ever having anything to do with our world. And so Nozick says we do want our theory to have something do to with helping people solve problems and live lives in this world. So, he says the way we acquire land is by mixing our labor with something to which nobody else has a claim. And that latter part is not a throwaway. That's a really important part of the theory. He's not saying: If I can run out onto your lawn with a shovel and turn over a few scoops then I come to own your lawn. It's like the only way for me to come to own your lawn is by coming up with a mutually agreeable arrangement with you. But if nobody has a claim--if you don't have a claim--then the thing that I do when I dig up a mushroom or plant a row of carrots is, I am investing, I am mixing myself with that land, with that product, in a way that nobody else is. And it's not that that has to be some extremely strong claim being created. The point is it's a unique and exclusive claim. The only way for somebody else to come along, the only way for you to come along later and say, I'll take some of those carrots, thank you, or, I think I'll share that mushroom with you, is by ignoring the similar claim that I've made previously. When nobody else has a claim to it then I'm not ignoring anybody, I'm not mistreating anybody, I'm not failing to respect anyone's separateness. But the person whom comes along second needs to get my permission then, in order to not be disrespecting me as a person. So, it doesn't have to be that strong a claim for it to matter that it was the first claim, and there really would be a disrespect involved, in the same way that any bear understands that if you get to the territory second, that first bear is going to stand there and even if the bear is smaller than you, that bear is going to say: I'm going to fight to the death for this, because otherwise I lose my identity. So, even bears understand that it matters who gets there first. And people understand that, as well. So, the thing about your talents is--in a way, it's very implicit in Nozick, but implicitly the idea is this: I can exploit my talents; I can make use of my talents without making anybody else worse off, without putting anybody else in a worse position; but nobody else can come along and commandeer my talents, can enslave me for example without mixing their labor with something I do think of as mine and I quite reliably and predictably will think of as mine; and that nobody can really avoid thinking of as mine. If we talk about it at all, we will talk about it as mine.
39:52	Russ: Nozick of course gets into the appropriate role of the state, and he comes down, if I remember correctly, arguing that--and I have to confess, although I found it exhilarating at the time, thinking back on it I find it a little less exhilarating in terms of its elegance--but his argument is, because of economies of scale, that the state has the authority or justness of performing a police function. But I want to step aside from the many things we might argue and discuss what the state could do, and just focus on the one, which is redistribution. So, if the state raises taxes, not for revenue purposes--that's what I want to put to the side--but merely to redistribute income. So, we've got these baseball players who can throw a baseball 100 miles an hour; we've got people with great voices who can entertain and make millions of dollars a year as a result, like the baseball players, actors and actresses with good looks. And I'm going to accept the fact--obviously Nozick thought it was important--that all these people work very, very hard. When you talk about your talents, there is a tendency to talk about your talents as an endowed gift. Some part of it is, obviously. But what a modern athlete has to do to be a successful earner of those high returns is unimaginable, I think, to most casual sports fans. I don't think they realize the amount of work that gets put in, the relentless effort. I'll put a clip up attached to this of one very moving and informative about this. Taking that as a fact, that some people can throw a baseball faster or sing better, are in demand for whatever reason, and that they've combined hard work to get there, is it unjust then to take a share from them and give it to others, against their will, merely to push the distribution of income toward that egalitarian, equal share outcome? I know what Nozick's answer is: Nozick's answer is No. But the average American, when confronted with the veil of ignorance--what do you think that person would say? It seems to me they are just two orthogonal theories. Rawls--would most people, not you and I, say: Well, behind a veil of ignorance I don't know if I'm going to be one of the gifted ones who works hard or one of the gifted ones who squanders talent; I might end up being one of the non-gifted ones; I might have an IQ of a low number and be endowed with a lazy temperament and I am not going to live very well; and I might be a gifted person with tremendous drive, a Michael Jordan or Steve Jobs, and I might end up with multi-millions. Where would justice lie there in the mind of an average thoughtful person? Would they find redistributive taxation offensive or admirable? Guest: So, two perspectives on this. One perspective would be that on the one hand, that pitcher who is excelling now who did something to make something of himself, make something of his talent. So, like you say, the labor is really there. And even some folks on the left, like David Miller, will say: the point wasn't whether the pitcher or Wilt Chamberlain worked extremely hard or took extreme risks. The point is there was a certain amount of work that went into it, and work that, after all, Wilt did, not that somebody else did. And so that is the thing that establishes Wilt's presumptive claim. It doesn't mean that he shouldn't be taxed for various purposes mainly but it does mean Wilt is the one that has such claim of justice that has anything to do with being deserving or merit or investing in creating the talent, bringing the talent to the table. So, that's one perspective. Now the counterpoint to that is a person who will say: Yeah, but in a way you are failing to understand the way in which the community's involvement goes all the way down. So, it isn't just you that worked. It's your parents that worked and your grandparents that worked and actually your parents' employers, your parents' teachers, your parents' grocers, cabdrivers. So, all of society worked to put you in the situation that you are in. Okay, so that's one perspective; that leaves us with a real understanding why people would disagree about this, why it would seem quite intuitive. Both sides of that debate would seem quite intuitive. Now the only thing that I would want to add to that is I would say: Okay, but let's remind ourselves, are we talking about a liberal society-- Russ: When you use the word liberal, you mean classically liberal or modern liberal? Guest: Ambiguous between them. Just a theory that believes that an individual is a real thing. It's not a scholarly, fictitious construct or something like that. There really are people in the world, and people really do have their own hopes and dreams, and people aren't mere pawns; they actually are agents taking responsibility and making decisions. Now, you can say that at the end of the day, society owns people. People don't own themselves. You can say that, and probably say that consistently; but you are not saying something liberal when you say that. So at the end of the day, for a liberal, you have to make sure you are on the right side of this question. When somebody says: Okay, I got it; I wouldn't be where I am today without my teachers and cab drivers and parents and all kinds of other people; but I don't like this deal ; I'm going go home now; I'm going to leave the country, perhaps, if you don't mind. Who gets to say: Sorry, you aren't enough of a self-owner that you don't have a right to say no? Maybe we want your kidney, maybe we want your blood, maybe we just want your labor, maybe we want to restrict what you can do by laboring for yourself and your family. And at some point we say: Well, let's be reasonable and let's go along with this to some extent. But still, there's a fundamental matter of principle, a question that needs an answer at the end of the day, which is: Do I have the right to say No? Do I have the right to walk? Do I own myself? So, the fact that you can think of other people who helped me, or you just imagine--how do you know that I'm not an orphan? Maybe in your imagination all kinds of people helped me. Tell me at what point other people helping me made me your property. Because if there was no point at which I became your property, then excuse me, but I'm going to go home, and I'm going to take all of my toys with me. If you want some of my toys, if you want me to share my toys, treat me like an adult, treat me like a self-owner, and make me an offer. And you might make me an offer that I'm perfectly willing to accept. I might say--and this was the thing you were excluding--yeah, I want to be part of a community, I want a community that has a real infrastructure; in fact, I want to be part of a community where the roads are free. Not that I think that anything is really free; I realize that I as a taxpayer will be paying for the free roads. But the point is, I want to minimize transactions costs because I want it to be as cheap as possible for my customers to get to my store. And so I would rather pay for that in part of my taxes than have to put up a toll road and have my customers have to pay to get to me. So, yeah, I want public goods, even things that aren't inherently public. Russ: Many goods aren't public goods that are provided. Guest: Yeah. So, I'm willing to pay for it; I regard my paying my share for it as a way of respecting me as a separate person; I'm in. You want me to fight for my country and maybe get killed in the process? I hate the thought, but I'm in; I realize that sometimes my share is going to be big. I'm in for my share. Now, you say I should also be willing to regard myself basically as somebody else's property. I should regard my talent as belonging to somebody other than me. I say, No. If we've gotten to that point, I want to get on a plane with a couple of my suitcases and my talent, and I want to go someplace where I'm treated with more respect. And if you are going to stop me, then we've stopped being a liberal society. If we are still a liberal society, then you realize this package of talents is mine. No matter where it came from, no matter how many friends I had or teachers I had, this is my package of goods. Russ: No matter how many public schools you attended. Guest: Yeah.
50:34	Russ: I'm fighting off the urge to end the podcast here because that was so eloquent. But I want to continue. Let me take a different approach to the question. We could make a different set of arguments against progressive taxation. There was a wonderful book--I'm also looking at my shelf; these comments about my bookshelf are a testament to my eyesight, the clutter of my room, and the height of my bookshelves--but, Blum and Kalven, two law professors, wrote a wonderful little book a long time ago called The Uneasy Case for Progressive Taxation, where they tried to lay out an argument in favor of progressive taxation. They made a bunch of different ones and they shot them all down, most of them; and I think the book concludes that the case remains uneasy. They are sort of pro-progressive taxation, but with qualms, is how I might describe it. So, let me make three arguments, if I can remember them--not from their book but from me sitting here talking to you--against progressive taxation. One would be: It's unjust. It's immoral. That's a Nozickian argument akin to what you just made: that you own yourself, you own your property, and taxation, especially for the purpose of redistribution is theft. The second argument would be: it's inefficient. It makes the pie smaller. And this would be a Rawlsian argument. So, Rawls, while in favor of progressive taxation, would say eventually: Well, I'm in favor of progressive taxation, but not to the point where it makes the pie so much smaller that people get smaller shares. The third argument against progressive taxation I would call practical--different kind of practical. And I guess deep down, it's the third argument that I find most compelling, both intellectually and in terms of persuasiveness, as I think about an impartial spectator thinking about our arguments, conversations here. The third argument would be: Well, if I give the state the power to tax people, that power will be abused, because John Rawls is not going to be the commissioner of taxation in this society. And if he is, he's going to end up being somebody different than a Harvard philosopher. He's going to be a commissioner of taxation, and he will be subject to the imperfections of humanity and the special interests that will try to sway him. So when I think about, to speak more generally, about limiting the power of the state, these three arguments work for so many issues. Think about minimum wages, can argue it's immoral--the state has no right to talk about what I can earn or pay. Can argue it's ineffective--it doesn't do a good job in helping the people it's intended to help. Or you could argue, well, when you give the state the power to set wages it's going to do more than that; we're going to be on the road to tyranny. So, when I think about those three arguments, going back to redistribution; I find myself strongestly drawn to the fear of tyranny. Maybe because I'm not behind a veil of ignorance. I'm sitting here earning well above the median; I live a good life; I live in the United States which puts me way ahead to start with; many gifts and blessings, many of them I've worked for, but many of them, as we said earlier, came to me. When I think about it--I have kind of a conflict of interest; in thinking about this, put myself behind the veil of ignorance, my biggest argument against taxation for purely redistributive purposes is that I think that puts you on a road to a very destructive political system. What's your reaction to that? Guest: It's a rich question. Gave me a chance to think for a minute. Well, first of all, your last thing: bias is a real issue. We are scholars and academics, so we both have a moral obligation to be as impartial as we can be, and to be lovers of truth. And it's really hard. We're only human. There are lots of ways that our minds work and gather information. They are inescapable and we wouldn't be better off if we could escape from them--we process bits of information one at a time, and the first bits of information we acquire are going to become the defaults, and it's going to take more energy and so on, and evidence to overturn those defaults. And that results in bias. We can't do anything about that. So, yeah, it's an issue. Two-thirds of my salary comes from the state, so there's a built-in dynamic leading me in the direction of being a statist. Russ: And instead you bite the hand that feeds you. As do I, so oft. Guest: Well, yeah, I guess. Russ: That hand that's doing the feeding doesn't realize it's being bitten. That's part of the problem. But that's another issue. Guest: Yeah, Freud would have an explanation--he'd say, yeah, I'm getting back at my parents or something like that. So, I'm sympathetic to all of these arguments. Certainly there becomes a point where either the amount of taxation or the form and rationale for taxation becomes so egregiously insulting--and threatening--that you are pretty much willing to go to war, to start a revolution, create a new country if that's what it takes in order to make a stand to correct that injustice. I'm sympathetic to that. I'm an immigrant; I'm a naturalized American citizen now and I believe in the principles of the Revolution. But at the end of the day, there's still an issue for me that as a philosopher, that's more like a premise than it is like a conclusion. I can say: Here's where I make my stand, and my colleagues can say: Me, not so much. I don't blame you; there's no particular reason why you have to agree with me on this. We can all be brothers--until you come around to collect your share of my paycheck. But I can see why reasonable people would disagree with this. So, these table-thumping, deeply compelling emotional beliefs about justice and injustice--they don't make great premises for arguments. They are better as conclusions. If you can get them to come out of your arguments, that's interesting. But if you just insist on them, not so interesting. The efficiency thing, I think we're on your turf when we talk about that; I believe that's a really important issue as well. Rawls, as you say, that is a Rawlsian argument; there are people in the world, not to name names, but who would say it would be worth making the 99% worse off if we could just nail the 1% to the wall and finally get our revenge on all those hoarders and greedy, the people who hog most of the nation's wealth. It's not that they produce anything; the way they acquired their wealth was by hogging it, not by creating it. Russ: That's Nietzsche and Ressentiment, which I don't get to say very often at EconTalk, so I thought I'd just throw that in; my college philosophy class pays off finally. Guest: I've read about that; I don't think I've ever attempted to pronounce that word before, certainly not on the radio. Russ: It's about a six and a half, maybe a seven. Guest: Yeah, you get points for Nietsche.
59:23	Guest: Now, the practical thing, your third alternative--actually I think that is the main concern that I have, too. In a way, maybe we are all children now of James Buchanan to some extent. I look back and I see it in Hayek; you can see it in Adam Smith; you can even see glimpses of it in Aristotle. But I think that concern and that awareness that power corrupts and absolute power corrupts absolutely--that has been with us, we've been aware of that concern for many, many centuries. And the idea that absolute power corrupts absolutely--that isn't just a kind of cute way of taking a point to its logical extreme. It actually is, I think a relevant dynamic of real world corruption, that the more power there is available, the more that that power is worth; the more it's worth to acquire that power; and so the more people will invest and the more unscrupulous they will be in doing whatever it takes to acquire that power--the more they will be spend as well as to lie in order to acquire that power. So, I think there really is a powerful reason to take, as Hayek would have said, to take the reasons every step of the way. There's always a reason, even a good reason, to create more power. There's always a problem coming up that hasn't been solved where we think we need a Czar or a committee or an agency--somebody--we need a Cabinet, to solve that problem. Like the reasons for doing it will probably never be without weight, without merit; and yet the result of creating more power in order to solve that problem is you create more power that gets bought and sold and auctioned off to the highest bidder, in effect, and used for whatever purposes that high bidder has in acquiring that power. So, you end up, the Bills come out with nice-sounding names on them, and then you actually read the bill and it will be 4000 pages that have nothing to do with the thing that forms the title of the bill; and nobody--literally nobody--has ever read the whole thing. Even the people who wrote it. There's 435 members of Congress; each threw in a few pages. So even the authors of the bill don't know what's in the bill. They just know: well, I've got something I can take back to my primary donors and my constituents. I can say: see, I've done what will warrant you in re-electing me, or in putting me on your Board of Directors so I can get $100 million payoff after I retire from the Congress or the Senate. So, you've got that kind of dynamic going. And so even good purposes give rise to corruption, well-meaning purposes give rise to an increasing level of corruption; and as a country gets older, as its bureaucracy gets bigger, I'm sorry, but it escalates. It starts growing, if not exactly exponentially, but at least episodically there will be periods of exponential growth, growth and emergence of new forms of power that wouldn't have been imaginable a generation ago will be accepted as just the next little step--if we didn't object to the previous step it doesn't make sense to pick this as the place. Russ: Boiling the frog. Guest: I guess that's the metaphor. That is my main concern as well, just that power is not going to be used for the purpose for which it was ostensibly created. It's going to be used for the purposes that the person holding that power currently has. Russ: I think back to a podcast a few years back with Bruce Bueno de Mesquita where he talked about King Leopold of Belgium, who was pretty popular among the Belgian people at the time for some of his social policies and legislation, where he was constrained by a Parliament. In the Congo, he was unrestrained; and he murdered millions of people--I think millions, certainly hundreds of thousands--and took booty and plunder. And I think Bruce very eloquently asked the question: Which was the real King Leopold? And we know the answer: the one who was unconstrained. Not a pretty picture. So, I think it's a real issue. What it brings to mind, though, which fascinates me--I haven't thought about it enough--is that interaction between the political system and the economic system. And Rawls kind of abstracts from it. Nozick--cynical is not the right word--he's not romantic about democracy. He has that extraordinary passage of the parable of the slave, which I recommend to everybody. I don't know if I can legally put a link up to it, but I'll try to; and you can certainly google tale of the slave Nozick. The foundation for libertarian ideas and policies.
1:05:30	Russ: But Nozick himself changed his mind to some extent at the end of his life, correct? Guest: That is correct. I actually can explain that. I only met Nozick once, so I was not really familiar with him as a person. But in December of 1999, Boston University invited me out to give an end-of-millennium talk. And I talked about the meaning of life, because it seemed like, what else are you going to talk about at the end of a millennium? Russ: That talk is in print, correct? Guest: Yeah, it is. Russ: It's a beautiful essay. Guest: Thank you. It's on my website. So, I was coming out to give that talk, and Nozick sent me a note and said: That's interesting. Would you be interested in having dinner afterwards? And I said: Well, absolutely. What else would I rather do? This would be a dream of a lifetime for me. I knew that he had had a recurrence of his stomach cancer. I did say my wife will be with me, who is a biochemist. There weren't search engines back then. Russ: Or they weren't very good. Guest: But he had somebody track down her articles on insect biochemistry. And he said: Well, please bring her along, too. So, we showed up for dinner and he had all kinds of questions about insect biochemistry. And they were smart, cutting edge questions. So, people talk about Nozick and they say, well, he was the smartest person I ever met. And me, I'm not sure I know enough about him to say that, but he was really stunningly impressive, I have to say, and it wasn't because he was trying to make an impression. He was just interested in everything. And he had good questions about everything. But then he turned to me, and well, I wish he had had all kinds of questions about my work, but he didn't. He said: I want you to know that my departure from libertarianism has been greatly exaggerated. And I said: You know, you don't have to prove anything to me; that isn't on my mind; I'm not worried about that; so whatever you were or whatever you are, I don't care; I'm just enjoying dinner. And he said: No, I want to explain. And I said: No, if you want to explain, please explain. And he said: Okay; so I published this book, Anarchy, State, and Utopia, and then I started thinking about symbolic value and I started thinking about what countries stand for, what they symbolize. And I started thinking that this thing that I had said in Anarchy, State, and Utopia, like if someone wants to sell himself into slavery and it really is his rational, best option, like he can save his daughter's life by selling a kidney, well then why not let him sell a kidney? And maybe it takes more than that. He has to sell himself, his person, into slavery and he says: If that's what it takes to save my daughter-- Russ: I'm in-- Guest: There's no questions on my part, no even sense of self-sacrifice on my part. It's just there's nothing I'd rather do in my life than save my daughter with it; so, I want to sell myself into slavery. Nozick said: If somebody is in that position and wants to do it, who are we to interfere with that person? So, Nozick said: I said that in Anarchy, State, and Utopia. Now fast forward, and I'm thinking about symbolic value. And I'm thinking: countries don't just do things, like defend freedom or not, or secure freedom or not, secure freedom of contract or not. They also stand for things. And at some point, America's supposed to be the country that doesn't just defend freedom. It stands for freedom. And I thought, if this is going to be the country that stands for freedom, allowing the emergence of a class of slaves, that's not a really impressive way of standing for freedom. In fact, it's not a really successful way of standing for freedom. And so he thought, he said: I came to the conclusion that it matters what a country stands for. And so, even though this is, in a truncation of freedom of contract and the sacrosanct status, individual status, of contractors--he said--I came to think there's an importance of standing for freedom; and in view of that I gave up on the idea that people should be allowed to sell themselves into slavery, even voluntary slavery. Just isn't a way of standing for freedom. So, it's out, even when it's the only way for a father to save his daughter's life. Period. It's an unconscionable contract, cannot be enforced. Of course people can say: Well, I'll do whatever you want to, to save my daughter. Of course, they can say that. But that guy can't go to court and sue and say he said he'd do whatever he wants. I want him to be my serf, do these degrading things, whatever. So, that's what Nozick said. That was my conclusion. But then he said: Then this other thing happened: My landlord was Erich Segal, author of Love Story, so I found out that my apartment was rent-controlled. And he'd been raising my rent every year--reasonable, but significant, but my rent had gone up. And then I found out that those rate hikes were illegal. So, I went to them--I said--I realized that I am rent-controlled, so it actually wasn't legitimate. And he said, Erich Segal actually waived a copy of Anarchy, State, and Utopia in my face, and said: You've abdicated the right to complain. And Nozick said: No, I haven't! Segal said: Yes, you have. And Nozick said: You know, I can prove that I haven't abdicated that right. I'll see you in court. He sued him and won. And Erich Segal had to repay the back rent from the rate hike. Russ: And then he got publicity about this. Guest: Yeah. And my colleagues were slapping me on the back and saying: Way to go. And then your stuff came out saying serious reservations about libertarianism. People were saying: You are so smart; I knew you'd come around, grow up; it was just a phase you were going through. And Nozick said: You know, it was a moment of weakness on my part, but it was so nice for people to be slapping me on the back and telling me that they had faith in me and they believed in me. Because they hadn't been saying that for years. And they started welcoming me back into the fold. And you know, God help me, but I just liked to not be vilified for a change. I liked to not be not a pariah in my own department. And so I went along with it. I could have done the snarky thing and said, No, your approval of me is based on a misunderstanding. I could have said that, but I just didn't. I was tired and I just let it go. But he said in fact it was just about slavery. That was my genuine, serious departure from my youthful libertarianism; but, he said, that's about it. Other than that, I haven't changed much. That was my conversation with Bob Nozick. He was delightful, I have to say. We talked about other things as well. I mean, that guy, he could talk. But he was also very interested in everything. He was a great listener as well. He was a delightfully gracious human being. Russ: Well, we were going to talk about Rawls about for about 20 minutes in my mind, and then Nozick for 20, and then the last 20 starting to explore some other ideas related to justice; but I see we've managed to go over an hour; and there's still plenty more we could talk about with regard to Rawls and Nozick. I think we'll stop here. Hope we can come back and address some other issues related to justice and inequality another time.

