Alex Tabarrok - Prizes, Prices, and Public Goods

Speaker 1 Look, I want a small government, but I want a government to be able to do what it's supposed to do at the time it's supposed to do it.

Speaker 2 Okay, today I have the pleasure of speaking with Professor Alex Tabrock, who's the Bartley J. Madden Chair of Economics at the Mercatus Center and a professor of economics at George Mason University.

Speaker 2 And of course, he's the co-author of the popular marginal revolution blog with Professor Tyler Cowan, who I've also had the pleasure of talking on with the podcast.

Speaker 2 So, Professor, thank you for coming on the podcast.

Speaker 1 Yeah, it's great to be here.

Speaker 2 Awesome. Okay, so first I want to ask you about the Grand Innovation Prize.
Can you explain what this is? And I'd like to ask you some more questions about it.

Speaker 1 Sure. I mean,

Speaker 1 the basic issue is that clearly speed really matters at this point in time in the midst of the pandemic. We've already been too slow.
We've been behind the virus every single step of the way.

Speaker 1 So we want to find a way of speeding up the incentives to produce a vaccine or a diagnostic or a therapeutic.

Speaker 1 And you might say, well, you know, don't the companies, for example, already have an incentive to be quick? And to some extent they do, but not as much as we would like from social incentives.

Speaker 1 So think, for example, about a vaccine manufacturer. Typically, most vaccines fail.

Speaker 1 all right they're hard to produce they're complex and most of them fail and what this means is that a vaccine manufacturer, they're not going to be willing to build a factory, to ramp up a factory to get the doses flowing, right, until the vaccine has been proven safe and effective and it's going to be approved, okay?

Speaker 1 So they're not going to start moving really until the vaccine is approved. So if you want them to move faster, you've got to give them bigger incentives.
And there's a variety of ways of doing that.

Speaker 1 One is to have like a big prize, you know, a billion dollars to the first vaccine, which meets a set of criteria. You know, it's effective at 60%, 70%, has such and such safety criteria and so forth.

Speaker 1 Or

Speaker 1 you could pay directly

Speaker 1 for manufacturing costs in order to get the firm to build the factory. You can say, okay, we're going to pay some of your costs.

Speaker 1 And there's pluses and minuses, but the basic idea of a prize or advanced market commitment or advanced market purchase or paying for at-risk capacity is the firms don't have as strong an incentive to ramp up the vaccine quickly as we would like.

Speaker 1 So we want to give them some extra juice.

Speaker 2 Gotcha. And the incentive is even weaker because you can only sell somebody a vaccine once, if it works at least, right?

Speaker 2 Yeah. Okay, so I have a question about

Speaker 2 how do you get money to the people?

Speaker 2 I guess you could give grants for manufacturing, but if somebody has a great idea for creating a vaccine, there's a billion dollar price to making that vaccine, but they don't have the initial funding to get that manufacturing or even testing up to par.

Speaker 2 What do you do about that?

Speaker 1 Right, so there's a tricky set of trade-offs because, on the one hand,

Speaker 1 the government really is not good at picking winners and losers. We know that from industrial policy, and that holds just as well for vaccine policy.
So,

Speaker 1 that pushes you towards just having a prize where you just, you know, all

Speaker 1 commerce. And another advantage of that is

Speaker 1 we really don't know what kind of vaccine is going to be the most successful and there's a whole bunch of different types you know there's the traditional live attenuated vaccine a killed virus vaccine there are some new vaccines using mRNA

Speaker 1 technology some DNA vaccines and maybe it's not going to be a vaccine at all maybe it's a therapeutic right which could serve the same kind of purpose or maybe there's some other innovation and when you have a prize, you really are opening up the field to these, to the crazy ones, right?

Speaker 1 To the ones who wouldn't necessarily get through the NIH committees, right?

Speaker 1 And that's, of course, the classic longitude story of the longitude prize, which was won not by Newton, but by this watchmaker, clockmaker.

Speaker 1 However,

Speaker 1 We also then have the trade-off, which is the point that you mentioned, is that some firms may not have the

Speaker 1 capital. And for those firms, there's a greater argument for funding them upfront.
And here, you know, there's no easy solution in a pandemic. I kind of think you want to go at all

Speaker 1 all guns blazing. Okay, you want to use almost all the tools that you have available to you.

Speaker 1 So what I've been working on this problem with Michael Kramer, Nobel Prize winner, who is kind of famous for the advanced market commitment for the pneumococcus vaccine, which probably saved 700,000 lives, was given to millions of children.

Speaker 1 And in that, the primary tool was the promise of a fixed price if you were to produce such a vaccine. We're more working on the COVID vaccine.

Speaker 1 We're more pushing towards paying up front for a large fraction of the

Speaker 1 manufacturer's costs for producing a factory or for repurposing capacity.

Speaker 1 And it turns out it's cheaper in our context to do that in this way. We could talk more about that.
But there are all these trade-offs for sure.

Speaker 1 And right now we're kind of pushing towards paying more for manufacturing capacity.

Speaker 2 Yeah, that's very interesting.

Speaker 2 Why can't it be the case that

Speaker 2 financial instruments can be created so that VCs make their living off of these sort of like high risk, high reward

Speaker 2 investments?

Speaker 1 maybe they can like have a deal with a researcher that they'll fund a lot of their fund their testing and manufacturing and if the vaccine works then they get half the uh returns of the price sure i mean absolutely when the markets are working well i mean that's what would happen it just takes a long time to set these things up and at every single stage there are these information problems so we say that you know the the government is not good at picking winners and losers but the truth actually is that the vcs aren't that great at it either right uh they have a comparative advantage They have an advantage over the government.

Speaker 1 I mean, they have skin in the game. But

Speaker 1 for a VC

Speaker 1 to learn enough about vaccines and to figure out to, you know, you got to be

Speaker 1 on presence

Speaker 1 to figure out which are the scams, you know, and which are a real possibility of working. This takes time.

Speaker 1 So I think... Look, here's how I put it to a few people I've talked with.
I've said, you know, I'm a sort of conservative sort of free market economist, economist, right?

Speaker 1 So I rarely, if ever, say things like this. But what I've been telling people is now is the time to throw money at the problem, okay?

Speaker 1 That's not something I usually say.

Speaker 1 But the costs of the COVID disaster, which are now running in the trillions, right, are so large that it's really going to pay, as I said, to kind of advance on all fronts.

Speaker 1 And we're going to lose money doing this. Okay.
There's going to be waste.

Speaker 1 We're going going to fund some vaccines which look great and then fail uh the astrazeneca vaccine for example uh this was early out of the gate this is from oxford uh it looked great they have um sold pre-ordered uh like two billion doses so this is kind of the really the most promising vaccine a lot of countries have bought into the astrazeneca vaccine and as you might know last week the

Speaker 1 trial, one of the clinical trials, was shut down because they had

Speaker 1 a negative effect. They're not sure whether it was due to the vaccine or due to something else, but it's a danger.
And that could happen. I'm not saying the AstraVeneca vaccine is going to fail.

Speaker 1 I hope it doesn't. I hope this turns out to be a false alarm, but that could happen at every stage in the process.
So you really want to have a diverse set of vaccines in your portfolio.

Speaker 1 And some of them, you know, pay for manufacturing capacity. Some of them

Speaker 1 have the price, the guaranteed price.

Speaker 1 We have some

Speaker 1 fast grants like Tyler has been given out.

Speaker 1 Take a lot of shots on goal because we don't know which shot on goal is actually going to be the one which succeeds.

Speaker 2 Okay, so let me ask you about prizes generally then. So are you emphasizing prizes in this context because it's such an immediate and big problem that we should try out different funding mechanisms?

Speaker 2 Or do you think prizes generally are a useful, you could be a useful solution in many fields where the problem space or the solution solution space is big

Speaker 1 yeah exactly so the the latter I mean I think one advantage of the prize in the current context is it's easy to explain to Congress okay

Speaker 1 so like just do something okay and this has been incredible frustration to me that Congress has been

Speaker 1 so lazy, so slow.

Speaker 1 They're so complacent. They're not doing anything.
I mean, it took them ages to

Speaker 1 set up funding for testing. And then they sent the funding and they haven't spent the money.
So

Speaker 1 it's just incredibly frustrating.

Speaker 1 And I thought a prize, because you can announce it even before you've gathered the funds or figured out who's going to be on the prize committee or anything like that. Just announce the prize.

Speaker 1 We're just going to give we have this pot of money. It'll be there a year or two from now.
We'll figure out who gets it. That could be done fairly quickly.
And in fact, there is

Speaker 1 in the code, I think from Obama's time,

Speaker 1 every agency has the right to set up a $50 million prize, up to a $50 million prize, and they can be accumulated.

Speaker 1 So you could have, you know, two or three agencies or four agencies could right now set up a $100 million, $200 million prize just by getting together. They haven't done that, but they could do that.

Speaker 1 So that was one thing, just the speed. The other point is the one which you just mentioned is that

Speaker 1 Prizes are particularly good when sort of the experts have kind of failed. Usually the experts are right.
Don't get me wrong. I'm not anti-expert.

