Pod Insights Freakonomics Radio 283. What Would Our Economy Look Like? (Earth 2.0 Series) About this episode If we could reboot the planet and create new systems and institutions from scratch, would they be any better than what we've blundered our way into through trial and error? This is the first of a series of episodes that we'll release over several months. Today we start with — what else? — economics. You'll hear from Nobel laureate Angus Deaton, the poverty-fighting superhero Jeff Sachs; and many others.
Transcript 7,910 words · 21 speakers
Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
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2:46 Stephen J. Dubner? Hey there, podcast listeners. Before we get on to today's Freakonomics Radio episode, a quick reminder to check out our other podcast, Tell Me Something I Don't Know. It's already got more than 5 million downloads, so what are you waiting for? You can subscribe wherever you get Freakonomics Radio. Our upcoming episodes include special guests like the Librarian of Congress, Dr. Carla Hayden, the undercover economist, Tim Harford, and in a special music show, Dan Zane's and Friends. Every show is recorded with a live audience, so come see a taping. We're in Minneapolis on April 26 and 27, and Philadelphia on May 8, and the Music Hall in Tarrytown, New York on June 3, and then six more shows back in Manhattan in the middle of June.
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3:38 Speaker 01 What if we could remake Earth? This is Meghan down in Texas. My name is Andrew Short. My name is Galucia. My name is Chris Adamson. This is Paul. This is Donnie Beck.
3:46 Speaker 02 And I live in Atlanta.
3:47 Speaker 03 From Romania.
3:48 Speaker 01 And South Africa. What would you change?
3:51 Speaker 03 One thing I've always wanted to reboot is how we define adults. What I'd like society to do is to treat adults, force every citizen to understand their responsibilities to themselves and to society.
4:01 Speaker 01 And if I had to choose one system to reboot.
4:04 Speaker 03 If I could change any one system.
4:05 Speaker 02 If I could, I would reboot the human understanding of self.
4:07 Speaker 03 One thing I've always wanted to reboot is.
4:08 Speaker 02 The well-scheduled education. If I could change anything, it would be the global mathematics system.
4:13 Speaker 04 It's got way up my hands.
4:14 Speaker 01 It's really a flawed system.
4:15 Speaker 04 If it were up to me, I would just say, okay, everybody, let's stop.
4:21 Speaker 04 Let's regroup, let's shut everything down, and let's build the whole system up again from scratch.
4:29 Stephen J. Dubner? It seems like every other day astronomers discover some new Earth-like planets.
4:34 Speaker 05 A possibly habitable world orbiting the closest star to Earth, and that's a really big deal.
4:39 Speaker 06 Finding a second Earth is not just a matter of if, but when.
4:46 Stephen J. Dubner? Can you imagine all the possibilities of having a new habitable planet? What would we do with it? Maybe we'd use it to raise all our food and harvest its precious metals and petroleum and lumber. Maybe we'd send all our criminals and political enemies there. Or maybe we'd say goodbye to this old Earth and move to that one instead. Earth 2.0, a fresh start. What would that look like? After all our trial and error on Earth 1.0, how would Earth 2.0 be different? If we had a chance to reboot our civilization, to build new institutions and systems from scratch, whether on a new planet or this one, what would we do?
5:30 Stephen J. Dubner? What would our political and economic and medical and educational systems look like if we weren't stuck with all the residue of the past few millennia?
5:42 Stephen J. Dubner? That, my friends, is the theme of today's episode of Freakonomics Radio. And not just today's episode. This Earth 2.0 thought experiment is so big and exciting, to me at least, that we're going to make a series of episodes on this topic. They'll come at you over the next several months. We'll start today with, what else? Economics. We'll hear from some of the most esteemed economists in the world.
6:05 Speaker 07 Well, that thought experiment's not so far from how I think about things day to day.
6:10 Stephen J. Dubner? We ask a Nobel Prize winner what he'd do as chief economist of Earth 2.0. Well, you know, I would turn the job down.
6:19 Stephen J. Dubner? But we press on undeterred. And the question is...
6:23 Speaker 08 The question is, if you knew at time T what you learn way in the future at time T plus J, would you do something different? And the answer is, often the answer would be yes, sometimes no.
6:49 Speaker 09 From WNYC Studios, this is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dubner.