Posted by Russell Roberts at http://www.econtalk.org/archives/2012/05/schmidtz_on_raw.html.

Taylor on Rules, Discretion, and First Principles

Mon, 30 Apr 2012 06:30:00 -0500

John Taylor of Stanford University's Hoover Institution talks with EconTalk host Russ Roberts about his new book, First Principles: Five Keys to Restoring America's Prosperity. Taylor argues that when economic policy adhere to the right basic principles such as keeping rules rather than using discretion, then the economy thrives. Ignoring these principles, Taylor argues, leads to bad economic outcomes such as recessions, inflation, or high unemployment. Taylor illustrates these ideas with a whirlwind tour of the last half century of American economic policy and history. The focus is on monetary and fiscal policy but Taylor also discusses health care reform and other policy areas. The conversation closes with a look at the likelihood that economic policy will change dramatically after 2012.

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Readings and Links related to this podcast

Podcast Readings HIDE READINGS
About this week's guest: John Taylor's Home page John Taylor's blog About ideas and people mentioned in this podcast: Books: First Principles: Five Keys to Restoring America's Prosperity, by John Taylor at Amazon.com. Articles: Price Controls, by Hugh Rockoff. Concise Encyclopedia of Economics. Phillips Curve, by Kevin D. Hoover. Concise Encyclopedia of Economics. Money Supply, by Anna J. Schwartz. Concise Encyclopedia of Economics. Monetary Policy, by James Tobin. Concise Encyclopedia of Economics. Milton Friedman. Biography. Concise Encyclopedia of Economics. Milton Friedman. Biography. Concise Encyclopedia of Economics. Arthur Burns. Biography. Concise Encyclopedia of Economics. Walter Heller. Biography. Concise Encyclopedia of Economics. James Tobin. Biography. Concise Encyclopedia of Economics. Robert Lucas. Biography. Concise Encyclopedia of Economics. Robert Lucas. Biography. Concise Encyclopedia of Economics. Podcasts, Blogs, and Video: Larry Summers and John Taylor Debate. April 4, 2012. Video, Stanford Institute for Economic Policy Research. Meltzer on the Fed, Money, and Gold. EconTalk podcast. Friedman on Capitalism and Freedom. EconTalk podcast. George Shultz on Economics, Human Rights and the Fall of the Soviet Union. EconTalk podcast. Other EconTalk episodes with John Taylor. EconTalk podcast.

Podcast Readings

About this week's guest:

About ideas and people mentioned in this podcast:

Books:

First Principles: Five Keys to Restoring America's Prosperity, by John Taylor at Amazon.com.

Articles:

Price Controls, by Hugh Rockoff. Concise Encyclopedia of Economics.
Phillips Curve, by Kevin D. Hoover. Concise Encyclopedia of Economics.
Money Supply, by Anna J. Schwartz. Concise Encyclopedia of Economics.
Monetary Policy, by James Tobin. Concise Encyclopedia of Economics.
Milton Friedman. Biography. Concise Encyclopedia of Economics.
Milton Friedman. Biography. Concise Encyclopedia of Economics.
Arthur Burns. Biography. Concise Encyclopedia of Economics.
Walter Heller. Biography. Concise Encyclopedia of Economics.
James Tobin. Biography. Concise Encyclopedia of Economics.
Robert Lucas. Biography. Concise Encyclopedia of Economics.
Robert Lucas. Biography. Concise Encyclopedia of Economics.

Podcasts, Blogs, and Video:

Larry Summers and John Taylor Debate. April 4, 2012. Video, Stanford Institute for Economic Policy Research.
Meltzer on the Fed, Money, and Gold. EconTalk podcast.
Friedman on Capitalism and Freedom. EconTalk podcast.
George Shultz on Economics, Human Rights and the Fall of the Soviet Union. EconTalk podcast.
Other EconTalk episodes with John Taylor. EconTalk podcast.