Speaker 1 Usually the experts are the best people to go to.

Speaker 1 But then sometimes you have a problem where the experts have run against the wall and you need to take a very broad view and you need to get the crazies in and you need to get the out-of-the-box thinkers and a prize could be very useful for that.

Speaker 2 So why don't we have prizes in other fields? Like why are grants the dominant way of funding research?

Speaker 1 It's a good question.

Speaker 1 And I don't really know the answer. Prizes were much more common in the 19th century, and then they kind of failed off or trailed off in the 20th century.

Speaker 1 And they've seen a little bit of a resurgence in more recent decades. One reason perhaps is that the, you know, giving out money is kind of a powerful

Speaker 1 job.

Speaker 1 And if you're doing it, you know, the NIH or a committee, you know, the people,

Speaker 1 you bring in, you give out the money to the people who are giving out the money.

Speaker 1 And that's a very nice kind of job, very nice, can be a very nice job to have.

Speaker 1 And a prize,

Speaker 1 if it's set up correctly, where, you know, you have a fairly strict guidelines as to what meets it and what doesn't meet it.

Speaker 1 And you only get it if you win, that kind of gives less power to the prize givers. And maybe that's part of it.
But I'm not really sure, actually. It's a puzzle.
It's a puzzle as to why.

Speaker 1 grants have been used much more than prizes.

Speaker 2 And but why don't we see evidence of the clear efficacy of prizes? Because there doesn't seem to be a clear coordination problem here.

Speaker 2 Like just an altruistic patron could just decide to set up prizes for not necessarily this problem, but just a lot of other problems.

Speaker 2 And if for many problems prizes are more effective, we should see that the results from these prizes, the innovations they create, are just much more effective than the grants that are afforded in that field.

Speaker 2 So why aren't we seeing like the clear evidence of the superiority of the prize?

Speaker 1 Well, we do have some evidence on this. For example,

Speaker 1 there are these Howard Hughes grants.

Speaker 1 So Howard Hughes actually tried to set up a tax dodge and ended up founding the Howard Hughes Medical Centers,

Speaker 1 which have lasted much longer than his tax dodge. So he had some benefits there.

Speaker 1 And the distinguishing feature of these

Speaker 1 Howard Hughes grants is that they say, okay, here's a bunch of money. Come back to us in five years and tell us what you did with it.
Okay.

Speaker 1 You don't really have to come up with a plan or tell them what you're going to do. They're sort of like a genius grant in some ways.
And it turns out that those grants are much more effective.

Speaker 1 The researchers who get them,

Speaker 1 that research tends to be much higher sighted, more patents, and so forth.

Speaker 1 And now you, of course, you have to control for the fact that the researchers who get these grants are different than the researchers who get other types of grants.

Speaker 1 But even when you do that, even when you set up some

Speaker 1 fine controls, it looks like giving money with less strings attached actually is more successful. We'll also see with my colleague, as you know, Tyler Cowan, has given out more than $20 million

Speaker 1 in COVID grants and given them out incredibly quickly. I think Tyler gave out $20 million faster than the NIH had given out a single grant.

Speaker 1 So we'll see how effective that had been. There have already been some good returns from that.

Speaker 1 So

Speaker 1 maybe there'll be a resurgence in prize giving or fast grants or prize giving or however you want to call it.

Speaker 2 Interesting. Okay, so now let me ask you about the Bamuval effect.

Speaker 1 Yeah, Bamul, yeah. So

Speaker 1 we have these industries

Speaker 1 where every year, just the prices just seem to keep going up and up and up and up without fail.

Speaker 1 And education, both primary and and you know secondary education as well as university education is one example where the prices sort of inexorably it seems go up. Healthcare is another one.

Speaker 1 But there's other ones as well. Those are the ones which are big and they're most common.
But another thing people have noticed, for example, is that

Speaker 1 fixing things, repairs, seem to go up a lot a lot over time.

Speaker 1 So it's much more expensive to have a pair of shoes uh uh repaired uh today than it used to be auto repair has been going up in in price uh over time relative to other uh goods and services so much that you know for example um i had to replace the blade on my lawnmower i didn't have to replace it the blade on my lawnmower got dull now even 30 years ago you'd probably go to a sharpener But I didn't do that.

Speaker 1 I just went to Amazon and ordered a new blade, right? No one sharpens their blades anymore, you know, maybe for like a $200 knife, but not for

Speaker 1 a lawnmower, right? You just buy another one, which is what I did. So anyway, so the question is, why are these, why is it that some sets of goods and services appears to be going up over time?

Speaker 1 And William Baumel is an economist. He has an explanation for that.

Speaker 1 Traditional explanations, of course, as you're probably familiar with, say, well, there's something wrong with the education industry. There's too much government, right?

Speaker 1 Or there's something wrong with healthcare.

Speaker 1 And in each case, there's like some special story.

Speaker 1 And the story that Jobmel gives, which is why one of the reasons I like it, it's like one theory to rule them all, okay?

Speaker 1 But that's kind of the background. So we have this set of industries.
Prices appear to be going up year after year after year. And the question is why?

Speaker 1 What we did, Eric Alland and I, in this little book, is, first of all, we we looked at the kind of traditional story. Is it like unions? You know, is it regulation?

Speaker 1 And it just doesn't appear to fit. It doesn't appear to fit.

Speaker 1 So what is the Bommel? What is the Bommel story?

Speaker 1 I explain it different ways when people ask me. I think I'll explain it in a different way today.

Speaker 1 I think the way to think about it is to think, first of all, in terms of real goods and services. Just think about the barter economy or

Speaker 1 forget prices for a second and just think about kind of real goods and services, the real economy. And you have some sets of goods and services which are increasing in productivity every year, right?

Speaker 1 So computers, they're getting faster

Speaker 1 and they're getting more powerful every year. Manufacturing, right?

Speaker 1 We're able to manufacture a car using less steel than ever before and in a shorter amount of time using less labor, you know, and so forth. So these goods are increasing in productivity.

Speaker 1 There's some other industries which, for whatever reason,

Speaker 1 are just slower, increasing in productivity. I mean, you're bound to have

Speaker 1 some randomness or just some differences, right?

Speaker 1 Some industries, for technological reasons, are increasing in productivity faster than other industries.

Speaker 1 So if you think about these two different types of industries, one of which is the progressive sector, the other of which is the slower sector, the slower productivity sector.

Speaker 1 It doesn't have to be negative productivity, just it's growing more slowly in terms of productivity. So you get

Speaker 1 in the progressive sector, you get a lot more output per input over time, and in the stagnant sector, only very slowly does output grow per unit of input. Well, if you think about that,

Speaker 1 then it has to be the case that prices in the stagnant or less productive sector have to be going up. And the simple reason is because goods trade for one another.

Speaker 1 So if you can get a lot more goods in the progressive sector, well, that means if you want more

Speaker 1 of the stagnant sector, you have to give up a lot, okay? Because you can get a lot, right?

Speaker 1 So kind of the classic example is the

Speaker 1 symphony, right? Or the string quartet. right and you think about 1826 the string quartet it takes four people 40 minutes to do a hide and string quartet.

Speaker 1 And you think about 2020, it takes four people, you know, 40 minutes to do a string quartet. So their productivity hasn't gone up at all.
But what you can get,

Speaker 1 the opportunity cost of that has gone way up. So

Speaker 1 in 1820, to hire four people, you know, for 40 minutes, you were giving up, you know, I don't know.

Speaker 1 like a bicycle,

Speaker 1 whatever you want to call it. I don't know something, you know.

Speaker 1 But now if you give up you know four people for 40 minutes that's worth a lot you know you can get you know for the movies and a dinner out and you know two bicycles or whatever right so you're just giving up a lot more um and that's really why the price has gone up is because

Speaker 1 of the progressive sector so to put it the other way it's not that there's a problem with the stagnant sector I mean it's not a direct problem in any case.

Speaker 1 It's not that there's something wrong, unions or, you know, regulation or something like that. What's really going on is something good.

Speaker 1 Something good about the progressive sector. That's why things are getting more expensive because

Speaker 1 you have to give up a lot more

Speaker 1 because this sector is becoming much more productive.

Speaker 1 Let me just give you one other way of thinking about that, and that is

Speaker 1 what this implies is that prices in the

Speaker 1 stagnant sector will start to go up less quickly when the progressive sector is slowing down.

Speaker 1 So this means that

Speaker 1 the prices in the stagnant sector go up much more quickly when you have a lot of growth in the productive sector. And now with the great stagnation,

Speaker 1 as growth is slowing down, we're actually seeing like healthcare prices are going up less quickly. So when did healthcare prices really go up?

Speaker 1 The big increase in healthcare prices was in the 60s, 50s, and 60s. And that's when healthcare prices really exploded.

Speaker 1 They grew much more quickly, like 10% a year.

Speaker 1 And that's when productivity was going up. So now productivity is slowing down, and we're seeing prices are not going up so quickly in these stagnant sectors.