7:04 Stephen J. Dubner? There are at least two scenarios when a thought experiment can be a useful thing. The first is when you're hoping to navigate an unpredictable future. The second is when you're trying to reimagine the past. The thought experiment we're undertaking today, Earth 2.0, involves both. If we had a chance to reconstruct our economic system, how would it differ from what we've already got? The reason this is a thought experiment, not an actual experiment, is that unless you're a dictator, you generally aren't allowed to simply blow up an existing system or institution and invoke your will. And the systems we've got, as much as we may be accustomed to them, aren't necessarily optimal. They've evolved over thousands of years, often quite randomly,
7:47 Stephen J. Dubner? sometimes by dictat, occasionally by pure accident. And once a given practice or custom is in place, it can be devilishly hard to change it, even if any rational person can see it's ripe for change. Why? Because of what's called path dependency, which means that once a path is worn into the ground, it's awfully hard to deviate. You can see this in examples large and small.
8:12 Speaker 08 So the first thing is, why do the British drive on the left?
8:16 Stephen J. Dubner? That's Claudia Goldin. She's a labor economist and an economic historian at Harvard. Her "left side of the road" riddle goes back to the Middle Ages.
8:26 Speaker 08 So it's a leftover, and excuse the pun, from a distant past, long ago, at some point when people were riding horses and/or walking along the road, and they were vulnerable individuals and they carried daggers. When a rider on a horse wanted to show that he did not have a dagger in his right hand, riding on the left of the road allowed the rider to greet oncoming riders with his right hand outstretched. "Hey, I've got no dagger. You're safe."
9:07 Stephen J. Dubner? Riding on the left and showing the empty right hand because...
9:11 Speaker 08 Because 85 to 90% of the population, we believe, is right-handed.
9:17 Stephen J. Dubner? This, by the way, is why so many people still shake hands.
9:20 Speaker 08 We're shaking hands to say, "Hey, I don't have a dagger in my hand."
9:25 Stephen J. Dubner? Riding on the left side of the road, meanwhile...
9:28 Speaker 08 So that became the standard. So buggies and carts and horses and people included walk and ride on the left. And when automobiles appeared, they also needed to conform to that standard, or else they would have run into the horses and the people. So everything follows.
9:47 Stephen J. Dubner? Everything follows, in Britain at least, but not in America. Why not?
9:53 Speaker 08 So we didn't start with people on horses with swords and daggers and stuff like that. We started later. So in colonial America, we had these carts with these oxen in the front, and there was a seat for the driver. And because people are right-handed, you needed to be on the left side to whip the rear of the animal. So this standard evolved, therefore. The reverse way, even though both standards evolved because the vast majority of people are right-handed.
10:26 Stephen J. Dubner? Two ways of doing the same thing. Maybe one's better, maybe not.
10:30 Speaker 08 I don't think it matters much. You can do whatever you want within your country. But once things become open, it really becomes difficult. So if Norway is doing something else, and if Denmark is doing something else...
10:45 Stephen J. Dubner? Right. That could be chaotic.
10:46 Speaker 08 Standards are put in place that serve a function at one time, and they persist even though occasionally everything around them changes.
10:58 Stephen J. Dubner? That is the peril of path dependency, that when you're locked in to a way of doing things, you're left hoping that the old solution will solve new problems. Golden has seen this in her research into how the modern labor markets can punish women.
11:13 Speaker 08 Well, job and school schedules were created for a world of a strict division of labor. There used to be a TV program called Father Knows Best, and there was Leave It to Beaver. So many of the job and school schedules that existed then are still with us, and they impose disproportionate burdens on working women. And they are a major reason why women today earn less than men. So why? Well, the world of work today gives disproportionate pay to those who work longer hours. And even if they don't work longer hours, they're on call. They're going to drop everything to do the job. So some firms are changing.
11:56 Speaker 08 And many of the changes are occurring because male workers, as well as female workers, are putting their feet down and saying, "This isn't a way to work and have a family as well." But some sectors, for example, in finance, in law, in many of the corporate sectors, are changing more slowly, if at all.
12:22 Stephen J. Dubner? So it's easy to see how our modern practices, rather than being tested and proven excellent, are built upon multiple accidents of history, which is why it's so tempting to pretend we could just start over from scratch.
12:37 Speaker 10 Okay, my name is Angus Deaton, or if you want the full formality, Sir Angus Deaton. And I'm a retired or emeritus professor at Princeton.
12:47 Stephen J. Dubner? Deaton won a Nobel Prize in Economics in 2015 for his analysis of consumption, poverty, and welfare.
12:56 Stephen J. Dubner? So our mission today, Professor Deaton, is pretty straightforward. We throw out all our existing systems and institutions on Earth and build new, more perfect ones from scratch. So knowing what you know about economics, what changes would you make? Let's just start there with the broad question.