Highlights

Time	Podcast Highlights HIDE HIGHLIGHTS
0:36	Intro. [Recording date: April 17, 2012.] Russ: Our topic today is the ideas in your new book, First Principles. Let's start with the 5 keys that you identify as being important for prosperity. Guest: They all center around the idea of economic freedom, which is by definition a situation where people can buy what they want, sell what they want, work where they want, help people in the way they think is best. But that's within a framework that includes these five keys. One is that the policy be predictable: that it remain within a predictable policy framework. Second is that there is an emphasis on the rule of law, so you know what the law is actually stating. Third is that the emphasis is on markets. And from an economist's perspective, markets are a wonderful way to get decisions made in an efficient way. They also provide the fourth idea, which is incentives. Incentives should be the focus of any economic freedom framework. And then finally, the fifth is a limited role for government, a specified role for government, which delineates what government should do and what markets should do. Russ: Your book traces the history of various periods of relative intervention and relative freedom. And we'll get into that in a minute. But I want to start by asking you a question about those 5 principles. Do you think that any of your ideological or interventionist opponents--people who are more interventionist than you are--would disagree with any of those five? Guest: Yes. I think, for example, maybe predictability is not that important when there is an emergency; you've just got to do what you've got to do; anything goes. There's clearly differences on scope of government and what the role of government should be. So, I think there's quite a difference. And it's just been the last few weeks I've had some, I think, good debates with Larry Summers, who has a more interventionist approach. You can see that in these discussions. So, he would put less emphasis on them, I believe. That's a way to put it. Not that you wouldn't think the rule of law is important, or predictability is important. It's how much emphasis you put on those. Russ: One of the ones you mention, the temporary versus permanent, strikes me as, in principle at least, an idea that could be somewhat immune from ideological or philosophical differences. You'd think that most economists would favor permanent interventions versus temporary ones simply because planning takes place over more than tomorrow. The future matters a lot and if you know what the rules of the game are and you think that they are going to be the same for a while, you are more likely to act than if you are uncertain about what the rules of the game are going to be. And yet it seems that despite that seemingly obvious fact of human nature and decision-making, I see a big difference between interventionists' willingness to impose temporary, short-run interventions of unknown duration. Is that a fair assessment of people who disagree with you? Guest: Yes. Russ: And why? Guest: The idea here is we all know from economics that people like to have more certainty about what policy will be. They can do their planning themselves. But I think people who emphasize that, well, that's maybe not that important, are going to stress the emergency. I mean, take the bailouts, for example. You've got to go in and do the bailout even though you are setting up a situation with less predictability and more moral hazard. They would say: We can deal with that later. A lot of it has to do with that kind of thinking. And there is a difference of opinion about that. For me, one of the reasons to do this book is just to go through history and realize how harmful a lot of those interventions have been. Not everyone, of course, but the deviations from the predictability--we've seen it in the past and it didn't work, and when policy has been more predictable, things have been much better. So, to me the evidence is just so clear. And it can be explained to people using just history; it doesn't have to be a lot of economics. But the reason, to go back to your question, is that some people think you just have to go in and do it, and not worry about the implications of that for next year or the following year. Russ: There is definitely political pressure, which we'll talk about.
6:05	Russ: Let's turn to that history, because I think it's a fascinating part of the book. I should mention to listeners: the book is short. I think it's about 200 pages. But it's a short 200 pages. It's a wonderful sketch of recent economic history plus some policy recommendations, as well as a laying out of the principles. And I found the history part to be fascinating because you were either in Washington at the time in some role, not always as the decisive role, but certainly in some role, so you had contact with the people who were making the decisions; or you have as colleagues now people who are very much involved in making these decisions. And one of your themes is the virtue of rules over discretion; and then the political forces that sometimes intervene. So, I thought we'd go through some of the episodes you talked about in the book and talk about that mix of rules versus discretion, which is a big underlying theme of the book, and also the political influence that sometimes affected policy instead of the economics. So, let's go back, well before some of our listeners were born--but not all--to the Nixon Administration. Which was in some dimensions a market oriented, free market oriented set of policy makers in that administration. And yet Nixon imposed probably the most obviously awful policy change for years around that time, which was the example of wage and price controls. How did that happen? Talk about what actually did happen and why it was important and how it happened. Guest: Well, Nixon came in with a more market-oriented philosophy. He had people like Milton Friedman and George Schultz advising him. And they were quite excited that this was going to get away from the more Keynesian, less market-oriented things that began in the late 1960s and really took the form of wage- and price-guidelines, temporary interventions; monetary policy got quite active. And the hope was that this would be a change. And Milton Friedman, for example, wrote in Newsweek in early 1971 that this is going to be great; we are moving away from all the excessive fine-tuning; we're going to rely more on markets; and it's going to be a good decade. And then what happened is Nixon was persuaded that it was going to take too long. And Schultz would later talk about it as the economist's lag is the politician's nightmare. And so the politics really got in the way; and Nixon said: I'm not going to wait. I'm not going to just let monetary policy get inflation down; I'm not going to just sit back. I'm going to do the kind of things that got popular in the 1960s with the more Keynesian approach. And then in August 1971 imposed the wage and price freeze. And of course it led people like Milton Friedman to really withdraw that article he wrote earlier in the year and say this is the worst piece I've ever written. Which he did; and came back in the way someone who was candidly assessing it would have to do. And so, as a result we continued with this, I would call it, interventionist policy--less focus on markets and unpredictability, less rule of law. All of those things. Which took a long time to get rid of it. It was another decade. Russ: And the wage-price controls, how did those manage to get approved, despite the quality of some of Nixon's advisers? Guest: Well, Nixon had other advisers who were less concerned about the principles. John Connally, for example over at the Treasury. You asked earlier: Does everyone believe in the principles? And I think you were asking about economists. But clearly some people don't think these principles are important. They don't think about economics that much; they don't think markets are that important. And so as a result they went away from that direction. But I think that it was political; the idea that it was going to take some time to get inflation down. And they didn't want to wait. They were worried about the election coming up. And so they went this more shortcut route, which was popular at the time, by the way. When the Freeze was announced, business liked it; labor liked it. It didn't take too long before people realized what a bad idea it was; but at the time, it was remarkably popular. Russ: So, the 1970s didn't turn out quite as cheery as Friedman had hoped, if Nixon had stayed on the path. Although we have to mention that the 1960s had very good growth rates. The mid-1960s, which were the time of the Kennedy Administration and the Johnson Administration, before Nixon came in--those 8 years, the economic advisers were very Keynesian in flavor. They were fine-tuners. They also were big spenders--not as economists; but Johnson clearly expanded the size of government through the Great Society was transfer payments, not so much spending on real resources; but still it increased the tax burden. And the economy did very well. You would argue, though, that that laid the seeds for the problems that came later. Guest: Absolutely. And also there were things in that period. The tax cut was a permanent reduction in marginal rates; that was a good thing. Russ: You are talking about the Kennedy tax cut. Guest: Yeah, the Kennedy-Johnson tax cuts. They basically were good. They were permanent. They were like a counterexample to all the other interventionism that began. And by the way, of course, you did have monetary policy at that point, at the urging of the Administration, became much more active. And William Martin, the Chairman of the Fed at the time, began to have a more inflationary policy. In fact, inflation began to pick up around 1965, 1966; you can see that noticeably in the data. And so that was a change which is related. To me, what is remarkable as you go through this history is all policies tend to move together. You got more interventionist on the fiscal side; you'd argue that you needed discretion on the monetary side. And then you mentioned the intervention of the government in the health care system expanded quite a bit at that point in time. And so all these things moved together; and I find that's one of the most remarkable things about the history. It's not just fiscal policy; not just monetary policy. They move together. Russ: Well, certainly a lot of the people in power at that time were optimistic and enjoyed intervening, so it would be beyond just one area. Guest: There's an important question about when you are in a position of responsibility in government the urge to intervene is there. There is a tendency to do something. And it's very real. The hardest, the right thing, is not to take a specific action; but you've got a good policy in place and you stick with it. One of the most difficult things in implementing these principles, even the people that believe in them firmly is: There's so many pressures, temptations, political and otherwise, to do something and intervene in ways that are inconsistent with the principles; and various reasons and excuses to do it. Sometimes they are a compromise, you know--you do have to run a government and people might disagree with you, so there will be decisions made which look like they are deviating from the principles but maybe for other reasons. And I go through a number of those examples. There was a temporary tax rebate in the Ford Administration. Not the kind of thing that his Chairman of the Council of Economic Advisers (CEA), Alan Greenspan, would have liked, but he went along with that idea; hopefully in exchange would be reduced spending. But it didn't quite work out that way. I like the examples you give of Greenspan--mainly because of his intellectual past and his relationship with Ayn Rand, he's viewed as this near-anarchist. But when he got near Washington, D.C., his rhetoric didn't quite match his actions. And I have talked in the past about his support, say, of the Mexican rescue of 1995, which he testified in front of Congress that that was a bad idea, but had to be done anyway. And similarly, many, many times he deviated from what we would call free market principles. In this case he was more of a Keynesian than he perhaps felt in his heart, endorsing a temporary rebate.
16:20	Russ: But that was not the low point of the Ford Administration's economic policy. That would have to be the Whip Inflation Now Campaign. And you discuss the speech that Ford made to announce that program. Talk about the program and the speech and the economic policy behind the scenes. Guest: This is a case where the Economic Advisers were not enthusiastic, including Greenspan, because it was harking back to wage and price guidelines and controls. But the program was called Whip Inflation Now. It was really a hope that somehow people would cooperatively, voluntarily reduce inflation, as a matter of just a national mission. Russ: Patriotism. Guest: Yeah. In retrospect it just sounds so strange. But President Ford went before a joint session of Congress, with his pin, his Whip Inflation Now pin-- Russ: on his lapel-- Guest: and pleaded with people. And in retrospect it is a very unusual kind of policy. It's certainly an example of how policy had moved in a direction way against, in this case, sensible rules-based monetary policy, less reliance on markets, less faith in markets. And you can see it so clearly. There are so many examples of this. Actually, you didn't ask about this, but Arthur Burns is another one, a person who--good economist. He's the mentor of Milton Friedman. If you asked who influenced you, he'll say: Arthur Burns who was my first teacher as an undergraduate. And here's a guy who, under Nixon, and then as Fed Chairman under Nixon, went around saying markets don't work, we need wage and price controls. So, amazing things happen. That's why these principles are so important. People should demand that their public officials should understand them and then follow them. Because there's temptations to move away from them. Russ: Burns, at the time, was Chair of the Fed, correct? Guest: Yes. Russ: How long was he Chair? Guest: About 8 years, through the 1970s. Burns replaced Martin. Appointed by Nixon to the Fed, and then continued until G. William Miller was appointed by Carter; and then he didn't last very long, until Paul Volker came in. The Volker appointment is really moving back to sensible policy; and that gets close to the Reagan Administration, which is a whole other enormous period of interest. Russ: We'll come to that in a second. But I want to stick with Martin and Burns. Martin was the Chair under Johnson. And if I remember correctly, when I interviewed Allan Meltzer about his history at the Fed, and you certainly second this point, Martin was very eager to keep President Johnson happy and liberalize the monetary expansion at Johnson's request in trying to finance the war in Vietnam rather than raising taxes. Is that correct? He did definitely move to an easier monetary policy compared to the 1950s when he was Chairman, and the early 1960s. It was partly because he liked the idea of cooperating with the Administration; his view of monetary independence did not preclude that. And you are right--Allan Meltzer writes about that quite persuasively in his book. What I observed here is that if you looked at the numbers you definitely see the impact of monetary policy, inflation starting to pick up. And also, if you go back and read, there's a very interesting document, the 1962 Economic Report of the President--that was the first Report with President Kennedy, and Walter Heller was Chairman; Jim Tobin was on the Council. It's a beautifully written, persuasive document of why you needed to have a discretionary monetary policy. So, that was part of the persuasion, I believe. It wasn't purely political; it was making an argument on economic grounds. An incorrect argument, I believe. But that was what was affecting policy. Interestingly enough, in 1962 was the same year that Milton Friedman wrote Capitalism and Freedom, which is a completely different philosophy than was being put forth by the 1962 Economic Report of the President. But of course the Economic Report of the President was what prevailed in terms of policy. Russ: And Capitalism and Freedom of course was at that point, and Milton's voice, was very much a voice in the wilderness. Guest: Yes. Russ: One of the things I think is so admirable and inspirational about Milton is that he wrote that book; it didn't make very much of a splash in the academic world; it was published by the U. of Chicago at a time when academic presses were not even as mainstream as they are now. So it was sort of a philosophical book in some dimension. And it just sat there. People read it. And over time, many of the ideas in that book became, instead of being viewed as crazy or kooky or bizarre, became mainstream; and many of them were adopted. Although when I interviewed Milton he was distressed to think how many weren't adopted. But that's his perspective. Good will. Guest: It took a while, but eventually it caught on. Actually, my view, we've gone back again a little bit at this point, which is distressing. Russ: Yeah, but I think the good news is there's always hope. Think how distressing it must have been to be Milton Friedman in 1963, 1964, and 1965 and see people not paying attention to your ideas; and in policy, ignoring them totally, seemingly on a very unhealthy path. And yet, the pendulum swings back now. Guest: And then also, being positive because you've got someone in--Nixon--who you think is going to change things and then completely disappointing you.
23:01	Russ: So, we get to--Nixon leaves office in disgrace in 1973, I think. We get Ford. Ford's policy is inept. And then he's followed by equally or perhaps more inept policy, which is the Carter Administration. What did the Carter Administration do that was so unhealthy economically? Guest: They now continued with enthusiasm the fiscal interventions; there was a program to give grants to the states for infrastructure, so that that would stimulate the economy. First-time home-buyers' policy, temporary thing to stimulate the economy; jobs credit of some kind. It was very interventionist-Keynesian, if you like the word; more so than Ford. At least the Ford advisers were uncomfortable with it. Charlie Schultz came in and replaced Greenspan as Chairman of the CEA, a very fine man, but he had, in my view, thought about this intervention too much. I was there at the CEA on the staff. Both Greenspan and Schultz supported Carter, and you could see the change coming in. So, they continued with it, and it didn't work; also continued with the monetary policy, which even got worse at this point. Burns was staying on at the Fed. And that continued for four years; now you really had a terrible economy. Confidence was dropping, unemployment rising, inflation rising. Eventually people saw it wasn't working. Carter's own advisers would write pieces later saying those policies didn't work. Annette G-- [?] analyzed the grants to the states and shows that they didn't work. So, we got away from those things. And fortunately things got better. Russ: And of course those assessments turned out to be temporary, not permanent, about the effectiveness of state intervention or temporary tax rebates or special credits for home-buying. Guest: We came back to them. In a sense people forgot. Or just the pressures of something else took over. It's disappointing from an economist's perspective that these studies were there and people just forgot about them or ignored them 30 years later. Russ: When you talk about monetary policy getting worse in the mid- to late 1970s, under Burns in the Carter Administration, how would you quantify that? What would be the measure you would use? If I said to you: Show me why that wasn't so good, what would be the--how would you tell that story? Guest: It was a go-stop policy. The Fed would try to reduce unemployment by stimulating money growth. Other ways to measure--you can look at interest rate rules. Interest rate rules were way off in terms of what was a sensible policy. Too low, if you like. And then they'd see inflation was picking up, and so they'd step on the brakes and you'd have a recession. Very frequent recessions, and at each step, inflation would rise. By the end of this period and going into the early 1980s, because it took some while to undo it, unemployment was in double digits, inflation was in double digits, interest rates were in double digits; and economic growth--productivity growth--had by that time begun to slow substantially. So, there's a lot of evidence of bad times and I think a lot of evidence that monetary policy was not rules-based. It was short-run oriented, highly discretionary. And in terms of monetary policy, there's many indicators to show that, including these interest rate rules. Which I talk about in the book. And we get to the end of the 1970s, where we have stagflation--we have simultaneous inflation and stagnation; the economy is either in recession but even when it's growing, inflation stays high. And this was of course deemed to be impossible by some variations of Keynesianism. There was supposed to be a negative relationship between inflation and unemployment. In fact, I still hear people tell me that it's obvious that when the government prints money, it has to create jobs, because people spend it and we know spending creates jobs. And yet both Zimbabwe, and the United States at the end of the 1970s, managed to have both high inflation and high unemployment. And this became a big challenge in the academic literature, to the Keynesian model. Guest: Interestingly, in 1968, Milton Friedman in his Presidential Address to the American Economic Association outlined why it is not going to reduce unemployment in any sustained way to have higher inflation or higher money growth. That's also a really beautiful paper, speech. Russ: Yeah, it's a classic. Guest: And by the way, there's only 3 pages of that talk which are on the inflation-unemployment issue. The major part of that talk is to urge a steady-as-you-go monetary policy. Because Milton had shown how powerful monetary policy can be, in terms of causing good and bad, and he was concerned that as people realized that, we were going move to one of these go-stop discretionary policies. So the main point of that speech was: Don't do that. Do this more steady as you go. And it's exactly the opposite of what happened. It took a decade, 12 years, to get to the right approach, that he recommended.