Speaker 1 So that kind of tells you this is not a good thing.

Speaker 1 So higher prices

Speaker 1 could be a good thing in some ways. And

Speaker 1 less price inflation could be a bad thing.

Speaker 2 Yeah, it's such an interesting explanation. It just changes all of the prevailing wisdom that you hear everywhere about

Speaker 2 why these industries are getting so much more expensive. But I have a few questions about that.
So

Speaker 2 as you laid out, one of the explanations of the bumble effect is that one of the main inputs into many of these sectors is labor.

Speaker 2 And if you can get more out of labor in one sector over time and not so much in the other sector, they're willing to pay more for labor in the progressive sector and that raises the price of labor everywhere.

Speaker 2 But how can labor be getting more expensive at a time where we keep hearing about wage stagnation?

Speaker 1 About what stagnation? A wage stagnation.

Speaker 1 Oh, yeah, right. Yeah, yeah, yeah.

Speaker 1 Right.

Speaker 1 So,

Speaker 1 first of all,

Speaker 1 we hear about wage stagnation. So, this is something which Helen and I actually add to the Bommel effect in our book, because Bommel was exactly, as you said,

Speaker 1 most focused on kind of labor in general. And we just give it a slight twist in our book.
We say, look,

Speaker 1 it's skilled labor. It's skilled labor, which in particular has gone up in price because

Speaker 1 it's become a skilled laborer is much more valuable in Silicon Valley, right, than they used to be. And so

Speaker 1 you think about healthcare, you think about education. These are sectors which involved a lot of skilled labor.
Okay.

Speaker 1 So I have a PhD.

Speaker 1 I teach, you know, typically like 30 students. We'll talk about online education later, but let's see, I teach 30 students a semester.
That's a really expensive use of someone with a PhD, right?

Speaker 1 I'm teaching 30 students and,

Speaker 1 you know, I don't want to say like I could go to Silicon Valley and, you know, be rich or whatever, but someone like me could, right?

Speaker 1 That is the trade-off which we're talking about as a society. Not Alex Tavrock could, you know, suddenly move to Silicon Valley.

Speaker 1 But somebody who has the opportunity of getting an economics PhD, they can spend their lives teaching 30 students at a time, or they could go work for Uber, which a lot of economics PhDs do, or for Amazon, right?

Speaker 1 And so the opportunity cost of a PhD has gone way up because now they can be hired, you know, for Amazon or Uber. And that's why, but they're still doing exactly the same thing in the classroom.

Speaker 1 They're still just teaching 30 students. So that price has got to be going, has got to be going up.

Speaker 2 Does Abomalifex suggest that AI automation fears are overhyped?

Speaker 2 Because more and more of the economy is service-based, uh, because I mean, that sector isn't growing more productive, so it's not growing smaller.

Speaker 2 Um, and also that the value of labor goes up over time as the sectors that are becoming more productive can produce more?

Speaker 1 Yeah, yes, and no.

Speaker 1 Um, so it's definitely true that the service sector has grown uh over time, and in general, you know, the stagnant sectors will grow over time because there's only so many cars you can have or want, really, probably, right?

Speaker 1 So, even if when cars get

Speaker 1 less expensive, people might have one or two

Speaker 1 and the quality goes up somewhat, but there's kind of a limit to revenues in that sector.

Speaker 1 So, the stagnant sectors do tend to grow. So, education and healthcare have become a bigger part of our economy, which is kind of natural.
Now, does this mean that AI is overblown?

Speaker 1 I think it means that we're not going to run out of work. That's true.
But

Speaker 1 I do worry, and as we're already seeing, that

Speaker 1 certain types of labor,

Speaker 1 you know, can be overrun by automation, right?

Speaker 1 So less skilled labor, their wages have not been going up.

Speaker 1 And partly that's automation, partly that's trade.

Speaker 1 And

Speaker 1 that is only going to become more serious with remote work and as well with automation. So yeah, I do worry about

Speaker 1 if you can't have, if you can't raise your education level, you can't raise the skill level of your workers, then you're in real trouble.

Speaker 1 You know, people are very flexible, that is true.

Speaker 1 But, you know, I think about horses, right?

Speaker 1 You know, the horse, when we introduced the automobile, it's not like horses all found alternative employment. They found the glue factory, right?

Speaker 1 And, you know, horses are pretty flexible. I mean, you can do a lot of things with horses,

Speaker 1 but it's not like they all slotted into different areas of the economy. Like the, you know, I mean, we did have more

Speaker 1 horses for recreation and so forth.

Speaker 1 But no, overall, the number of horses is down. And so I worry about less skilled labor.

Speaker 2 And how much of the great stagnation, you mentioned the great stagnation, how much of it can be explained by just the economy over time is more and more dominated by the sectors that are growing in productivity the least?

Speaker 1 Yeah, I think that's exactly right. I mean, as you shift to the service sector, you see a

Speaker 1 decline in your growth rate simply because you're buying more of the things which are growing more slowly.

Speaker 1 And that's going to continue.

Speaker 1 It can be part of a naturally growing economy.

Speaker 1 There's a new good book on this.

Speaker 1 You probably know it. I've forgotten.

Speaker 2 I should take the title.

Speaker 1 The author is going to be mad at me for not, I'll come back to it.

Speaker 1 But there's an optimal stagnation. Okay, so it can be good that

Speaker 1 we are growing more slowly in the sense that

Speaker 1 you have

Speaker 1 focused your spending on sectors which are growing more slowly. And that's kind of a natural change.

Speaker 1 Now, obviously what we would like is for all sectors to boom and maybe we could do something about that, but it's not going to be easy.

Speaker 2 So speaking of one of these slow growth sectors, let's talk about education. So

Speaker 2 you write in the paper to decrease the college wage premium and the relative price of goods and services that use college-educated workers, we need to increase the educational attainment of the U.S.

Speaker 2 workforce.

Speaker 2 Now, my first guest on the podcast was your colleague, Brian Kaplan, and he would argue probably the opposite: that he'd say, you're just increasing the cost of signaling if you make people have higher educational attainment because they had a signal relative to the other counterparts who are now more highly educated.

Speaker 2 So, how would you respond to that?

Speaker 1 Yeah,

Speaker 1 so

Speaker 1 there's clearly, Brian is clearly right that there's a lot of signaling involved, particularly in college education. That's not the only type of education that counts, for example.

Speaker 1 In Germany and Austria and many of the European countries, they invest a lot more in apprenticeships and worker training.

Speaker 1 So the interesting thing is, is that

Speaker 1 We have this crazy system in the United States where

Speaker 1 the high school graduation rate rate is actually quite low compared to other countries. I think at the time I wrote my book, it was only like 75% for men.
It's gone up since then.

Speaker 1 It's maybe like 80, 85%.

Speaker 1 But we still have a large chunk of our workforce, which does not graduate high school. But then of those who graduate high school, we send a huge proportion to college.

Speaker 1 way more than in Europe, in Germany. Okay, so we're sending like 60, 70% of those who graduate high school, then go on to college.
And in Germany, it's more like, you know, 40%.

Speaker 1 I can't remember the exact figures, but it's something like that. Okay.
So it's like a completely crazy system.

Speaker 1 And on the other hand, in Germany, almost everybody graduates high school, like 97%, something like that.

Speaker 1 So I think we can rebalance here.

Speaker 1 Definitely more people should graduate high school.

Speaker 1 More people should be highly skilled. Does that mean they should be going to college? No.

Speaker 1 Because when a lot of these kids go to college and then they take, you know, I'm going to upset some of my friends, then they go into journalism, right?

Speaker 1 Which is like a terrible field or psychology, right? These are terrible fields to go into for jobs.

Speaker 1 And yet these fields, journalism and psychology in particular, have grown. The number of people, shockingly, going into computer science has been like flat for like 30 years.

Speaker 1 I mean, you would think whatever field has grown more than computer science, you would think it would be booming. But actually, no, it's pretty flat.

Speaker 1 And what increases we have seen in people going into computer science has all been foreign students. Okay.

Speaker 1 So the foreign students, they don't, you know, if you're from South Korea or India, you don't come to the United States to do a journalism degree or psychology, right?

Speaker 1 You know, your parents aren't going to allow you to do that.

Speaker 1 You come to get some hard science, right?

Speaker 1 And so I think the U.S. students should do more of that.

Speaker 2 Yeah, I promise I'm not contributing to the problem. I'm right here at university studying computer science.

Speaker 1 Okay, so I didn't want to make any presumptions.

Speaker 1 But yeah,

Speaker 1 I'm glad you fit the

Speaker 1 correct modus operandi. You're doing the right thing.
Yeah, yeah.

Speaker 2 It would have been quite, it would be pretty funny if I was right here studying journalism and had to hear you say that.

Speaker 1 Okay, so now let's talk about it. You actually could be a good journalist.

Speaker 1 There might be room for you.

Speaker 2 So let's talk about something that you have launched, Marginal Revolution Online University, which is trying to change up the system a little bit.

Speaker 2 And so you've written about online education and how it's going to, how these massive open online courses are going to select for the best teachers.