29:05	Russ: So, Volker, who is appointed by Carter--and you have to point out also that even though the Carter Administration was very interventionist in many ways, it also did, under Alfred Kahn, sow the seeds of deregulation, which continued under Reagan. But it started under Carter. In all these stories there's a mix of good and bad, depending on your philosophy. But Volker is Chair of the Fed under Carter; stays on under Reagan; and follows what is a very politically challenging monetary policy. What was your Schultz quote--now we are back to George Schultz--an economist's lag is a politician's nightmare. So, that took place in the 1980s. Reagan had to endure--the 1982 midterm elections an extremely unhealthy economy, partly created by Volker's attempt to ring inflation out of the system. Correct? Guest: Yes. Absolutely. The times then, and when Reagan came in--you are right to point out that some of these decisions were made under President Carter. He appointed Volker, after all. But I think here, the fact that Reagan supported Volker during these very tough times is very significant. Very unusual for a President to do that. He basically didn't try to encourage the Fed to work to get unemployment down. He knew that they were going to do the right thing by reducing inflation. And so I think here's a case where the philosophy of the Administration helped monetary policy. Unlike back in Johnson-Nixon, where it hurt the policy. It's really monetary policy in this case following, I think, a much better rules-based policy under Volker, focused on inflation; that was what he needed to do, and it was tough. But he had support from the White House. Russ: Now, I'm pretty sure that the LBJ-Martin confrontations took place in the White House. That LBJ had Martin in his office, and berated him. That's my memory. Maybe it's wrong. Do you know how much Volker and Reagan talked face-to-face during this time period, say 1980-1983, when there would normally be political pressure on Volker to ease up a little bit? Guest: Very little, in the sense of--certainly no sense of telling him to ease up. It was just the opposite. If not now, when, would be the kind of things Reagan would be talking about. And also, remember, here you have some very important advisers with Reagan, including Friedman, including Schultz, and including Tom Sowell and Arthur Laffer. All these people who had strong market sense. And what you really do to get the economy moving again. And he also appointed some Chicago Ph.D.s over to the Treasury--Beryl Sprinkel, for example, had that more of a monetarist approach to him, and the CEA had Murray Weidenbaum; and Bill Poole came later. Niskanen. People who were quite strong on what needed to be done. And if you stuck with it. And Reagan had outside advisers through this whole period which encouraged him to stick to this. So it's an example where the principles that were held by Reagan--he came in that way; he would give many radio addresses and speeches with down-home stories describing why these same principles that I've tried to articulate with these five points, basically Reagan talked about those kinds of things in his own way and was firmly committed to them; and surrounded himself by people who had the same basic orientation. And that's what it took. Russ: I have a feeling--this is just pop psychology--but it may have been beneficial that Reagan, like Milton Friedman, had spent a lot of time in the wilderness. It was a different wilderness, a political wilderness. But had come to the Presidency later in his life and after a long time of trying to uphold what he thought was the right thing; and as you say, writing and speaking on it. And I think it was both harder for him to walk away from those principles and less appealing to give in to the short run. Though, having said that, of course he did many things that were not particularly free market. He expanded the size of government; he didn't cut spending successfully; he put voluntary quotas on Japanese cars. So he had his own deviations as well. Guest: When you look at the history, you've got to make some judgment calls about what are the important things; and so here I would say: he did remove the last vestiges of the wage and price controls on energy. He did not have stimulus packages. He encouraged the Fed to focus on monetary policy which I would call more rules-based. And certainly in terms of emphasizing markets and less regulation, he certainly continued with the things that Carter began with. So, it is a judgment. And the Reagan tax cuts, although sometimes they are advertised as being based on a Keynesian idea, was not Keynesian. It was permanent. It was not temporary-targeted stuff. And that was, I think, large in assessing it. But you are right--it's not perfect. You have to get your principles in there as best you can. But in this case there's such a contrast with the 1970s that it seems to me--and it went beyond Reagan. I think it went into President Bush 41, and I think in many respects until Clinton. Until recently.
35:31	Russ: So, I'd love to keep talking about the history; I'd like to get to some of the policy recommendations. Just one closing point: I want to come back to this issue of temporary versus permanent you've alluded to. When you trace the whole history of these last three and a half decades or so, going back to either Kennedy, Johnson, or Nixon, starting from there and coming forward, there's a striking number of temporary interventions--tax breaks, tax rebates rather than rate cuts, that are by definition one-time; ad hoc programs such as the home-buying program, cash-for-clunkers in recent years. And the academic support for these programs--as you say, many times there was enthusiasm for these programs, sometimes from economists of various stripes. But there's really remarkably little academic support for these programs, especially when we take them one by one. So, these principles you are talking about--there's a lot of general agreement but a lot of particular disagreement. And they are complicated, so there are judgment calls; it's sometimes hard to assess; inevitably there are going to be issues of confirmation bias and cherry-picking; you can't measure these things precisely. But we are better at measuring individual programs with a little more precision. And it seems to me--and maybe it's just my bias--but there's remarkably little evidence to support any of these programs, from left or right. And yet they keep happening. Guest: You're right. That's the thing--you have these broad trends; you compare the 1970s and the 1980s and 1990s; compare the 1990s and now; that is all consistent with these principles. But then in addition you have, when you look individually--cask-for-clunkers or whatever it happens to be--you see that at least it's controversial. I think they don't work, but there's huge controversy about it, and we're still doing it. Amazing to me--a very famous paper I refer to in my book is by Tom Sargent and Bob Lucas, who later won Nobel Prizes. In 1978 they wrote this paper, "After Keynesian Macroeconomics." It was a devastating critique of those kinds of policies. And it made a difference; and at least we moved away from them. And then here we come back now and we're doing it all again as if we completely forgot. So, there's something else going on here besides the economics research. That's for sure. And maybe what you need to do is just to have a broader understanding of this beyond the equations and the econometrics, just to look at the history. Which is what I'm trying to do here. Russ: You mention a paper I think by Alan Blinder, that was--do you remember that paper? Guest: Sure. First of all, he showed that the wage-price freeze and those controls just didn't do anything lasting; maybe made things worse. So that intervention didn't work. And he also worked on the small effects of these temporary rebates. So there's two things that he looked at. And even after that--it's small but at least it's something, would be the kind of thing you would hear later; he certainly has been supportive of the Keynesian interventions of recent years. Russ: For sure. Before we move on to policy recommendations, I have to raise a question that crosses my mind from time to time. I don't have strong empirical evidence for it, but there's some casual empirical evidence. And that is the temptation to say: It's all monetary policy. All of this other discussion about fiscal mistakes or fiscal stimulus or various interventions: If you get the monetary policy right, things go well; if you don't, it's over. I'm a big fan of the argument that moral hazard created by past bailouts created the current mess we are in; but I am open to the possibility--and I probably asked you this question before--that the whole thing is bad monetary policy. Guest: Well, I certainly emphasize that a lot. It's I think a major factor leading to the financial crisis and also the slow recovery now. Obviously it was a big factor of the problems in the 1970s. It's actually interesting--it is probably the most difficult, arcane part of the whole discussion to explain and talk about. People--regulation, temporary tax cuts, things like that, you can talk about and explain, but monetary policy, you suddenly get into an area where, I think, it becomes more difficult to explain to people. Politicians tend to get a little less interested in it. But it is probably the most important of all. Russ: I think it's not only more difficult to explain; I think it's more difficult to understand. I think that's part of the reason it's more difficult to explain. It is somewhat mysterious. We are in this strange time now where we have this unprecedented Fed intervention, and yet despite the enormous creation of reserves through the Fed on the balance sheet in the banks--and you talk about this in the book--it hasn't done very much. Partly because they've encouraged it somewhat to sit on the books via paying interest on it. I ask this every time--it continues to mystify me--and I'll ask you again: Why do you think the Fed carried out this unprecedented intervention and yet watched and encouraged, if anything, its lack of impact? Guest: Well, they think it's had impact on the purchasing of the mortgages or the medium-term Treasuries. They focused more on what they did with the money rather than creation of the money. So they would argue that it would lower mortgage rates, it would lower medium-term Treasury rates other than what they would be otherwise. That is the rationale for it, I think, for the most part on their side. And they think that the money side of the equation, the balance sheet, that they'll be able to undo that in time, before it causes problems. And many people, including me, have doubts about that. Russ: Today is April 17, 2012, and I just got an email about a news article in the Wall Street Journal and MSNBC's coverage of this issue, that the Fed has finally released its transcripts from the 2008 key meetings, of which--I think it's a 5,208 page transcript--and virtually all policy discussion has been, as they say, redacted. Which is a fancy word for blacked out and unreadable to the general public. What's left is: How are you today? Okay; I'm doing fine. So that part, they didn't black out. It will be interesting; I assume some day we will get to hear at least what they said were the justifications for some of the policies. Guest: It's going to be very important for people to go through that, and I think investigative reporting can start a little earlier than that. But it's so important to get that straight. Russ: I would encourage members of the Federal Reserve to talk publically off the record. But that's not really my area.
43:34	Russ: Let's move on. We've talked on this show before about the Taylor Rule and your particular study and recommendations for getting discretion out of monetary policy and having it be more rule-based. What you talk about in the book that I think is novel, besides going over some of the basics of that, which are important, is you try to give an idea of how one might actually implement a more rule-based monetary policy. So, talk about--other than the idea that certainly less discretion is a good idea, how could you hold the Fed's feet to the fire? Guest: What I think is most important is that the Congress ask the Fed to describe its strategy. And then, if the Fed decides to deviate from it, they must explain why. Those are the two parts. Explaining what it is, and then if they decide to deviate, to explain why. I think that would go an enormous way toward having a more rules-based policy. There is very little information about what really the strategy is that's being used now, for example. The quantitative easings are very hard to describe. But even interest rate policy. So, those are the two steps. In the past the Fed had to do that with respect to money growth--it had to describe its plans and then describe if it deviated. That was taken out of the Federal Reserve Act in the year 2000. So, my proposal is to reinsert that, but in a more modern way, where the Fed itself would have--it would have, as of course it should have--itself, the decision to make about what the policy is, what the strategy is for setting interest rates, what they are actually going to do under certain circumstances. It's their responsibility to do that. You don't want the Congress to micromanage along those lines. But you do want them to work it out and describe what it is. That's my main proposal. I hope something along those lines happens. Russ: Given the political temptations we've talked about, one way to look at this change would be just to introduce just a very modest amount of accountability that was lost in 2000. You talk in the book, and it's quite interesting because you of course have a personal relationship with Alan Greenspan. You know him, you talk to him. You talk in the book about his deviation from past steady-as-you-go monetary policy, and his ventures of the 2001-2003 period, 2003-2005. And one has to wonder, what role that 2000 change in accountability had in giving him the freedom to do that. Guest: It certainly could have been a factor. I think another thing that I would point out, and talk about in the book, is: The record was quite good for the 1980s and 1990s, until this period. And Greenspan succeeded Volker; and I think it was a situation where he had to find out how to run monetary policy in this low-inflation environment. And he made the 1994-1995 interest rate increase, that was very well-timed. And other things. So, I think what happened in this 2003, 2004, 2005 period is, they actually tried to do better. Perfect, innovate; becomes a good problem. And they deviated from what was working in order, I think, to try to make it work even better. They thought that keeping rates low extra-long would reduce some downside risks; there's various ways to put it. I think that's what happened. And perhaps it would have been harder if there were these procedures in place where they had to report their strategy. I think it would have been. But the motivations for doing it are complex. And also if you talk to different members [of the Federal Reserve Board of Governors] around at the time, they have different views about what happened. Ben Bernanke was an influential member of the Board of Governors at the time. He has different views about why they made these decisions. Russ: Have you heard or read anything about why that 2000 change happened? Guest: Oh, it's very simple. They had focused on money growth. And money growth itself had become harder to measure, because of the different ways to define money. There had been alternatives, with the credit card development and other ways to make payments. And so they just felt that they were spending so much time stating what the growth rates would be and then they'd find out they were off and had to explain why. So, I think it made sense to at least change them. They just removed them. I think in retrospect it would have been better to replace them with a better way to describe the strategy. But the reason they took them out was pretty clear. I don't think there was really very much complaining about that at the time. I certainly didn't complain about it. Russ: Well, it seems--on one level it seems reasonable. On another level it seems kind of shocking. Well, it's really hard for me to tell you, it's really hard for me to set my policy and then to be accountable. So, let's not have to describe what I'm doing. That does make it easier. It does solve the difficulty problem. It's strange. Guest: It's a good point.
49:20	Russ: Let's move on to some specifics, moving forward. You have a famous chart in the book, which I think you reprint from a Wall Street Journal op ed that you wrote, that has an ominous picture of the ratio of the national debt to GDP. Where it's basically relatively flat. A few bumps, and it takes off like a rocket. Unfortunately, much of which is forecasted debt, because of entitlement promises. Talk about that. Is the national debt, the level of it, a threat to our prosperity? And why? Guest: Absolutely. Especially if it goes along the lines of that chart, which is the GDP ratio going above 100, going above 200, above 300. So interest rate payments become the whole budget. So, that is not sustainable. But that's what current law is. So, it is a real threat. And it's got to be fixed. I think in terms of fiscal policy, that should be the main focus at this point. And what I try to do is say: Well, you can fix this, in some sense, in a very simple way: Just bring spending as a share of GDP back to where it was before the crisis of 2007. That would be 19.5% of GDP. You do that in a gradual way. I kind of outline how that could occur. It's not austerity by any stretch of the imagination. Russ: Oh, come on, John. Guest: Undo this explosion. Russ: John, 19%, there would be people starving in the street. People dying. Mass starvation of poor people. Children in rags. Nineteen and a half percent--you remember? 2007 was like the Middle Ages. Guest: Well, that's what we are led to believe. But I think common sense, Russ, which you are espousing here sensibly, suggests that can't be true. 2007. That's what I try to explain. And people--I think people understand that. They just say: Hey, why is this so hard? Why aren't we getting to this, even faster than what I propose? Russ: So, the big debate we are going to hear about this summer, I suspect--we are already hearing it now--is, yes, we have a budgetary problem, and the common sense view is, well, we have two tools to close the gap. We have spending cuts and tax increases. So, a wise, middle-of-the-road approach is to use both. Why not? Why not use both? You argue for much larger spending cuts rather than tax revenue increases. Why? Guest: Well, actually, remember, I want to bring spending to, as a whole, to 2007 levels as a share of GDP. And by the way, that's growth, of course, since GDP has been higher. So, I use the word "cut" in a way that the growth rate is slower than it otherwise would be. But the reason is, we've now been exploding. Government spending is expected to explode on entitlements--largely the health care. Russ: For purely demographic reasons. It's not ideological reasons. Guest: I think it's not just demographic, because some of these entitlements are growing in real terms for beneficiary. Like Social Security is growing in real terms for beneficiary. A 45-year old now is projected to get a lot more under current law under real terms, inflation-adjusted real terms, than a 55-year old. So, it's more than the demographics. And that's why it shouldn't be that hard to fix. Health care is not just demographics. It's projections of rising costs of health care. So, that's why I think it's mainly on the spending side. And I argue it's completely on the spending side, because as a matter of just arithmetic, so much of it is that way. And so if you could just hold the growth rate down so we don't expand as a share of GDP, you can do without increasing taxes. And of course that's better, for going back to some of my principles, for incentives for the role of government, all these things, to keep tax rates at a level at they were roughly, in 2007 or even 2000. Russ: I don't think we can measure it, but the uncertainty--and we've talked already about uncertainty, the temporary versus the permanent--but certainty about how we are going to resolve this issue is a political reality. Because there is going to be a debate. We don't know how that debate is going to turn out. That certainly has to affect the state of the economy now. Guest: I think it is. I think it is a real drag. We do not know how this exploding debt is going to get resolved. And I believe if it is massive tax increases--I don't think that's likely, quite frankly--I just think we are kind of debating at the edges here at how much the tax increase will be. I think the right thing is to focus on the spending growth, stopping the explosion. And I think that will also, by the way if that's done well, will make people's lives better. The health care reforms' using markets more, decentralizing decisions to the states on Medicaid for example, will make those programs work better. So that should be a positive, not a negative. Not austerity. Russ: One man's austerity is another man's growing government. No one is actually--maybe other than Ron Paul--I don't think anyone has proposed anything like austerity. And we certainly haven't practiced it. And yet certainly austerity is the fault of, is causing the slow recovery. Just the thought of it is enough to discourage economic activity. Which could be true, of course. Future expectations do matter. But I don't think there is any much of a prospect of it actually happening.
55:38	Russ: Let's talk about health care reform. We don't know what's going to happen to Obamacare. It may survive its judicial Supreme Court test; and it may survive the next election. But, it may not. If it did not, and if there was an opportunity for an alternative, what kind of alternatives do you think could be put in place that would slow the growth of health care spending, keep the size of government down? Personally, I'd like to see Medicaid, Medicare phased out. But you are more of a centrist than I am on that. So, how would you move toward an improved budgetary picture? Guest: On Medicare, both sides want to keep the growth rate from exploding. One side, and this would be more the House Republicans at this point, want to do that by providing a certain amount of funds over time and then having people decide what kind of health care insurance they buy, in Medicare. So it decentralizes the decisions; they are not made in Washington, but a total amount of money is clear. The other side is the decisions about how spendings are made are controlled in Washington, but effectively price controls and decisions on what are appropriate care. And so I think, in this case, again going back to these principles, again going back to markets and incentives, the first approach is going to work better. On Medicaid, moving the decisions to the states makes a lot of sense. You get better performing, lower costs, as a result of that. Then on the private sector side, or sort of non-Medicare, non-Medicaid, which is a big part of Obamacare, you certainly could save a lot by allowing insurance to be purchased across state lines. I thought there is still a lot to do in reform, on the malpractice, legal side of things. I think also providing deductibility for insurance or other medical expenses outside of the employer would help the coverage quite a bit. So, I think there's quite a bit to do to keep costs down and to provide better medical care without putting 16 million more people on Medicaid, which is what the current proposal is doing. A lot of people will think you do better uninsured than on current Medicaid. So there are a lot of problems with it. But the kind of thing I just outlined is an alternative which could be quite workable. But this is going to depend on the election, of course.
58:26	Russ: In your book, I want to go back to an historical episode you mentioned that we've not talked about, which was, in advance of Reagan becoming President, a number of economists got together and wrote a document encouraging various policies. It's hard to be optimistic about such an effort today, mainly because the likely Republican front runner, the likely nominee, Mitt Romney, does not have a history of adherence to these principles the way Ronald Reagan did, at least on paper, through his own speeches. What's your feeling about where we are headed? And my view, by the way, is: I'm not sure how important it is who wins the next election. It will matter, but it seems to me that whoever wins, Democrat or Republican, will face some of these constraints regardless of their professed philosophy. Guest: I think the memo you are referring to was written just after the election in 1980. Reagan's advisers wrote him a relatively short memo, about 20 pages, outlining what they thought would be good for policy--tax policy, budget, regulation, and monetary for big issues. And they did stress a lot of these principles that Reagan had before, which I'm trying to articulate in this book. It was a very well done piece of work. I don't see why that couldn't happen again. I don't see why a platform along those lines couldn't happen. I think it's very promising to me at least from this perspective that there is this House budget out there that has some of these principles in it, and so that could be part of the debate. To the extent that the nominee, Governor Romney, is close to those and articulates those and has already begun to do that--he recently gave a good speech along these lines on so-called economic freedom. So, I think that the message here--by the way, I think the message I outline in this book is not partisan. These principles, they work. And regardless of party, you should be trying to elect people that adhere to the principles and know how to deliver them. And it's not partisan in a political sense of the word; and in fact historically, you just go back to what we talked about in this show. In the late 1960s and 1970s you had Johnson, Nixon, Ford, Carter--both political parties. More recently, in this middle period, you had Reagan, Bush 41, and Clinton. And now, toward the end of the Bush 43 Administration and Obama, you have--don't know exactly when it happened, but it's certainly different. So, I think if people recognize this is so important to get right and just get the right people in there, that we can make these changes. So, I'm a little more optimistic than I think I hear you are in your question that we'll be able to do it. But obviously we'll have to step away from it to make the assessments.