Speaker 2 What's going to happen to the rest of the people who are trying to teach right now or are already teaching?

Speaker 1 Yeah.

Speaker 1 So I think the long run is pretty bad for teachers.

Speaker 1 You know, we always complained that, you know, look how poorly we teach our teachers. You know, we pay them less than our sports stars, right? You know,

Speaker 1 basketball or something like that. And what's going to happen is we're going to pay our teachers more like basketball stars and baseball stars, but there's just going to be a lot fewer of them, right?

Speaker 1 Because when you teach online,

Speaker 1 you know, I said earlier I teach 30 students, but with Marshall Revolution University, I can teach 300 students, and I do.

Speaker 1 So

Speaker 1 hundreds of thousands of students. So like, why,

Speaker 1 you know, then there's,

Speaker 1 I mean, frankly,

Speaker 1 people like me, if not me,

Speaker 1 are going to drive a lot of people in the teaching business out of business. And that actually would be a good thing.

Speaker 1 Because, you know, why should you

Speaker 1 The problem is education has always been difficult to scale, right?

Speaker 1 It's such a one-on-one kind of business. And if you're able to scale education,

Speaker 1 actually we're being forced to because of the pandemic, but if you're able to scale education, there are huge, huge, massive returns that are possible there.

Speaker 1 So

Speaker 1 whoever cracks that nut, and I don't think it's been cracked entirely.

Speaker 1 I think we've gone a long way, Marjorie Revolution University, but we're only the beginning.

Speaker 1 Whoever cracks that nut is going to do incredibly well because you go from one person teaching 30 students at a time to literally you could teach the entire world.

Speaker 1 And you tie, this goes back to the Bommel effect,

Speaker 1 if you can tie education to a progressive sector, right? Instead of tying it to a labor-intensive sector, you tie it to technology, which is a progressive sector. Then, you know, all bets are off.

Speaker 1 Everything can change really, really quickly. So artificial tutors.
Artificial tutors are already as good in randomized controlled trials as real tutors okay uh

Speaker 1 and uh you homework assessment systems i mean so

Speaker 1 what a uh an ai uh can do is look at hundreds of thousands of student responses on a test for example and then it can figure out looking at you written some tests and it'll see your pattern of errors.

Speaker 1 And it says, aha, okay, machine learning. I could see the machine will be able to see what concept you're not grasping and so instead of just repeating you know the lesson okay

Speaker 1 the artificial tutor can pinpoint and direct the student exactly to that piece of knowledge oh you're using the quadratic formula incorrectly this is what you need to know okay it can direct them exactly to that piece of knowledge which they need to unlock um the key the key to learning so the students can advance much more quickly.

Speaker 1 So I think there's huge, huge possibilities for artificial intelligence and for

Speaker 1 video online learning and so forth.

Speaker 2 So you give out these optimistic scenarios of how education is going to change, but a pessimist might say, well, listen, we've gotten these sort of predictions back since Edinburgh said that the motion picture is going to change education forever.

Speaker 2 And the same thing happened with the radio, with books, with television. So what's different this time? How is it this is going to disrupt the system that's been around for a thousand years?

Speaker 1 Yeah, you're absolutely right. You would think that with books, right? You know, oh, you can get all this knowledge, you know, in this book, and then you can carry it around with you.

Speaker 1 You know, you can read it at night whenever you want to. You know, this is much better than having to talk with some professor guy.

Speaker 1 Yeah, the book has a lot of the advantages, which I claim for online education. So this makes me,

Speaker 1 I don't know, worried or humble or modest or

Speaker 1 I could be wrong, it's for sure.

Speaker 1 You know, I do, I tend to think, though, that, so, you know,

Speaker 1 it's bad to say this time is different,

Speaker 1 but it is interesting how

Speaker 1 a group of technologies come together, which seemingly

Speaker 1 small differences can make big effects. So I think, for example, about the Apple Newton.
Okay. So the Newton was basically

Speaker 1 a cell phone. It was basically a portable computer, kind of a, but it was just,

Speaker 1 it wasn't quite fast enough. It wasn't connected to the internet enough.

Speaker 1 So it just, the Newton never took off. And yet really just, it's really just a small step.
from the Newton to the iPhone. And yet the iPhone was huge.
Okay.

Speaker 1 But technologically, there's very little difference between the Newton and the iPhone. The Newton was a failure, the iPhone was a huge success.

Speaker 1 So I think just in kind of the speed at which things can be done online

Speaker 1 and just

Speaker 1 the quality of the animations, the music, the artificial intelligence, all of these things advancing, you kind of reach a threshold and then

Speaker 1 things boom. And I can tell you that my students, you know, I teach a bunch of students online at George Mason University.
A lot of them, surprising even to me, tell me that they prefer online.

Speaker 1 They prefer at least my class

Speaker 1 online. And, you know, this makes sense because students have different methods of learning.
And the kind of the classroom kind of sucks, right? I mean,

Speaker 1 you sometimes you can't hear the professor,

Speaker 1 you know, you have to be there at a certain time, at a certain place, you can't pause, you feel you can't ask questions.

Speaker 1 With online, something you know, you didn't quite hear, you didn't understand, you just pause it, you know, and you rewind, right? Or think about podcasts.

Speaker 1 You know, I think a lot of us are very familiar with listening to podcasts at, you know, 1.5 or 1.25 speed, right?

Speaker 1 Because then you just slow down when there's something new and you speed up when there's something not new. And that's like a huge advantage.

Speaker 1 Okay, so I can learn a lot more with the podcast just because I'm in control of the speed, you know. And so this means that online students can go at their own pace.

Speaker 1 So there's a huge number of advantages. And this idea of tying it to a progressive sector, I think, is important as well.
This is an example I gave, which we discovered purely by accident, is that

Speaker 1 we captioned all of our videos in English. Okay.

Speaker 1 And then we discovered, you know, that YouTube automatically takes the English captions and translates them into dozens, hundreds of other languages.

Speaker 1 And what this means is that every improvement in deep mind, right?

Speaker 1 Every improvement in artificial intelligence automatically turns into an improvement in our product because periodically, you know, the captions, they get better without us having to do any work, right?

Speaker 1 Just the YouTube algorithms, you know, improves the captions over time.

Speaker 1 And so our product is becoming better even without us making any changes.

Speaker 2 But I don't want to speak for Brian Kaplan here, but maybe somebody might say,

Speaker 2 what if you're just solving the wrong problem, that people aren't really giving up four years of their life to get a better education?

Speaker 2 I might just be speaking for myself here, but your videos are much better as far as an economics course goes than my high school economics course.

Speaker 2 And I still have to attend my high school economics course and my college economics course.

Speaker 2 And so unless we can figure out a way for people to signal their intelligence and conscientiousness through online online courses, people are not going to substitute this for what college provides.

Speaker 1 Right. So this is why I think that

Speaker 1 the online, the MOOCs, as it were, you know, Coursera and things like that, they're not going to replace universities. But universities are going to go online, right? So you still need that stamp.

Speaker 1 You still need, we haven't cracked that nut.

Speaker 1 Maybe we will.

Speaker 1 You know,

Speaker 1 there are some ways of doing it in some fields right now, like computer science. But you're right, we haven't cracked that nut.
But that's why universities will be the ones who go online.

Speaker 1 They're not going to be, and not all of them are going to make the transition. You know, we're seeing this right now with the pandemic.
A lot of universities are falling by the wayside.

Speaker 1 But the ones which can

Speaker 1 have a reputation,

Speaker 1 a high reputation, they're going to be able to go online and they're going to be able to expand their market. Now, some of them don't want to.
Like Harvard does not want to expand its market.

Speaker 1 But a place like George Mason, where I teach, okay, has a decent reputation in the world, okay, and we'd be very happy to expand our market.

Speaker 1 We'd be happy to have tens of thousands of students all over the world. Georgia Tech has done this probably, as you know, better than anybody.

Speaker 1 Georgia Tech has the largest computer science program and master's program in the world, has something like 7,000 online students. The online students are treated exactly as the

Speaker 1 residential students. They're graded in exactly the same way.
The professors don't even know which is online, which is not online.

Speaker 1 It is a hugely successful process. It graduates, I think, like 7% of all the computer science masters in the world.
So it's a hugely successful program.

Speaker 1 And they're only able, it's a quarter of the price, less than a quarter of the price online than it is residential. So that I think is

Speaker 1 a trailblazer or a warning warning sign, depending on your point of view. But Georgia Tech has taken

Speaker 1 a master's degree in computer science and successfully brought it online to the entire world. And that is a mark for the future.

Speaker 2 Now, tell me if this is too optimistic a scenario, but is it, or if it's precluded by Bammel's effect as well?

Speaker 2 But is it possible that the people who would have been teachers otherwise, but now are being out-competed by the best teachers in the world, they will just end up being personal tutors.

Speaker 2 And then we can get back to like a sort of older model of one-on-one instruction, whereas it's going to be too expensive. Yeah.

Speaker 1 Some of that will happen. So I think,

Speaker 1 you know, what is the real nut to crack? A lot of it, right, is

Speaker 1 I'm going to sound contradictory because I'm going to say psychology, right?

Speaker 1 Not that you need a degree in psychology, but

Speaker 1 people are going to need coaches, right? So, you know, life coaches, which people laugh at because only the rich and famous, you know, have a, you know, a life coach or whatever, right?

Speaker 1 But that is a large part of education, I think, is going to be more like sports people, people in sports, they all have coaches. So why shouldn't you and I have coaches?

Speaker 1 So I think there will be an industry for life coaches, somebody to encourage you, somebody to try and map out your skills, kind of like what the high school advisors are supposed to do.

Speaker 1 You know, you're this sort of person, you should go to this. You you know, there'd be a lot more of that.

Speaker 1 So education will be debundled, right?

Speaker 1 The kind of traditional lecture part of it, sage on the stage or all that, that transmission of information,

Speaker 1 that part will go online and a many,

Speaker 1 a much smaller number of teachers will teach many more people, but

Speaker 1 the coaching part of it,

Speaker 1 possibly the tutoring, will be spread out.

Speaker 1 It'll be much more hierarchical, actually. So

Speaker 1 one guy at the top will have this kind of hierarchy of TAs and things like that.

Speaker 1 I mean, that's kind of how college works anyways. A little bit.

Speaker 1 A little bit already, yeah, but even more so.

Speaker 1 right like we you're absolutely we have it already where you know michael sundell you know teaches you know 400 students or whatever in his philosophy class and has a bunch of tas um but you multiply that by a factor of 10 or a factor by 100.

Speaker 1 And so I think the model will, which I've already started, Tyler and I have already kind of started this, but whoops,

Speaker 1 the model will be kind of

Speaker 1 you teach online, right? And then you show up at different places around the world for like guest appearances. Okay.
So I've been to India a couple of times.

Speaker 1 I go and I teach there and the old students all know me, right? It's kind of weird, right?

Speaker 1 But they're all, they are, oh, Professor Tavarok, you know, they all, they're already familiar with me. They know how I teach and so forth.
And then I just show up in the class.

Speaker 1 So I can kind of see a model

Speaker 1 like Paul Erdos, you know, the famous mathematician who would just go around the world and co-author with different mathematicians. I've never had a fixed address.

Speaker 1 I can see some teachers doing that, just kind of going around the world. And they teach a few days in South Korea and a few days in India and kind of it builds up this community.

Speaker 1 Most of the teaching is online, but then you get to meet the person occasionally.

Speaker 2 But with the Bamul effect,

Speaker 2 shouldn't I expect that

Speaker 2 because if education now becomes a progressive sector because of the substitute, then it's going to exasperate

Speaker 2 the increasing cost and things like TAs or coaches or whatever else that you know.

Speaker 1 Yeah, so we're so yeah, we're never gonna

Speaker 1 as so there are two effects going on at the same time, which Baumel

Speaker 1 nicely has both of them. And that is, you know, why is the stagnant sector becoming a higher price? Well, it's becoming a higher price because the progressive sector is growing more productive.

Speaker 1 But that means you're also getting richer. So there's a substitution effect and there's an income effect.

Speaker 1 So that's an interesting thing about education and healthcare.

Speaker 1 is that even as the price has gone up, we're spending more on these goods, right? And that's really bizarre from just about the perspective of just about any other theory.

Speaker 1 Because if you think that the problem is a lack of negative productivity or regulation or something like that, right?

Speaker 1 Well then

Speaker 1 if education is becoming more expensive because of costs are going up, well then you wanna consume less, right?

Speaker 1 So then why would you be consuming more when the price is going up? You need like two theories to explain this. One theory to explain why the price is going up.
And then you need like another theory.

Speaker 1 Well, we're becoming more credentialed or whatever to explain why people are consuming more of this good. In Bommel,

Speaker 1 you're pushing out the production possibility frontier as it is becoming

Speaker 1 more curved at the same time. So the price is going up, but you're also becoming richer.
So Bommel explains both of these things very, very nicely.

Speaker 2 It's not contradictory at all in Baumel's theory that you would spend more on a good even as the price is going up because the reason the price is going up is in part because we're becoming more generally richer over time right and so it's becoming more affordable uh but then you also point out in the paper that even though we have more teachers per capita now math scores really haven't increased right um so shouldn't we expect like if teachers are going up it's not just a cost per teacher it's also the amount of teachers we have shouldn't that at least increase the outcomes we get yeah so

Speaker 1 you're absolutely right um And if you were dealing with kind of a fixed set of students, I think that would happen.

Speaker 1 But we are, as I mentioned, you know, many, many more people are going to college than ever did before.

Speaker 1 And that just means like that the standards are going down and the students,

Speaker 1 I mean, frankly, the students just need a lot more hand-holding today than they did in the past, because in the past,

Speaker 1 I mean, you just had the elite, which was going to college, right?

Speaker 1 And these people could kind of take care of themselves. They came from wealthy families

Speaker 1 and could kind of take care of themselves. And now we're just having many, a much wider variety of students are coming to college.
And they do need a lot more input.

Speaker 1 Now

Speaker 1 there is another factor

Speaker 1 which is tied with the great stagnation, which is very worrying, is that we seem to be needing a lot more input per unit of output in even in the progressive sectors like i mentioned computers uh becoming much more faster and so forth but if you look at the number of

Speaker 1 researchers in the computer sector like yeah yeah kind of you know guys figuring out i'm not talking about computer scientists i'm the guys who are working on the chips right uh the electrical engineers i suppose okay you need many more electrical engineers to get the same growth rate today than you did in the past.

Speaker 1 And the same thing, you know, I work a lot on pharmaceuticals.

Speaker 1 I tend to, you know, focus on the FDA and the FDA kind of slows things down. But even putting aside that,

Speaker 1 the amount of research and development budget which goes into creating a new pharmaceutical is much higher today than in the past. And it's not just a regulation effect.

Speaker 1 You also have just many more scientists, it seems, to get the same

Speaker 1 life expectancy increase from a pharmaceutical than you did in the past. It was more low-hanging fruit in the past.

Speaker 2 Right. Yeah, as you know, and as Tyler Cowen wrote about, Nicholas Bloom and others wrote a paper where they talked about this.

Speaker 2 Like there's, we need 18 times as many semiconductor engineers just to get the same Moore's law. Oops, sorry about that.

Speaker 2 The same Moore's Law doubling of transistors every two years.

Speaker 1 Yeah, exactly. It's very worrying.

Speaker 1 So kind of one hopes that maybe we will see kind of some quantum quantum leap in some technology.

Speaker 1 You know, you kind of get a quantum leap, right? And then you get diminishing returns and then you get another quantum leap. So I'm hopeful that, you know, maybe it's quantum computers.

Speaker 1 I don't know, quantum leap, but,

Speaker 1 you know, hopefully we'll see some,

Speaker 1 you know,

Speaker 1 growth. Some sector will explode.

Speaker 1 Otherwise, those facts, which you just mentioned, are kind of really disturbing.

Speaker 2 Yeah, they mentioned that it was every 13 years, you need to double the amount of researchers to get the same growth. So we could just have every pair of 13-year-olds just have four research kids.

Speaker 1 Yeah, yeah. And it's disturbing because, right,

Speaker 1 because you would have predicted that

Speaker 1 with many more researchers, research is a public good, you know, ideas are free, they flow everywhere, that you would have had much, much more advance.

Speaker 1 And it just seems that we've only barely been able to keep pace. If that, you know, I am optimistic, sort of,

Speaker 1 you know that with china and india becoming richer that you get a lot more scientists and engineers in the world as a whole um and that'll give us a boost um

Speaker 1 but so far you know it's not

Speaker 2 it's not the huge gain that one would have hoped for yeah yeah um i i just plugged those numbers into like uh into some code and it turns out that if if the if you know research productivity declines every 13 years or halves every 13 years you plateau at like 40 increase or something like

Speaker 2 But if it doesn't, in the next entry, you could get like 600% growth otherwise.

Speaker 1 Right, right. So there's a

Speaker 1 small possibility of a very big gain if we get lucky, but the trend is not good. Yeah.

Speaker 2 Oh, so let me ask now about dominant assurance contracts. Before I ask you some more questions about it and we get in the weeds, do you want to explain what that is?

Speaker 1 Sure.

Speaker 1 So

Speaker 1 dominant, it's kind of interesting. interesting.
This maybe is my most important paper, but it's kind of overlooked,

Speaker 1 except recently it's grown a little bit, but this solves the public good problem.

Speaker 1 That's a little bit of an exaggeration.

Speaker 1 But, you know, Paul Samuelson said this problem was impossible to solve. And for a long time, it looked like you couldn't solve this public good problem.
The public good problem, right,

Speaker 1 is that

Speaker 1 for a good which benefits everybody, you know, non-rival,

Speaker 1 non-excludable, okay,

Speaker 1 there's gonna be a free rider problem, okay?