Posted by Russell Roberts at http://www.econtalk.org/archives/2012/04/taylor_on_rules.html.

Cowen on Food

Mon, 23 Apr 2012 06:30:00 -0500

Tyler Cowen of George Mason U. and author of An Economist Gets Lunch, talks with EconTalk host Russ Roberts about food, the economics of food, and his new book. In this wide-ranging conversation, Cowen explains why American food was once a wasteland, the environmental impacts of plastic and buying local, why to stay away from fancy restaurants in the central city, and why he spent a month shopping only at an Asian supermarket while living in Northern Virginia.

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Readings and Links related to this podcast

Podcast Readings HIDE READINGS
About this week's guest: Tyler Cowen's Home page Marginal Revolution, Tyler Cowen and co-blogger Alex Tabarrok. Tyler Cowen's Ethnic Dining Guide. Cowen's blog on food. About ideas and people mentioned in this podcast: Books: An Economist Gets Lunch: New Rules for Everyday Foodies. Articles: "Is Food the New Sex," by Mary Eberstadt. Policy Review. January 27, 2009. "The Locavore's Dilemma: Why Pineapples Shouldn't Be Grown in North Dakota," by Jayson L. Lusk and F. Bailey Norwood. Library of Economics and Liberty. Jan. 3, 2011. Podcasts and Blogs: David Owen on the Environment, Unintended Consequences, and the Conundrum. EconTalk podcast. Taubes on Fat, Sugar and Scientific Discovery. EconTalk podcast. The Economics of Obesity, with guest Darius Lakdawalla. Econtalk podcast. Townsend on Development, Poverty, and Financial Institutions. EconTalk podcast. Barro on Disasters. Growing corn for ethanol. EconTalk podcast. Munger on Fair Trade and Free Trade. Agricultural programs and subsidies. EconTalk podcast. O'Donohoe on Potato Chips and Salty Snacks. EconTalk podcast. Banerjee on Poverty and Poor Economics. When you get a windfall, you don't just spend it on chickpeas. EconTalk podcast. Grab Bag: Munger and Roberts on Recycling, Peak Oil and Steroids. Slow food versus carbon footprints from transportation. EconTalk podcast.

Podcast Readings

About this week's guest:

Tyler Cowen's Home page
Marginal Revolution, Tyler Cowen and co-blogger Alex Tabarrok.
Tyler Cowen's Ethnic Dining Guide. Cowen's blog on food.

About ideas and people mentioned in this podcast:

Books:

An Economist Gets Lunch: New Rules for Everyday Foodies.

Articles:

"Is Food the New Sex," by Mary Eberstadt. Policy Review. January 27, 2009.
"The Locavore's Dilemma: Why Pineapples Shouldn't Be Grown in North Dakota," by Jayson L. Lusk and F. Bailey Norwood. Library of Economics and Liberty. Jan. 3, 2011.

Podcasts and Blogs:

David Owen on the Environment, Unintended Consequences, and the Conundrum. EconTalk podcast.
Taubes on Fat, Sugar and Scientific Discovery. EconTalk podcast.
The Economics of Obesity, with guest Darius Lakdawalla. Econtalk podcast.
Townsend on Development, Poverty, and Financial Institutions. EconTalk podcast.
Barro on Disasters. Growing corn for ethanol. EconTalk podcast.
Munger on Fair Trade and Free Trade. Agricultural programs and subsidies. EconTalk podcast.
O'Donohoe on Potato Chips and Salty Snacks. EconTalk podcast.
Banerjee on Poverty and Poor Economics. When you get a windfall, you don't just spend it on chickpeas. EconTalk podcast.
Grab Bag: Munger and Roberts on Recycling, Peak Oil and Steroids. Slow food versus carbon footprints from transportation. EconTalk podcast.

Highlights

Time	Podcast Highlights HIDE HIGHLIGHTS
0:36	Intro. [Recording date: April 16, 2012.] Russ: I kind of felt like saying, when I introduced this podcast, was this past week was on disability insurance; before that was on inequality; we've done a lot on the financial crisis: I felt like saying: "And now for saying something completely different." We're going to talk about today the economics of food and your love of food; and I want to start by asking you to talk about what a foodie is to you and what role food plays in your life. Guest: Well, let's start with economics. Early economics is the economics of food. If you read Adam Smith, if you read David Ricardo, so a lot of the early economics I read was classical economics. So, for me economics has always been economics of food. But as a foodie, I'd say I started in my early 20s. My food upbringing was quite conservative. Decent quality, but nothing unusual; no real diversity. And I was living in Germany, a completely foreign food environment; and I started trying to make sense of it using economics. Russ: And the rest is history. So, what would you say? You have a food blog? Guest: That's right. Russ: And you spend a lot of time--it seems to me, which is maybe not possible given how much time you spend on other things, but you seem to spend a reasonable amount of time trying to find good food and eat it. Is that accurate? Guest: I enjoy traveling around. I think it's very important if you live in Northern Virginia to be an anthropologist of suburbia, and to focus on food and to learn that one area very well. It's a good way of doing that. So I feel I'm doing social science. And the notion of taking small things and studying them in great detail--food for me is a window onto that perspective. Plus, it tastes good. Russ: And, do you think you are unusual in how much you enjoy food? Or would you say it's an intellectual experience, this combination of social science and gustatory habit? Guest: I'm not sure I would accept a distinction between the intellectual and the emotional side. But if you think of food, sex, and sleep as three primeval pleasures that virtually all human beings enjoy, I take the simple view that we should regard those things quite seriously. And the book is about one of them. Why should we not? It's in a sense the higher realms of culture, which are maybe a bit phony in some ways compared to food, sex, and sleep. Russ: Is finishing this book going to change anything for you, food-wise? Guest: I've eaten more vegetarian food as a result of having written the book. And that's a good thing. That's the main change. Russ: But is, going forward, is your interest in food going to change now that you've finished a book about this phenomenon? Guest: Uh, less of my research will be about the history of food, by quite a bit. But other than that I don't think my life will change very much. Russ: You're still going to be interested in finding a really good barbecue place in North Carolina. Guest: Whatever it may be. Absolutely. Russ: I don't want to lose this. Why have you become more vegetarian since writing the book? Guest: I think it's unethical how we treat animals in factory farms. By eating less meat, you cut back on that, however minimally. It's also good for the environment to eat less meat. Russ: Because? Guest: There's a climate change problem resulting from a lot of animals, which emit methane. The impolite word is fart. If you have a vegetarian diet, to a greater extent you make some minimal inroads on that problem. Russ: By reducing the size of the cow herds of the world. Guest: That's correct. Russ: I understand you are not solving the problem, but you are not participating and you are making a small, incremental--marginal, as we might say-change toward the different level of methane emission. Guest: Yes. I don't feel it's ethically wrong to kill and eat animals per se. But I do feel how we treat animals before killing and eating them is wrong. Russ: Sometimes. Guest: Sometimes. But in this country quite often.
4:58	Russ: And on the palate side, how have you found this change? Guest: Vegetarian food makes much more sense when you eat spicy food. So, one good way to become more vegetarian is simply to cultivate your own taste for spicy food. To just eat vegetables straight up, unless they are very good, as you might find in Italy or France--in an American supermarket they're mediocre. It's not going to stick with you. So, for a greater vegetarian diet to stick, it has to be somewhat incentive compatible. So, think in terms of how you can spice your lentils or season your cauliflower. Russ: Are you a student at all of this paleodiet [?] literature that suggests that we all have to eat meat and that overconsumption of carbohydrates, for example, is not good for us? In fact any consumption of carbohydrates, maybe sugar, is not good for us? Do you give any credence to that literature? Guest: I read about it. I agree with some of it. I'm not convinced by a lot of it. Refined sugar, I think there's a lot of evidence it's bad for us. A lot of the paleo people are fairly ant-vegetable along some margins. I don't see the evidence they are right there. I think they underestimate how quickly some parts of human evolution can occur; and the notion that we have had agriculture and have lived in cities for quite a while now, I think they under-rate. So, I think if your diet has a lot of vegetables, even vegetables with carbohydrates, that's probably fine. I think, say, bread in moderation is fine. So the notion that you should just eat fruit, nuts, meat, cheese, for the most part--I don't see that there's been a strong case backed by data made there. Russ: Saying that you should or shouldn't eat fruit, nuts, and cheese? Guest: The notion that you should only eat fruit, nuts, meat, cheese and some number of other things--basically low carb diet--I've never seen any well-done statistical study showing that has a serious payoff. Russ: But for many viewing Gary Taubes's--I've become skeptical of this argument, that fat is bad for you. And you do a couple of times in the book allude to the health effects of that. Do you have a position on fat? Guest: I haven't seen serious evidence that fat in moderation is bad for you. Russ: Yeah, I don't think it is. Guest: I agree. Russ: Interesting question.
7:16	Russ: Now, the book opens with a sort of a defense and a state of the American cuisine. We don't have a great reputation--Americans don't--of a great place to eat. So, talk about that. Some of that is true. Some of that, you suggest, is not true. For the part that's true, you have some interesting explanations. So talk about that. Guest: Well, some of our bad reputation is an illusion, precisely because America shifts so many of its culinary products overseas. So, if you are at a McDonald's in Europe, it's not necessarily the case that the raw materials come from the United States, but the idea of McDonald's does. And it's not very good. So, in essence foreigners are getting a lot of the worst of our food; and they overgeneralize somewhat. To actually live here and eat here is quite pleasant, I find. You have a lot of choice. And a lot of it's very tasty. And there is a lot of healthy food available pretty readily. So the overall picture has gotten much better in the last 30-40 years. But American food for a lot of the 20th century was quite grim. I think a few of the culprits are that the child is given too much authority in the American family. Prohibition and WWII, which combined had very long lag effects actually--America doesn't become among its elites a wine-drinking culture comparable to Western Europe until the 1970s. And that helps support a notion of quality food. And I think also cutting off most immigration in the 1920s had disastrous effects for American food. So the typical narrative is: We had bad food because of big business and capitalism; and I want to say, to the extent it's true we had bad food, a lot of it was the fault of the law. Prohibition and also immigration restrictions. Russ: And then a cultural preference for children, which you explain in the book: but the idea that children like bland food in general, don't like exotic food. Guest: They want soft and sweet, and that's [?] for really good food for the most part.
9:12	Russ: You travel an immense amount, relative to me anyway. When you were abroad--you go to Latin America, you go to Asia--are there American restaurants other than McDonald's? Are there places, is there anything identifiable as American cuisine to foreigners other than fast food? Guest: Depends what you count as an American restaurant. So, if you go to the Caribbean, say, Central America, you can find Pizza Hut; but it's not like Pizza Hut here. It's generally quite good. And people might go out for a special meal to Pizza Hut there. Is it American food? They've made it their own cuisine. And as pizza American to begin with, you can debate these points at length. But I would say Europeans have crystalized this notion of American food which a. doesn't exist as American, and it becomes a sort of whipping boy for American mass society. But I think food here right now is quite creative. If I fly to Western Europe I don't necessarily think I'm going to eat better there than here right now. Russ: But this question of American cuisine: You make one reference to the fact that it's a little bit like English cuisine. It's got a bad reputation. Not particularly well deserved. But I think when people think of American cuisine they think of either these sort of Americanish foods--not really American. A hamburger. Hamburgers and frankfurters are I think named after German cities. Guest: Absolutely. Russ: And pizza again, seems to be another import. We've made them our own in some dimension. But I think that's what Americans think of when they are living in an exotic or foreign cuisine and they come back to America. What they miss, or what they long for is hot dogs, hamburgers, pizza--things that, for better or for worse have become American. In a little bit we'll talk about barbecue which certainly has a distinctive American set of versions. But there isn't a cuisine quite that's American per se other than it's enriched by that immigrant population or event. Guest: I would define it by the diversity, and not by particular foodstuffs. So, American cuisine is the ability to choose Indian or Szechuan or Mexican-American or whatever else. That's American cuisine. Russ: Which again obviously is a result of that immigrant population. Guest: And it's strongest in the suburbs, so Europeans that come to visit America, they think they are going to try to real American food. They are walking around in the center of Boston--which is okay for food--but it's not necessarily the best stuff. They never see the glories of the ethnic foods in the suburbs; and they go home rather disappointed and they decide they are critics of McDonalds were maybe right all along. That's a mistake. Russ: And you talk in the book about role of the center-city restaurants, which is where many tourists are going to spend a lot of their time, versus the suburbs. Why are the suburbs a decent place or great place to eat in America? Guest: The suburbs often have better schools. Asians are attracted by better schools. So most of the best Asian restaurants in the United States are in suburbs. That's one big reason. But another big reason is you have lower rents; there is more space; there is more room for experimentation. You have more strip malls. And you get a richer mix. I wouldn't say it's richer than what's in Los Angeles, but the cities that do best actually do well by being suburb-like, such as parts of Los Angeles, or Queens and Brooklyn in NY. Russ: And as you point out, if you are paying a high rent you've got to generate a lot of volume. Guest: Hard Rock Café. Russ: You can't cater to a niche clientele. You have to cater to a group that is fairly large. Guest: Or be very expensive, like the wonderful places on the upper East side of Manhattan. But you can't go to those very often, if at all. Russ: And you would argue the food experience there is merely okay for the money, and not great. Guest: Well, for the money the food often tastes quite good. But is it worth $300, is it worth getting dressed up, is it worth the hassle of getting a reservation? Not obvious to me. Russ: Or not to Tyler. But obviously there are people who are purchasing other than the food at those places. Guest: No one can make it their daily food lives. So you are still left with the other question of what to do.
13:36	Russ: Now, you detail in the book a rather interesting experiment, shopping for a month in an Asian supermarket. I'd like you to talk about why you did that and how it affected you. Guest: First, I think as human beings we all have status quo biases. So, we have our ruts. We have our food ruts, we have our supermarket ruts. I thought by shopping at this Chinese market for a full month, I could just get out of my ruts and see everything fresh. To me it was also an experiment in information processing. The notion that I could walk into a store not know how to find anything, and not be very good at figuring out how to find it--this was exciting. It's a way of discovering the world anew. And so I did it. And it was great. Russ: A little bit like being a tourist, but close to home, too. Guest: A little more radical than being a tourist. Russ: So, what was that like? I think the average person--when I started that chapter, I thought: How interesting is this going to be? But it turned out to be quite interesting. Talk about some of the experiences you had in that supermarket. Guest: I found myself gravitating very quickly to foods I could see and touch. Because I knew how to find them. Russ: A lot of jars you mention that had labels that didn't always have English and if they did, weren't easy to find the English. Guest: Jars; it was like Borges's Library of Babble. You knew it was there but you weren't going to find it. The greens were there; you grabbed them; much better selection, greens you wouldn't get elsewhere, anywhere else. All fresh, all delicious, completely changed how I eat, immediately. Russ: Six types of bok choy. Guest: Yes. I didn't even have to keep track of which was which. Just grabbed one, buy, it bring it home. It always worked. Russ: Always interesting and tasty. Guest: That's right. Russ: And talk about the seafood. Guest: There were dozens of kinds of seafood. A lot of it I didn't recognize. Not all of it smelled fresh to me. But there was just far more choice than in a Giant or Safeway. And it was cheaper. And again, you would just see what looked good and ask for some, bring it home saute it, put on some garlic, some ginger, some olive oil, whatever--it was almost certain to taste good. Russ: Did that not turn out so well, that seafood? Guest: No, it was fine, actually. I'm careful in what I buy. Russ: A number of times in the book you refer to the virtues of cultures and cuisines that have different standards, say, of preservation and health, safety, than America's, which is of course quite high for a variety of reasons, some admirable, some maybe not so admirable. And you often talk about eating, especially abroad, as an adventure; and you praise the virtues of it. Have there been any dark times in those adventures? You don't mention any of them in the book. Have you ever had some experiences abroad where you ended up prone for extended periods of time? Guest: Two times I've gotten very sick. The last was eating a breakfast buffet in Zurich, Switzerland; and that was right before I was supposed to debate Jeff Sachs. Russ: Not a third-world country. Guest: I believe it was from the raw fish. I don't know. But it went very badly. Russ: The debate or the meal? Guest: The meal. The debate, I won. In the mid-1980s, the first time I was in Mexico, eating restaurant food I got very sick. Since then I've eaten street food and I've done fine. Russ: Any advice for those in exotic places for safety, who want to be adventurous but are a little bit anxious about what they are doing? Guest: Well, cooked food is best; if you can see it, even better. I think street food is safer on average in most parts of the world. If you know a little bit about municipal water supply you'll be able to figure out a lot of things. I wouldn't eat a lot of street food in India, for instance. But in Mexico, I think it's the safest food. Russ: Going back to the supermarket--so, you stuck with a lot of greens. There were a lot of other things; you didn't just go greens and seafood. You did venture into the jars and other parts of the store, right? Guest: Sure. If you are willing to spend the time, you can find what you want. Delicious sauces and spices. Russ: And how did it end up? You talk about some of the longer term impacts of that one-month experience. How has it changed you? Guest: I think I have a better understanding now. If people are to eat more greens, it has to make sense for them economically and it has to taste good; and lecturing people about it is probably not going to work. And it worked for me immediately. I was a convert within an hour upon arrival. So, I think there are some broader food lessons we could take from that supermarket, that we also could take from India. If you go to a public function in India, the food is typically automatically vegetarian. And if you want meat, you can ask; they might be able to bring it. But you simply assume that tasty vegetarian food will be served. When you are in India, your inclination is to want to eat more vegetables. So, we could be more like that. Russ: Either for health or for policy reasons. Guest: For both, yeah.