Speaker 1 And so people won't wanna contribute to it, even though it benefits everybody.

Speaker 1 People say, oh, I'm gonna sit back, I'm gonna let the other guy contribute to it, and then I'll benefit without having to pay the cost.

Speaker 1 And of course, when everyone does this, you don't get the public good at all, right? So how to produce public goods? It's a huge, huge problem.

Speaker 1 And it looked like this was impossible to solve. Now, I solved part of it with this dominant insurance contract, which is easier easier to explain today than when I wrote the paper because

Speaker 1 before I wrote the I wrote the paper before Kickstarter.

Speaker 1 So Kickstarter is now something almost quite similar, not quite the same, but similar. So in Kickstarter,

Speaker 1 you contribute towards the public good. And you only pay if enough other people contribute that you reach the threshold, right?

Speaker 1 You get over the line, and then you have to pay. So Kickstarter solves one problem in that you're not worried that the other people, you know, just won't show up and then your funds will be wasted.

Speaker 1 Okay. Your funds are never wasted.
Your funds only are taken from you if enough people show up to contribute towards the public good. Okay, that's an assurance contract.

Speaker 1 Here's the dominant assurance contract. It has just one simple twist.
It says

Speaker 1 if

Speaker 1 not, if you don't reach the threshold then everybody who agreed to pay gets a refund bonus okay

Speaker 1 so uh

Speaker 1 therefore

Speaker 1 think about it you're thinking about whether should i contribute to this project or not well there's really only two cases you need to consider one is if the project is uh successful then i get the benefit of the public good there's some uh a benefit there so that's a positive good to me if the project is not successful if not enough other people contribute, okay,

Speaker 1 then I want to contribute because I'll get the refund bonus and I won't have to do anything. Okay.

Speaker 1 So either way, you're actually better off contributing than not contributing.

Speaker 1 So what this means is that it turns an insurance contract into a dominant insurance contract, which means that it's now a dominant strategy, okay, in some circumstances, if to contribute to the public good because you benefit either way.

Speaker 1 right and so

Speaker 1 um

Speaker 1 this means it just doesn't solve all public good problems um because we

Speaker 1 it solves it for kind of a public good where you know the right size so if you want to build a bridge it's usually not too hard to figure out should be a two-lane bridge or a four-lane bridge okay or a lighthouse okay you just have to figure out how much is it going to cost for the right size lighthouse it solves the contribution problem there are other public goods where you're not quite sure how much of it should you actually produce like defense.

Speaker 1 Like should it be 100 billion, 200 billion, 500 billion? How much do people actually want? This does not solve that, but it does solve the contribution problem. And what some colleagues and I,

Speaker 1 Tim Kayson and Robert Zuburkis, what we've actually shown is this works in the lab.

Speaker 1 So we've run experiments and the dominant insurance contract is able to double the number of projects which are successful.

Speaker 1 So if you could put this on Kickstarter, you could probably double the number of successful projects.

Speaker 1 So, it does actually work.

Speaker 2 Compared to just a normal assurance market.

Speaker 1 Correct, correct. So, most projects on Kickstarter fail.

Speaker 1 We think some of them should fail. Some of them are just bad projects.
But we think some of them fail because

Speaker 1 the assurance contract doesn't solve all of these problems. But a dominant assurance contract

Speaker 1 would allow more good projects to succeed. That is, you have some project where the benefits are bigger than the costs.

Speaker 1 A dominant assurance contract will help you to get those good projects, it will help those projects be successful.

Speaker 2 Yeah, it's such a brilliant idea and useful idea because like it takes the equilibrium from being towards being a free rider to like to actively contributing to the public good.

Speaker 2 So what about projects though that are uh

Speaker 2 you you mentioned like a bridge for example, right? But there's like a notorious problem of the inflation of the budget over time.

Speaker 2 So, you know, it was projected to be 10 million, but now we can't build it unless we get an extra 10 million. What do you do if that kind of thing happens?

Speaker 1 Well, one problem at a time, my friend.

Speaker 1 So,

Speaker 1 yeah, I mean,

Speaker 1 that's going to happen whether it's a public good or not, right?

Speaker 1 So, you know, you're absolutely right that there is a tendency for these big dig projects to inflate in scale. And

Speaker 1 there's a problem, especially in the United States, with why

Speaker 1 subways and construction and tunnels, why they're so expensive here compared to the rest of the world.

Speaker 1 And

Speaker 1 part of that problem is unions.

Speaker 1 But there's a variety of reasons for that. Unions and legalism.
And, you know, we've

Speaker 1 historical committees and we've just put on so many

Speaker 1 requirements to build that it's just become really, really difficult and expensive.

Speaker 1 So dominant insurance contract does not solve all problems.

Speaker 2 So is a path for libertarian-minded people like you and me to, instead of having to like convince a majority of people to adopt our ideas, to just like set up alternative institutions that are based on ideas like this?

Speaker 1 Yeah, so I mean, I think that's a very progressive way of thinking about it, right? Is

Speaker 1 that I've actually said that it could very well be the case that we need many more public goods especially local public goods and a dominant insurance contract is a way of bringing this out of showing that this is true um so if we can allow if we can create a regime under which not just dominant insurance contracts, but you know, Glenn Weil and Vitalik Buterin and a co-author,

Speaker 1 Zoe, I believe, you know,

Speaker 1 they have other schemes as well, right? So there are these mechanisms,

Speaker 1 some of which use the blockchain, some of which work online, some which don't work online,

Speaker 1 to produce public goods. And

Speaker 1 creating a market mechanism, it sounds contradictory, but designing a market to produce public goods could change

Speaker 1 everything, right?

Speaker 1 And I think that would be a very kind of a progressive way of thinking about things.

Speaker 1 Instead of saying, you know, the government's doing it wrong all the time, let's create an alternative institution which can do things better.

Speaker 2 Yeah, yeah. The optimistic scenario here is,

Speaker 2 Elias Rudowski wrote a book called Inadequate Equilibria, as I'm sure you know. And then he detailed three ways in which like a civilization can feel.

Speaker 2 Asymmetric information, which, and you read an article with Tyler Cowen on how that's becoming a smaller problem.

Speaker 2 Decision maker is not the beneficiary, which is not a problem because of dominant assurance contracts, and also, um, inoptimal Nash equilibria, which is also not a problem because of dominant assurance contracts.

Speaker 2 Is this so? Is this just like the future? Is this how we solve a bunch of the problems, coordination problem, whatever else this is there are?

Speaker 1 Uh, well, we'll, I guess we'll see. Um, try to get the paper, uh, you never know until the paper gets out into the world, right?

Speaker 1 Um, so

Speaker 1 uh, hopefully, uh, I do think that

Speaker 1 you know, democracy itself is a mechanism,

Speaker 1 It's a mechanism to both collect and aggregate preferences and to

Speaker 1 kind of

Speaker 1 exclude dictatorial.

Speaker 1 It's to improve governments.

Speaker 1 It's a governance mechanism, right?

Speaker 1 And

Speaker 1 we've now had 200, 250 years of experience.

Speaker 1 And we know it works well in some cases and less well in other cases. It's not a great preference aggregation mechanism.
It is actually a pretty good way of limiting government.

Speaker 1 There are things which democratic governments don't do. Democratic governments do not starve their own citizens.
That's a very low bar, but it's a low bar which many governments fail to meet, right?

Speaker 1 So democracy has a lot of benefits, but it's not the end of the story either.

Speaker 1 There are different types of democracies. There's different ways of shaping preference, different mechanisms.
And particularly as we go online and as we live online much more,

Speaker 1 I think many more of these mechanisms are going to become viable. And the nice thing about online is that it satisfies the tiboo conditions.
Tiboo conditions are local public goods.

Speaker 1 That is, you can move from world to world to world to world very easily at low cost online. So it's much less costly to set up a new type of government.

Speaker 1 You know, every new blockchain project has got its own governance system. Most of them are terrible.
most of them are going to fail.

Speaker 1 Um, but when before in human history have we had as many experiments with governance mechanisms as we are today,

Speaker 1 it's really quite extraordinary. Like, Tezos has got its mechanism, and you know, Ethereum has got its mechanism, and so we're doing much more experimentation in how to organize collectively, right?

Speaker 1 This is Glenn Wall and his radical exchange project.

Speaker 1 So,

Speaker 1 the collective organization

Speaker 1 is an unsolved problem, right? How do we act collectively to solve public good problems without becoming dictatorial, without becoming,

Speaker 1 you know,

Speaker 1 without falling under rent-seeking, you know, without falling under all of the problems of collective action, right?

Speaker 1 If we can crack that nut, that's a huge thing. And the plethora of online worlds and experiments is I think

Speaker 1 one way which we're going to do this and it's it hasn't been done right the last time we did this was transitioning to democracy basically after World War II you know World War II I think there was like eight democracies in the world at the end of the world at the end of the war and now we have hundreds so we've got many experiments in democracy.

Speaker 1 Some of them have worked well, some of them haven't.

Speaker 1 But now with online worlds, we can have thousands of experiments with new types of governance mechanisms.