18:45	Russ: Who else shopped in that supermarket? Guest: It's mostly Asian and Chinese shoppers. There's a pretty decent contingent of Latinos who shop there, because it's cheap; and there's a whole aisle with Latino goods. So I also picked up Latino goods when I was there because a. it was there, and b. that was something I understood much better to begin with. You could always ask in Spanish because the staff in the store spoke Spanish, not Chinese. Russ: And you did a little research on how reliably different or similar this store was compared to its counterpart in China. Guest: That's right. I interviewed some people from China. Russ: And what did you find? Guest: They thought it was remarkably similar in terms of what it offered, to the extent that they were surprised. But they thought the quality of the fresh items was not quite up to China. Here there's a longer supply chain. In China, more of the food comes from right nearby. Russ: While we're on the subject of Asian food, we talked earlier about how American tastes, income change; imported food styles when they come to America. You've presumably--I know you've eaten a lot of Mexican food both in Mexico and the United States; and you have a very interesting chapter we'll get to later about why they are different and how they are different. But in general, with Asian cuisine, a lot of Americans love Chinese food. They love sushi, Japanese food; they love Thai food. What do Americans find when they go and eat authentic Japanese and Thai food? Guest: Well, it's a big surprise to them. So, a lot of the food in Thailand tastes quite bad, because of the ingredients. Your median Thai meal might be better here. But that said, the peaks of Thai food in Thailand are greater than here. Most so-called Chinese food in this country isn't Chinese at all--some strange hybrid; it's closer to American food. I think Szechuan cuisine translates the best because it's based on spices which can be dried and shipped to some extent. But Cantonese food doesn't really exist here at all. It relies too much on fresh seafood and good vegetables. Russ: But through most of the middle of the 20th century, Chinese food in the United States was Cantonese in some sense of origin. Why was it so bad? Guest: In some hybrid sense--a lot of carbohydrates, a lot of goo, no sharp flavors. I grew up eating some of this. It just wasn't very inspiring. I guess it was okay. You could do worse. Russ: But a Chinese person eating that food would not have recognized it, presumably. Guest: That's correct. And if you would have gone simply to an American seafood restaurant, say in 1970, and ordered a plain piece of fish, you would be getting something closer to Chinese food than going to a so-called Chinese restaurant in New Jersey. Russ: What about the meat-vegetable ratio? Guest: You mean how it's changed over time? Russ: No, about the United States versus China. Americans like meat. Guest: Far more meat here. Absolutely. Russ: But seafood you say would not be that different. Guest: Depends which part of China, of course. But if you think of relying more on seafood and vegetables, you'll have gentler flavors, sauces and spices will matter more, subtleties will matter more. Meat is more overwhelming. American places serve meat--beef with broccoli, maybe with some sweet sauce. Russ: Brown. Guest: There you go. Brown. Russ: As you call it; you talk about the ubiquitous brown sauce.
22:21	Russ: Let's talk about Mexico for a minute. You've spent a lot of time there, and you highlight how distinctive Mexican cuisine is from American Mexican food, even in American cities that have large populations of Mexican residents. I think you focus on El Paso. A lot of interesting things there. Talk about some of those differences and why they are there. Guest: I made a number of trips to Mexico with the deliberate purpose of tracking down the Mexican food supply chain and actually visiting it as it works; and then as a cook I tried replicating the dishes. And the thing I found--it surprised me--is how many of the differences spring from the meats and the cheeses. Mexican meats tend to be richer in flavor, and the beef will be dry aged. And it's very hard to get that at a reasonable price in the United States. The Mexican cheese are gooier and richer. So, if you can replicate for your own cooking, Mexican meats and Mexican cheeses, you can actually come fairly close to a lot of Mexican dishes. But for legal and regulatory reasons, to do it the Mexican way in the United States simply doesn't work. And our Mexican food is very different, and typically it's worse. Russ: Talk about the labor intensity of dry-aged beef. I didn't know anything about how dry-aged beef is actually created. But as you point out it's created differently in Mexico than in the United States. Guest: The way it's done in Mexico, at a small scale, is you simply put it out and wait till it starts turning green. And you have people monitor it and shake off the flies. And it's not just labor intensive; it wouldn't pass Food and Drug Administration (FDA) inspection standards. Yet I've eaten it many times; I'm perfectly fine with it. I'd love to get it here. U.S. dry-aged beef is done in a more systematic, better-regulated way, inside of large institutions. And it costs a lot more. It can be several times more than beef which is not dry-aged. So, you can get it here; it's just expensive. And most supermarkets won't carry it. Russ: The demand's not there. Guest: Yeah. Russ: So, the meat is different; the cheese is different. Anything else that's important? Guest: Well, fresh fruit. In Mexico typically it's seasonal. So, when something's in season, it's fantastic. Otherwise you don't get it. So, here you have more choice, but it's choice among mediocrities. There you are more likely to get things which are special. But you can't just walk into a Mexican Walmart and have all the fruits and vegetables you want year round the way you almost can do in the United States. Russ: Let's talk about that general issue. It intrigues me. I'd say, somewhere in the 1980s and 1990s it became a common belief that American produce--fruit and vegetables--was second rate. And part of the reason was this idea that it had a lot of preservatives; it was available maybe year round even, but not very good. It seems to me--maybe it's an illusion--the choices we have now, I'm assuming that that supply chain has gotten more efficient. But to me, the quality of fruit in the United States compared to 25 years ago seems greatly improved to me. In the following ways. First of all, it's perfect. Which consumers demand. You don't get a bag of apples of which half of them are kind of rotten and bruised and full of problems. They are all gorgeous. And if you don't like the bag you can pick them out yourself and leave the rotten ones behind. There's plenty to choose from in your average supermarket. The variety of apples: when I was younger it was Delicious, maybe Macintosh. Maybe something else. Now the profusion of apple selection and the relative flavor in them seems much greater than when I was younger. Citrus seems much better. A Costco navel orange is a magnificent thing. A red grapefruit there is spectacular. Has it gotten better? Am I imagining it? Guest: It's gotten better. But I think it's one area that still lags behind. If you go, say, to Chile, which is now quite a developed country, and you get a fresh fig when it's in season, or strawberries, I think they are a full order of magnitude better than what you get here. Even from the farmers' market. So, we have a ways to go. California is much better than most of the rest of this country. The West is better than the East. We're getting there. But I'd say it's where we lag the most, fruits and vegetables. Even at Whole Foods. I'm a big Whole Foods fan, but I don't think that much of their produce. Russ: What would it take to make it better? Do you have any idea why it's not as good? Guest: Distance and freezing and transport and the desire to have it year round are all problems to me. They are not problems to everyone. Russ: People are happy to have it. Guest: But I'd rather have less choice, higher quality, and pay a higher price.
27:27	Russ: You have a chapter on barbecue. One of your favorite foods. You have three rules for good barbecue, which are: a barbecue restaurant should open early, should be in a small town, and go for the ribs, not the brisket. Why are those good rules? Guest: If it's in a small town, the chance that they are skirting laws and regulations, or maybe the laws aren't there, are much higher. So, you want some kind of classic barbecue pit. This creates a problem with smoke. It potentially creates a problem with fire. In small towns there's more likely somewhere you can put it. Harder to do in midtown Manhattan. And more likely there's a special deal with the fire chief, where he overlooks some irregularities. Places that open early basically run out of meat, and that's great. You eat barbecue in Mexico, the food is gone by 1 p.m. or sooner. They don't reheat a new batch of it. That's it. Start eating at 10 a.m., maybe earlier; they bring it in from the countryside where it's been cooked underground. It's completely fresh; it's ready to go. Then it runs out. The stand closes up. End of story. That's the best barbecue. Russ: So, the issue is the--I think you describe it as the cooking process begins the night before. Guest: And it's not sitting around all day. So, foodstuffs that are served very rapidly at very particular points in time and then go away, they tend to be better. Russ: You mention for example fish tacos in Tijuana versus San Diego. Same thing. Why? Guest: Fish tacos in Tijuana, most likely something pulled out of the water. Capacity for refrigeration--it's better now, but most small taco stands are used to just getting in fresh supplies and serving them basically, more or less, right away. And it will taste very good. San Diego, you are part of this longer food supply chain where everything is regularized and you get a shipment, and it's more likely it's been frozen, and it's handled by more people. It still can be good. But it's not going to taste the same. Russ: You ever wonder whether you have any romance about these issues that cloud your palate and assessment? The sort of fresh-out-of-the-water, the fisherman himself is making the taco. Does that ever cross your mind? Guest: I would gladly volunteer to do a blind taste test. Russ: You're not worried about confirmation bias. Guest: Well, it would be a blind taste test. Russ: I mean in general. In a way it doesn't matter, whether you are fooling yourself or not. Guest: That it would be hard to run the test is an important point. To take the Mexican food and try to cross the border with it is not legal. And that to me says a lot. Russ: And it's not legal because? For health reasons? It's regulatory. Guest: Supposedly. There's a trade issue and a protection issue. But that fact to me suggests there is something to the difference.
30:22	Russ: What's our biggest food problem? Guest: Agricultural productivity in the last 20 years is going up at much slower rates than it used to. In the longer run, this means higher prices for food; and it means more starvation. It means more malnutrition. This still afflicts many hundreds of millions of people in the world, very often young children. Half of the children in India below age 5 have malnutrition. That's awful. Russ: How do we fix that? Guest: There's not a single silver bullet, but having better local institutions. India itself needs more agribusiness. They need more economies of scale and agriculture. They need better roads so crops don't spoil as they are being brought to market. They need better fertilizer. They just need overall better governance, less corruption. Some idea of local attention to detail and monitoring and accountability and quality control, which is pretty good in a lot of countries and highly variable in India, and to solve problems like malnutrition in India or cholera in Haiti--there's many examples. It's a kind of slow building of institutions and trust and decentralization and market incentives, brick by brick, that's just hard to do overnight but can be done. Russ: And in America, malnutrition is not our main problem. Our main problem is obesity. Guest: That's correct. In terms of health. Russ: If you want to call it a problem. Guest: But it is to some extent. Some people are voluntarily obese, but I think there are people who want to be thinner and find it hard to get there. Russ: We need to cut our carbohydrates, Tyler. As I did. Works like a charm. Kind of a joke but kind of true. Guest: Well, I think any diet in economic terms--it's not a joke. Draw a map with indifference curves. And impose any restriction on what you eat, whether it be due to religion or due to a diet. Any restriction will limit your optimal choice bundles, and you'll consume less food. So there's a way in which any strict diet can have some positive effects, right? Russ: I'm not sure that's true. Guest: Not literally any. Not any diet that said: Eat all junk food. But a lot of reasonable-sounding diets work just by limiting your choice and then you want to eat less. Russ: As a kosher consumer, I'm not sure eating kosher keeps you thin. Just because I can't have the pork and shellfish that other people can eat. Guest: Impose more restrictions. Russ: Yeah. I need to get stricter. So, what might improve? Well, I guess there are two issues here. I don't believe, I don't like to view obesity as a public policy problem. It's viewed that way I think by people who like to meddle in other people's lives. I understand the argument for it; I don't find it convincing as a policy issue. But there are, as you say, many people who prefer to be thinner than they are. Or at least that's what they say. Guest: But some of them really mean it. Russ: I think so. So, you have some creative ideas on that other than just restricting eating white foods or not eating white foods or whatever those kinds of restrictions that some people suggest--eat grapefruits. You have some ideas about using the price system to encourage us to do better. Guest: Well, let's start with some simple empirics. The groups of people in the United States least likely to be obese are people who are quite wealthy, people who are quite well-educated, and Asians. Those are rough generalizations. Of course there are many exceptions. So, the more people become foodies and the wealthier society becomes, in the longer run we are aimed in a good direction overall. And obesity rates seem to have leveled out. So I think there's grounds for cautious optimism about the future. And people becoming foodies probably will make this issue better rather than worse. I don't think there's a single cure overall. I don't think taxes on junk food has a big enough effect to make people less obese in a significant way. I think innovation from consumers, people deciding they want to be less obese and doing things like shopping at Great Wall--we will make some gains. Russ: That's your Chinese supermarket. Guest: That's right. I don't think there is a silver bullet solution. And again, I think a lot of people will actually end up willing to remain somewhat heavier, to be able to eat what they want. Russ: Do you think being a foodie makes you thinner? Guest: There's a causal question, and there's a question of what we see in the data in terms of the correlation. But if you look at people--say, drive out to West Virginia, a rural area--you'll see much more obesity than you'll see around here, and you'll see fewer foodies. I understand causality is tricky. But I think as we move more in the direction of high education, wealthier, more interest in food in a serious way, this will be correlated with other good food and weight outcomes.
35:28	Russ: Let's turn to some of the environmental issues you talk about in the book, which are very interesting. I'm reminded of an article by Mary Eberstadt in the Hoover Review where she talked about how we used to have a lot of taboos and strong feelings of stigma and other attitudes toward sex, but at some point food became the way we express our taboos and our preferences. And we are much less tolerant of people's food choices than we used to be. Which is fascinating to me. And food of course is a way--and your book is an example of it--that we often express our identity: through what we don't eat. We mentioned kosher; we could talk about vegetarians. That's just scratching the surface. Within those two there's all kinds of gradations and choices people make to identify in certain ways. Vegan being an obvious way on the vegetarian side. And it's a moral issue, not just a health issue; not just a "that's what I like," or what I choose. And the environment being an area where people's food choices are increasingly, I think, part of their identity and their worries about the impact of what they are choosing for other people in the world. You start your discussion of this in a really provocative way, by asking the question: Who is the greenest man alive? And you give us three choices. So what are your three--there are obviously more than three--but three interesting choices for the greenest man alive? Guest: Well, one is this fellow named Edward Begley who tries to burn as little fossil fuel energy as he can in his life. And he buys his carbon offsets for everything. There are then some references to the Wal-Mart Corporation, and people who have worked for that. And they have done a lot to make their supply chain more efficient. Russ: Shockingly more efficient. Guest: A big difference. That saved a lot of fossil fuel energy. And of course, that's been driven by their self-interest. And I cite the example of a man who is trying to make a new kind of cement which is more carbon-friendly. And then finally an African pygmy, who lives largely in the rain forest and hunts elephants and lives some kind of hunter-gatherer lifestyle, at least part of the year. And may have a shorter life expectancy, and is much shorter and have a lower rate. Those are all candidates for the greenest man on Planet Earth. Russ: And the winner is? Guest: Probably the African pygmy. Actually. Ed Begley consumes a lot more fossil fuel and energy than he thinks, just by being here and living in a house. Russ: Yeah. Guest: So, I don't think the ideal of being completely green really makes any sense. Resources are here to be used in some way. They should be used responsibly, and efficiently. And we don't always do that. And I think in terms of property rights and internalizing externalities is the way to go. Not some kind of absolute minimization of impact on Planet Earth. Russ: I remember an essay that Edward Wilson wrote on--a line I'll never forget. He said: Darwin's dice rolled badly for the earth. What he meant by that was that we became the dominant creature of the earth. It could have been the cockroach. The cockroach thrives, but not the way we do. There don't have to be 7 billion human beings. He was saying that evolution could have taken a different turn. Then the earth would be spared parking lots, fossil fuel. Fossil fuel would just stay safely pooled in the ground, not turned into gasoline, kerosene, natural gas, all the things that we do to change the climate of the earth. And his argument was the earth would be better off. And I always thought: How does the earth feel about that? I don't know--the earth, to me, is not a sentient creature. I never understood that argument. So, I'm in the human side of asking the question: What can we do? Like killing ourselves, mass suicide, would have some impact presumably on the environment. But if you are not going to go that way, it's hard. You stuck either becoming a Pygmy, or sitting around in our loincloths. Not over fires--we'd have to do what? Strange focus, perspective. Guest: Modern agriculture can support so many billions of people. It's the single biggest breakthrough in human history. Most lives are good lives. Even in a lot of the poorer countries. Russ: If you think people are important. Guest: Sure. Russ: You do have to take that step. Which, I do. I think you do, too. But, as you say, we have to be responsible. We don't particularly want to degrade the planet or destroy the planet or whatever that might mean. Make it hard for future people to enjoy the planet, or even our children or grandchildren to enjoy the planet. So, you take on some of the ways that some people presume are good for the planet, and sometimes that's true. You have some good things to say about plastic, for example. Guest: Plastic is often more environmentally friendly than having a paper bag, for instance. Russ: Because? Guest: Because it takes less energy to make it and to dispose of it. Studies seem to show pretty clearly plastic is better for the world. Plastic can even be better than having those reusable cloth bags. If you re-use those cloth bags, say, 200 times and up, and don't lose the bag, don't have to buy a new one if the bag gets torn, don't misplace the bag--then the reusable cloth bag does seem to be better. But that's hard to do; and even then you are just at the break-even point. So, the environmental virtues of plastic relative to a lot of alternatives are somewhat under-rated. Russ: Yeah. My county, Montgomery County, has recently put a nickel charge on plastic bags. If you want a plastic bag, you have to pay a nickel. And it's been fascinating to watch what people have done in response to that. My view is I like to pay the nickel. I kind of enjoy paying the nickel, even though I don't like where the nickel goes--which is to fund my county's activities. I kind of like the idea that I am not going to change my bag habit for a nickel. There is some pride left in me. My wife's very different. My wife has cluttered the back of her car with cloth bags and various other mechanisms. I think she usually remembers to bring them in. But, I talk to the cashiers; some people forget to bring them in. Other people, their protest, is to clutch all of the groceries to their bosom and carry them out to the car and sacrifice their time, loading them one by one into the back of their car; and then when they get home--something akin to Costco, by the way. They don't make it easy for you to get the goods en masse into your car. You've got to box them up in difficult ways. But I find that--it's a fascinating thing. You are suggesting that you'd have to use the cloth bag a great number of times. Guest: That's right. The more effective way to help Planet Earth is just to take fewer trips to the supermarket. Buy more when you are there. Save up; your car will burn less gas; you are more likely to have some beneficial impact that way than trying to clutch it all to your chest and then eventually making more trips to the store. Russ: And you also tout the virtues of stopping on the way to someplace you are going. That's obviously another way. Guest: That's right. We are programmed to reject plastic, to think it's corporate. The adjective "plastic" is negative: He's a plastic personality. So, you feel good rejecting plastic. It's a way in which we pursue what I call mood affiliation rather than actually trying to be effective.
43:39	Russ: What about eating local--the locavore movement, the idea that we should eat locally grown foods, fruits, vegetables--is gaining in popularity quite a bit. What's your take on that? Guest: Local food often tastes better, as I mentioned before. But transporting food is 10-15% of the energy cost of food. So to think that by making a stand on eating local, you are addressing the main problem--you are not. A lot of the environmental impacts, the negative ones from food, come from eating meat. A lot of local farmers aren't very efficient. They make a lot of trips in their truck. They don't have economies of scale. Imagine you live in Albuquerque. Try eating local food there and think through your local water policy, and that's an environmental disaster. So, eating local food can be environmentally better, but lots of times it's environmentally worse. And it's in any case not the biggest issue. Russ: And you talk quite eloquently about the challenge of trying to parse out, for every product, its transportation costs. It reminds me a little bit of Hayek, in his understanding of the role of prices and steering things. Except for externalities--which are not trivial in these examples--the beauty of the price system is that the price captures the costs plus a little bit more, where the little bit more is the profit margin. So, in general, prices tell you which things are produced most efficiently. Guest: That's right. Russ: But there are these externality issues. So, your suggestion is that rather than becoming expert at how your shirt is produced or how your apple is grown, you are better off buying the cheapest one. And then, policy-wise, we should solve that externality problem through carbon taxation. Seems to me, one of the major externalities today is from climate change. And both fossil fuels and eating of meat--basically cows' farting--are areas we could to some extent remedy with a carbon tax. A methane tax, as the case may be. Russ: How would we do that? Guest: A carbon tax would be applied to fossil fuels. They would become more expensive, there would be an incentive to substitute. I think there's a very good chance carbon tax would not solve the problem of climate change. But I view it this way: The way the American budget is running, we will need more revenue from some sources. So, we have the choice of taxing people's entrepreneurship or taxing something at the margin which has some negative externalities. So, I prefer to put the taxes on those things that have the negative externalities. Russ: My worry, among many--I mean, you have some very subtle and interesting arguments for how the tax might be shaped. In general, the political system is not so good at subtlety. Guest: Oh, I agree. Russ: And it's just going to add on this carbon tax to everything else; it's not going to substitute for anything. Guest: But just to have a string of zeroes as the estimate of the externality, that's politics too. That's not exactly where we are now, but that seems wrong to me. Russ: Well, we do have a carbon tax, though. Guest: Partly, yes. There's a tax on gasoline. Various regulations. So there's a carbon tax. Russ: You talk about 6 ways to be more effective. It's on p. 183 of the book. Could you talk about each of them briefly? Personal things people can do if they want to have an impact instead of eschewing plastic and buying local--maybe they could do some other things? Talk about those. Guest: Well, one of them is to just make virtuous behavior more fun. So, if you want to eat better, eat greener, whatever it is you are trying to do: lecturing yourself is of limited value. It has to fit into your self-interest. Simple economics point. If there is something you like and it's environmentally dangerous, I say: Try eating the very best of that. It may spoil your taste for the inferior product. Russ: Because it's expensive; it will slow you down. Guest: So, say you feel guilty about foie gras, a reasonable point of view, I would think. Just have the very best foie gras once. Russ: Which is how much roughly? Guest: A lot. Go to Paris, have it; you won't crave American foie gras as much. Just give up refined sugar; it will also help the environment. It's in a lot of different processed foods; but you can eat an awful lot and avoid refined sugar. It's good for you. Limit food waste: the notion that you buy things and they decompose, that also has a problem with regard to climate change. So, just be more careful there. Don't buy things you are not going to eat. Minimize the number of car trips. There's one thing they asked me to cut out of the book, but in many ways it's the most important one: and that is, spend a lot of money educating your daughter. Russ: Why? Guest: Women who are educated are likely to have fewer children. Now you might think this is good or you might think this is bad. I'm not convinced it's good. As I said before, I'm happy for there to be more people. I'm just saying that if you have a single-minded obsession with making the world greener, what you can do that actually works is to either have fewer children or treat your children in such a way where they will have fewer children. Russ: Interesting. Guest: So, as a man who has no biological children, I actually think of myself as much, much greener than a lot of environmental advocates. This doesn't have to be a good thing, all margins considered. But again, if you are just looking at: How green are you?, I don't actually feel that guilty. For that reason. Russ: It opens up a lot more plane trips. Because you don't have biological offspring--they are going to be taking plane trips? Guest: And if you apply a zero discount rate to environmental evaluations, or a very low discount rate, if you are having no children or fewer children, then there are no children of yours to have children, and so on. And the net impact over time of having time of having children is quite substantial. Russ: Yeah. I don't believe you should apply a zero discount rate, but that's another topic. Guest: But within the framework of what's being discussed, if you are worried about the very distant future as being something very real. Again, I'm not saying one should do that. But if you want to start with effectiveness, go there. Russ: Interesting. Big shift of gears. That was fun, and I'd be interested. Did you try to put up a fight for that one? Guest: No. I think my editor was right. But it would have been viewed as a distraction. And people would have read it in a variety of different ways that I didn't intend, like thinking that I'm blaming them for having kids or that they are wrong to want kids; and that's not at all my view. I have long been pro-population, agreeing with Julius Simon, and so on. But if you are just going to obsess over green cost, start there.
50:36	Russ: So, to shift gears, you give some advice on cookbooks; and you have some interesting things to say about cookbooks generally. I'm a big fan of cookbooks. I have a lot. And you point out many people who buy cookbooks don't use them. So, I have a handful that I use; and I have four or five handfuls I never look at more than one or two times. What's your advice on cookbook purchases and consumption? Guest: Like most things in life, it's common we buy books for their symbolic values, including cookbook books, as a kind of memorial for having visited a restaurant or thought about a particular cuisine or gone on a trip. If you want it for that reason, fine, but don't fool yourself into thinking it's about the food. For most people you should have, say, a half dozen cookbooks that you know quite well, and they present cooking in a conceptual manner; and you use the book to learn how to think about food. A cookbook should be more like an economics book, actually, explaining how things work and how to put things together. And then you'll be able to create your own recipes with much greater facility. Russ: And some of your favorites are? Guest: Oh, Diana Kennedy's books are very good; Rick Bayless's books are very good; Fuchsia Dunlop--her books on Szechuan cooking are fantastic. Again, those are relative to my taste, but I can vouch, relatively speaking, they are conceptual cookbooks that try to teach you how to think about the food. Russ: I like what you had to say about cookbooks from famous restaurants and authors. I know you just mentioned earlier that you might be fooling yourself. But there's a particular aspect of it that you were critical of. Guest: You can't duplicate the recipes. And you can't get on a learning curve. Russ: And that's the goal, I think. Guest: That's right. There's 37 things to do. The first time you try you won't get it right. Which is okay, but then there's no trial and error. Like, which one of the 37 did I get wrong? When there's a simpler, more conceptual recipe, you may screw it up, but then you know how to improve. And getting on that dynamic learning curve is a very economics idea. Russ: I can't remember which cookbook I have which had this characteristic. But there were always somewhat complicated things to do, and things would inevitably go wrong the first time. Certainly. Maybe every time. For a long time. And I remember the first step of a recipe was: Build a brazier. And I thought: Trouble. I don't know what a brazier is exactly--I think maybe it's a hole in the ground with fire. But it's not going to turn out well, this recipe. Close the book, turn the page, find something simpler. Guest: And it has to do with our theory of how market competition works. In a Hayekian way, it's about local competition over particular margins, trial and error, and learning. That's how competition works. Not that two totally different firms doing 4000 things somehow slug it out in this big arena and then at the end of it all someone is left standing. There are small, gradual improvements based on learning, seeing what works and what doesn't. Russ: You're saying--I don't understand the role of how competition entered into this cookbook discussion. Guest: If you think about how market competition works, it's that you have people competing doing relatively similar things, but with some variation on the margin; and there's something a bit akin to controlled experimentation and the ability to evaluate and compare rather than en masse evaluating one big thing with all its processes against another big thing. Russ: Oh, okay, so you are saying that the best strategy for improving your home cooking is to-- Guest: Take a lesson from Hayek on how markets work, local competition, trial and error. Russ: And get a little bit better, and hope you are moving in a good direction. Do you watch cooking shows? Guest: Usually I don't have time, so no. When I do turn them on, which I do periodically out of a sense of duty, I end up frustrated almost immediately. Russ: Because? Guest: They are not informationally dense enough for me. There's endless shots of things being put into pans and chopped up. And they feel to me like a kind of drug administered to people to keep them in like a stupor. I don't know. Russ: Why do you say that? The stupor part? The drug part? You think the educational component is so small? Guest: There's variation in quality. But I think people turn on the TV for a few reasons. They turn it on to relax. And they turn it on to have something to talk about with the person they are with. Which is fine. But again, that means in some ways, TV is not a great medium for food. Some of the cooking shows with competitions, I find those much more useful than the cooking shows. So, something like "Top Chef," where people dissect the food, I find that somewhat useful. Russ: To me, as someone who used to do a lot of fly fishing--and I watched some cooking shows; I don't have cable, which greatly limits my TV-- Guest: TV diet. You watch less TV. Russ: That's why I do it, and I want my kids to watch less TV. But I do have regular TV; and with our current regular TV package, which has like 8 channels, one of the channels is a PBS food channel. So, I get Jacques Pepin and Julia Child, reruns of this glorious, entertaining show where they banter back and forth in their peculiar personalities. That I enjoy just for itself. But I do watch occasionally, and to me it reminds me of--and cookbooks as well remind me of--fly fishing. So, fly fishing is something that you do sometimes. It's an expensive habit, it has a lot of technique, it has a lot of equipment. Like cooking. And when I'm not doing the actual act of fly fishing, the two closest things are to watch someone else fly fishing on TV--in a place I'll never go, which is again akin to the cooking show; I'm not going to use, make some of these dishes--or to read about it. So, cookbooks--of course cookbooks are more than just collections of recipes. As you point out in the book, there are tales and stories and childhood memories. I think people who like food--I think you are maybe an exception--people like consuming those either with their food, alongside their food, or when they are not cooking. Or when they are not eating. So, if you are not fly fishing, you read about fly fishing, you leaf through the catalogs of the waders you might get next year, the fly you might acquire. Similarly, I think for foodies there's this obsession with equipment. I don't know if you ever watch "America's Test Kitchen," but they have a whole segment every show where they go through what's the best mandolin or the best grill-top this or that. The best cheap knife. That doesn't appeal to you? Guest: Not that much. I think I really am an exception, and I deliberately wrote this book to, in a kind of bracing way, give people an alternative perspective on how to process information about the world of food. Through a more analytic lens. Russ: And you eat out a lot. How much time do you spend cooking at home? You cooking. Because I know you cook a lot. Guest: My wife doesn't cook much. If I'm not traveling the chance that I'm cooking at home is 60%. Since I'm traveling a lot, then it's hard to cook. So, I enjoy cooking; I like to read cookbooks if they are good; and I like to go shopping for food ingredients. Time is the constraint. Russ: The shopping for the food ingredients is a little like tying the flies. Guest: That's right. It's my version of that. Russ: There's an emotional, intellectual mix of anticipation. Guest: And I feel like I'm getting something done, but maybe I'm just postponing getting things done. It's my way of achieving some balance. Russ: It's a very high quality form of procrastination. Guest: That's right. Russ: You can delude yourself into thinking you are making progress sometimes, doing those activities.
58:39	Russ: You mention Mexican cuisine. Is that the dominant cuisine of your home cooking? Guest: Indian, Mexican, Chinese--almost all ethnic. And just simple dishes, like fish with lemon and sea salt; lentils. Russ: I think you said you have four woks. Is that correct? That puts you above the median. Guest: One of them went bad, so I guess now it's down to three. Russ: What happened to it? Guest: Just too much use. It's still there, but I'm not sure I would use it. It feels past its best days. Russ: Probably needs an overhaul. Probably salvageable. Why do you have four woks? Guest: Sometimes you need woks to store things. They are great for storage. Sometimes you need two of them on the stove at once. If one is being used for storage and two of them are on the stove at once, and then you need a backup just in case one of those goes bad, you need four. They don't cost that much. Russ: Do you have a big stove? Sometimes it's hard to put two woks on at the same time. Guest: Not enough. We can manage, but it's not that easy. Russ: Have you been tempted to redo your kitchen and go super-industrial? Do you have a fetish for equipment? Guest: I've been tempted, but ultimately I believe it's a distraction. Russ: It is definitely a distraction. It's a form of consumption. Guest: Yeah. I have no fetish for equipment at all. Totally practical perspective on equipment. The joy I get from a really good, sharp knife--it's there, but I view it as an expense, not a toy for purchase. Russ: Anything closing you want to say about what you might suggest people might do more to get into the kitchen or out of the kitchen, into better food? Any closing inspiration? Guest: In general, I would say this: again, going back to the linkage between food and economics, the notion that economists should, at the micro level, become extreme anthropologists about something--it doesn't have to be food--I'm a big advocate of. If you make it food, one nice thing about that is it ties in with the rest of your life. You have to eat. There's some kind of economy of scope there. It helps you bridge cultures. There's a production angle, there's a consumption angle, there's a mass media angle, there's a literary angle; of course, there's an economics angle. And you get all of those things at once. So, I would recommend it to more people. Russ: And then after that, maybe a book on sleep. Or something else.

Posted by Russell Roberts at http://www.econtalk.org/archives/2012/04/cowen_on_food.html.