Speaker 2 That's so fascinating.

Speaker 2 By the way, what do you think of Robin Hansen's idea of a future archie where prediction markets decide which policies to adopt?

Speaker 1 Right. So, you know, Robin's idea is remarkable.

Speaker 1 You know, I often, you know, tell my students, look, in the whole history of the world, okay,

Speaker 1 you can kind of say there's really only been like maybe four types of government. There's, you know, there's the monarch, the dictator, there's rule by the aristocrats, oligarchy, right?

Speaker 1 And democracy.

Speaker 1 So there was, Aristotle understood all three of those. Then you had like maybe kind of some Rothbardian anarchism, okay? Rothbardian and David Friedman style anarchism.

Speaker 1 So that maybe made four kind of governance systems. And then Robin has his new one, which is incredibly rare, right? So that makes five, which is futarchy.

Speaker 1 It's an entirely original idea for governance by futures markets um and he's created a lot of uh powerful arguments uh in favor of it so i am hugely

Speaker 1 um

Speaker 1 i'm a huge promoter of futarchy uh to run experiments uh with it i would love to see many more experiments with uh futarchy with dominant assurance contracts with kind of some of glenn walls radical exchange ideas um you know i want to see a lot more experimentation in these big ideas than than we've had in the past.

Speaker 1 And online worlds may be one way of doing that.

Speaker 2 Well, can we consider your idea of dominant assurance contracts as a sixth form of government with like actual consent of the governed?

Speaker 1 It's pretty good. Yeah, it's pretty good.
I wouldn't quite put it up there with

Speaker 1 monarchy or democracy, but it's a mechanism. It's a mechanism.
I'm not sure I can run the whole government with dominant assurance contracts.

Speaker 1 So

Speaker 1 I'm going to give Robin his kudos for creating the fifth governance system.

Speaker 1 It's pretty amazing. Yeah, yeah.

Speaker 2 So let me ask you about

Speaker 2 the different ways in which you've been creating content. So you write papers, you write books, you've written a textbook with Tyler Collin.

Speaker 2 And of course, you did the online videos with Marginal Revolution University. Which have you found to be the most effective way of communicating information to your audience?

Speaker 1 Well, it's pretty amazing when I get emails from students like around the world, from India and Pakistan and South Korea and so forth. And

Speaker 1 they say, thank you, Professor.

Speaker 1 I was able to pass my class because of you. And of course, I don't know who these people are.

Speaker 1 But so it's amazing that I have students that I've never met. I never probably never will meet.

Speaker 1 Sometimes when I do travel, I get to meet some of these students, which is great, right?

Speaker 1 This idea that a teacher can teach thousands and hundreds of thousands of students millions of students is pretty remarkable and I'll tell you kind of a secret Tyler that you know between Tyler and I our goal is to teach more people economics than anyone has ever taught in the entire history of the world

Speaker 1 so we are right now we're behind Adam Smith okay we're behind we're behind Marshall okay

Speaker 1 um we're behind mill and we're catching up to manku okay

Speaker 1 so i think we might overtake manku um which would make me very very happy um

Speaker 1 so and that's like possible it's i'm not saying it's going to happen but that's like that's a conceivable dream that tyler and i could teach more people economics than anybody else in the history of the entire world that is actually possible i don't know what's gonna i'm not saying it's gonna happen um but we're climbing the ranks

Speaker 2 oh i i don't know haven't uh have you not already done this because i don't know how many copies of The Wealth of Nations have sold and much less how many have been read.

Speaker 1 But like,

Speaker 2 I can imagine that Marshall Revolutionary University has had more views than there have been reads of The Wealth of Nations.

Speaker 1 Wealth of Nations has been around for a while. It was pretty bestseller in its time.

Speaker 1 So I think we have a while to catch up with Adam Smith. Indeed, the world has the world

Speaker 1 would do itself a favor by learning it's Adam Smith, which it still hasn't done. So Adam Smith still has some lessons to teach.

Speaker 1 So, we're catching up, but we're not there yet.

Speaker 2 Yeah, also lessons that can be learned through your videos as well, though.

Speaker 1 True.

Speaker 2 Yeah, so okay, so to close out this interview, which has been really fascinating.

Speaker 2 Oh, actually, before I ask the final question, I want to ask: so, you have all these ideas, dominance assurance contracts, prizes for increasing innovation during pandemics,

Speaker 2 tons of other ideas, right? Very relation from Robin Hanson.

Speaker 2 Is it frustrating to be an economist and you're putting all these ideas out there, but like very few of them are adopted by the government and you know how useful they would be.

Speaker 2 What is it like to be an economist putting out all these ideas out there?

Speaker 1 Yeah, it's frustrating at times for sure. Like I just said, you know, the world is not caught up with Adam Smith, let alone with dominant assurance contracts.

Speaker 1 I do think that in economics we are very fortunate that

Speaker 1 the skills which we are taught as a profession are widely applicable to a large range of fields.

Speaker 1 They're very general and widely applicable to a large range of fields. And we do have credibility in policy and with the administration.

Speaker 1 So while I don't feel that

Speaker 1 I'm super listened to or whatever,

Speaker 1 but

Speaker 1 I found myself talking with people at the White House and the Council Economic Advisors, me and Michael Kramer.

Speaker 1 So I don't know, you know, Operation Warp Speed, I don't know how much they listened,

Speaker 1 but

Speaker 1 maybe it's, you know, in part being in Washington.

Speaker 1 I feel I'm

Speaker 1 certainly not, you know,

Speaker 1 at the heart of things, but

Speaker 1 you do feel in Washington that you're sort of close to the pedestals of power in some ways.

Speaker 1 You know, Coase said that

Speaker 1 an economist could earn his entire lifetime wages just by stopping one bad idea.

Speaker 1 So I guess I feel I've done that. And that's, but maybe that's it.
Maybe that's enough to justify.

Speaker 2 I find that very comforting that you're being consulted with because all I see is Paul Romer just getting incredibly upset at how little his advice is listened to.

Speaker 2 And then I feel bad that if other advice isn't listened to as well.

Speaker 1 No, absolutely. I mean, and, you know, Romer has been pounding on testing right from the beginning, and he's been absolutely right.
And

Speaker 1 yeah, I've been incredibly frustrated talking with people in Congress, and they're just and they're always like, Well,

Speaker 1 nothing's gonna happen in this bill, but maybe in the next bill, it's I don't understand it. It does seem that

Speaker 1 we

Speaker 1 it does seem something is wrong, to be frank. It seems that something is wrong, and we haven't solved that problem.
But it,

Speaker 1 yeah, I hate to end on it on a negative, on a negative note, but uh, yeah, there's something something wrong well can you expand on that

Speaker 1 well

Speaker 1 look um this is a part of what you know tyler called uh state capacity libertarianism okay

Speaker 1 and what is that this is something that i've written about i didn't use that term but um i've talked a lot about is look i want a small government but I want a government to be able to do what it's supposed to do at the time it's supposed to do it.

Speaker 1 Okay.

Speaker 1 And even I was shocked, like the CDC, their entire reason to ETHRA, right? Their entire reason for existing is to stop a pandemic. And yet, they completely failed.
They blotched the first test, okay?

Speaker 1 And then the FDA came in and said, oh, private companies, you cannot use your testing. You have to apply to us to do, you know, to get approval from us to do your test.

Speaker 1 And that slowed everything down at the beginning of the pandemic until the virus got ahead of us, right?

Speaker 1 And it just seems like,

Speaker 1 you know, in the the past, the government might have been smaller, but it was able to do things,

Speaker 1 sometimes bad things for sure. But the way we rammed up for World War II, you know,

Speaker 1 was a remarkable achievement. And it just seems that, and it's not all Trump's fault, okay?

Speaker 1 Trump is terrible, whatever, you know, you blame him as much as you want, okay?

Speaker 1 But you cannot blame the failures of the CDC and the FDA all at Trump's doorstep. You know, Congress has completely failed as well, right? Congress is the one supposed to be passing the law.

Speaker 1 Where's Congress's testing plan? Where is Congress's vaccine plan? Why is it that

Speaker 1 the only good thing that has come out of the administration on the pandemic is Operation Warp Speed? You know, why didn't Congress do that? That's actually Congress's job, okay?

Speaker 1 So Congress has completely failed as well. And there's a lackadaisical attitude.
There's a complacent attitude, which given that some of them are getting the virus, I completely fail to understand.

Speaker 1 Like Boris Johnson, he actually got the damn thing. You'd think he would want to solve this problem.

Speaker 1 And so it seems that not only are we not getting the government that we paid for, right, we're getting less. Okay.
I at least want to get

Speaker 1 something for what I pay for it. And

Speaker 1 pandemic.

Speaker 1 assistance or pandemic responding to a pandemic, responding to a war. They're high on my list.

Speaker 1 Like I'm worried now, like the way I never was before, that, you know, we would lose a war with China or something like that. Okay.

Speaker 1 You know, that never even occurred to me that the United States,

Speaker 1 you know, the greatest military superpower in the history of the entire world, right?

Speaker 1 By far the largest economy, highest per capita, you know, incomes and so forth, to think that we might lose a war,

Speaker 1 just would never have occurred to me. But now I just think things are so dysfunctional that anything is possible.

Speaker 1 And it's, well, I am worried. Yeah, I'm worried.
And it's not just about the pandemic, but I think that is just the canary in the coal mine, which tells us that this government is not working.

Speaker 1 And it's not all going to be

Speaker 1 The danger is that with a Biden administration, you know, the liberals will be so happy that all thought of fundamental change will end, which is what happened, for example, under Obama.

Speaker 1 You know, under Bush, there was a big anti-war effort, right? Okay, you know, big anti-war protests and movement. And Obama came into power and that all went away and the war kept going, right?

Speaker 1 So, you know, we're still in Afghanistan, we're still in Iraq,

Speaker 1 still, you know, bombing countries around the world. So the Obama did not solve the problem, but the protests went away.
And if Biden is elected, that's not going to solve the problem of complacency.

Speaker 1 That's not going to solve the problem that the government is riven with legalism and bureaucracy and inefficiency and slowness.

Speaker 1 But it may take some of the force for change, take the wind out of the sails, and that is a concern. Wow.

Speaker 2 Okay.

Speaker 1 What's the way we make our government more effective?

Speaker 2 Is there some solution?

Speaker 1 You know,

Speaker 1 I don't don't have a solution, but one thing which I think is going to be helpful

Speaker 1 is actually competition with other countries, such as China and India. You know, like what really made us,

Speaker 1 why did we go to the moon? Okay.

Speaker 1 We went to the moon because we were competing with the Soviet Union, because they kicked our butts by putting somebody into space and made us look like fools, made us look like technological laggards.

Speaker 1 So we got our act together and we devoted a huge amount of money to innovation, right, to NASA, a huge amount of the budget,

Speaker 1 like 12%

Speaker 1 at the height, 12% of the U.S. budget was going to NASA, which, you know, you can complain about whatever, okay, but it was going to innovation.

Speaker 1 So one of the things that I've said, you know, in my book, Launching the Innovation Renaissance, is

Speaker 1 what we have today is a warfare welfare state. Okay, we do two things.

Speaker 1 We invest a lot in the military and we invest a lot in various forms of welfare, by which I'm including Medicare, Medicaid, and redistribution and whatever.

Speaker 1 And I'm not even going to say that it's bad or whatever, okay? But what I would like to see us be is an innovation state.

Speaker 1 And as the warfare and the welfare state have grown as a share of the budget, the innovation state has shrunk.

Speaker 1 So we're investing much less in research and development, federal dollars in research and development than we used to.

Speaker 1 And I would like to see it shift us away from warfare and welfare and towards innovation.

Speaker 1 And when we see China start to kick our butts, where China is developing new pharmaceuticals, China is developing more artificial intelligence, China's developing genetic engineering, like what are we going to do when the first Chinese with super IQs of 160 plus start marching out of their factories?

Speaker 1 Hopefully that will kick us into gear and we'll say, okay,

Speaker 1 we've got to respond. So

Speaker 1 I'm not one, I'm much more about cooperation than I am about international competition. I don't think we're at war literally with other countries.
I think our interests actually align. But in terms of

Speaker 1 igniting the passions of a nation towards innovation and away from complacency, competition in the sense of the Olympics, a good kind of competition if we can keep it, if we can keep it to that kind of competition and not to, you know, blowing each other up, that kind of competition, I think, would do

Speaker 1 would do a lot of good in reigniting America to become kind of

Speaker 1 the leading nation of the world, not just in terms of innovation, but also in terms of freedom and liberty and

Speaker 1 racial and sexual equality, all of these things, which in many respects, not all by any means, but in many respects we've led in the past.

Speaker 1 And to kind of reignite that, you know, to say like, bring all people from Hong Kong, let's bring them to the United States, let's bring the Uyghurs to the United States, okay?

Speaker 1 Let us be that shining beacon on the hill. That's what I would like to see the United States be.

Speaker 2 Yeah, yeah. I had the pleasure of interviewing Caleb Wadney, which who made a similar point as you, that the path dependence of technology is very important.

Speaker 2 And so it's important that it happens a free country. Now that you mentioned launching the innovation renaissance, do you mind if I ask you a question about the book?

Speaker 1 Sure.

Speaker 1 If your audience can take it, I can.

Speaker 2 So

Speaker 2 you explained that both the supply of innovation in terms of global talent will be increased because of globalization and also the demand because we'll have a global market.

Speaker 2 So then how do we explain the great stagnation, which happened during the same period as the time of greatest globalization?

Speaker 1 Right. Yeah, so this,

Speaker 1 so

Speaker 1 all of these trends should be very, very positive, right?

Speaker 1 Because, you know, the way I like to put it is that as China becomes richer, they're all going to be looking for a cure for cancer too, right?

Speaker 1 This is a problem which affects everybody.

Speaker 1 And so you have a much larger market, a much bigger RD market.

Speaker 1 And you already see in China

Speaker 1 leading technologies, Tencent and so forth,

Speaker 1 Baidu and things like that. So they're already investing a lot in these technologies, which are public goods.
Artificial intelligence is another one.

Speaker 1 So I think we have a lot to gain by this increased budget devoted to R ⁇ D.

Speaker 1 What I didn't

Speaker 1 realize, I suppose, is that there is this countervailing wind, which we now know from the Bloom and Van Rienen

Speaker 1 work, which we talked a little bit about earlier, that it does seem there were a bunch of low-hanging fruit and we are having to devote more and more resources to get the same output.

Speaker 1 Now, whether that's a fundamental technological factor, whether it's a regulatory factor,

Speaker 1 whether that's a temporary factor in response to these quantum leaps in technology.

Speaker 1 Like we got electricity, we got the internal combustion engine, and it takes 50 years to kind of grind everything out we can out of them.

Speaker 1 Now we've got computers, it'll take some time to do that. Maybe biology is the next one, or as I said, quantum computers.
I don't know what it's going to be.

Speaker 1 But there may be a next technology where, again, that gives us kind of a leap.

Speaker 1 Who knows? What I can say is that

Speaker 1 the globalization has been good for research and development.

Speaker 1 We would have been much worse off if we didn't have that.

Speaker 2 Okay, good. And the final question, which I asked all my guests, is what advice would you give to a 20-year-old? Or to yourself when you were 20 or just to a generic 20-year-old?

Speaker 1 Yeah, well, I have a generic 20-year-old. I got two of them.

Speaker 1 So.

Speaker 1 Look, the world is changing faster.

Speaker 1 So probably my advice is becoming, you know, the advice of older people is becoming less useful over time. You know, it's a don't play those video games.

Speaker 1 And now, like, video games, you know, you can be, you know, you can earn a lot of money playing video games.

Speaker 1 So, I guess I got that one wrong. I should have told my kids, you know, learn how to play this video game and be a sports star, if you need sports star.

Speaker 1 Look,

Speaker 1 the return of skill is going up.

Speaker 1 So,

Speaker 1 education continues to be extremely important.

Speaker 1 Get an education in

Speaker 1 a sector which is complementary to technology.

Speaker 1 So you don't want to be competing against technology. You want to be racing with the machine to use Eric Brindofelson's and McAfee's term.
You want to be racing with the machine.

Speaker 1 So if you can get educated in a sector like electrical engineering, computer science or economics as well, but in a a sector which is complementary to technology, data,

Speaker 1 data science. So if you're able to, like what is increasing in the world faster than data.

Speaker 1 So if you're able to analyze data, that is going to be a incredibly beneficial skill because we're getting a lot more of it, right? And extracting meaning from data is very difficult

Speaker 1 and making it accessible to human beings.

Speaker 1 So if you have some skills which come come out of economics, causal inference, but also out of data science, machine learning, and so forth, if you have some skills to extract information from data, that's going to be very valuable in the world going forward.

Speaker 1 So it's not, these are areas where I have some sort of expertise in. It's not all that.

Speaker 1 You know, marketing is going to continue to be important, oddly enough, right? You would think that that's going to go, no, that's marketing, things like that is going to be important. Design, right?

Speaker 1 so what is apple apple is just a great design company right uh just an absolutely fabulous design company so and that's complementary to technology right so you want to take technology and find a way of putting it in human hands which is creates a delightful satisfying experience right that's very airy fairy and yet that's an incredibly valuable skill so it's not just um hard science but if you you have an artistic impulse, then I would say that's fine.

Speaker 1 That's also going to be valuable if you could combine it with a technological field, right? So an artistic impulse in design,

Speaker 1 that is going to take you much, much further than in like just poetry, let's say, okay.

Speaker 1 So you want to combine these things.

Speaker 1 Oh, okay. Okay.

Speaker 2 Very good advice.

Speaker 2 And thank you so much for being on. It's an incredible privilege to get to ask questions to somebody of your expertise.
So thank you so much for your time.

Speaker 1 Oh, great. Great being here.
And you asked great questions. So thank you very much.