13:15 Speaker 10 Well, I'm actually quite hostile to the question. You know, I don't really believe in this sort of social engineering that's implicit in the question and that, you know, that can very easily turn into a form of tyranny, especially when it's done in a non-democratic or non-organic way. So that, you know, I think, you know, when you ask a question like that, you think, ooh, wouldn't it be nice to have a world government or something? Well, the answer is it would not be nice to have a world government. You know, local governments can be tyrannical enough before you start. So I really do sort of believe in organic development.
13:56 Stephen J. Dubner? So rather than saying, let's throw out Earth 1.0 and start from scratch and institute some, as you disdainfully suggest, some centrally planned, you know, over-economy, how would you assess overall the success of this spontaneous, orderish series of economies that have evolved organically?
14:18 Speaker 10 Pretty highly, I think. I thought you were going to go somewhere slightly different, but let me give the answer to that question too, which is that I'm always a little worried when people say, you know, why can't we be more like Sweden? Or, you know, why does Germany succeed whereas Japan doesn't? I think what is very important, and it's part of the organic development, is that, you know, these countries are different from one another largely, I think, because people want it that way. And, you know, for example, a healthcare system that works in Britain, it may just not work at all for Americans because tastes and habits and things that people have accepted for a long time. And also their history.
15:01 Speaker 10 I mean, people go through wars often feel differently thereafter than people who don't. I mean, I don't, I don't think Swedish tastes are fixed or Scottish tastes are fixed, but I think they're real enough. And so, you know, one of the dangers of trying to come in with a template and re-engineer the world is that they often don't recognize those facts, whereas the organic growth really does.
15:26 Stephen J. Dubner? Now, where did you think I was going to go with that question?
15:29 Speaker 10 Well, sort of, you know, which country do you think would be the template for, you know, a new nation 2.0 or something?
15:36 Stephen J. Dubner? Mm-hmm. Okay. Which country would then?
15:39 Speaker 10 Well, none. You know, the ideal country for Americans is different from the ideal country for Swedes. That's not to say each one's got its ideal country. I mean, people would like some improvement, I think.
15:51 Stephen J. Dubner? Yeah, so, so, keeping in mind that I very much respect your desire to not blow up the system and start over, if I were to make you the, let's say, chief economic advisor of Earth 2.0 and give you the, the task of writing up the kind of elevator pitch for some rules to live by, some things that you definitely want to do and some things that you definitely don't want to do, just give me a few things on the plus side and a few things on the negative side.
16:18 Speaker 10 Well, you know, I would turn a job down. What I would do. And it's partly because, you know, I do have a track record of turning down similar, not quite so global, jobs. But, you know, I do think it's just a bad thing to do, especially at that level. And I think it would make me into a tyrant. It would breed hubris. And, you know, I'd do more harm than good.
16:46 Speaker 07 Well, that thought experiment's not so far from how I think about things day to day.
16:52 Stephen J. Dubner? We did find an economist who is open to our proposition.
16:56 Speaker 07 I'm Jeff Sachs. I'm a professor at Columbia University and a special advisor to the United Nations Secretary General on sustainable development.
17:07 Stephen J. Dubner? Sachs has also been an advisor to the Vatican and many heads of state. He's considered a sort of poverty-fighting superhero. He's run economic and humanitarian rescue operations all over the world.
17:19 Speaker 07 I went into economics believing that it ought to be useful, and it ought to be useful for addressing big challenges.
17:28 Stephen J. Dubner? To that end, Sachs has a clear vision of the goals that economists should be helping to achieve.
17:35 Speaker 07 Economic prosperity, social fairness, and environmental sustainability. And while that's not perhaps the most abstract vision of the world, I think it's a pretty good shorthand for where we stand in the 21st century of what we ought to work on. Now, how do you actually do that in the world? You don't do it top-down because everyone's circumstances are quite different, but I'm a big believer in that framework. You could call it a moral framework if you want, but I really believe in that, that if we think together in our best mode as human beings, in the mode of problem-solving, these are really solvable
18:18 Speaker 07 problems. So, let's get some shared goals. Let's have them meet the morality and the ethics test. Let's do something that is, you know, became anathema for some market economists. And let's hold ourselves accountable by measuring every year. What are we doing? Are we more unfair, less unfair?
18:39 Stephen J. Dubner? Which country at this moment in time that we're speaking, do you feel has the best blend of politics, economics, and social structure?
18:49 Speaker 07 That's easy because three countries come up at the top of every list, whether it's happiness or sustainable development. And those are the Scandinavian countries. Sweden, Norway, Denmark. They're market economies, but they're also social democracies. They tax a lot and they guarantee access to a lot of services. Health, education, daycare, childcare, vacation time, family support and so forth. And in my view, they work the best on the whole planet.
19:23 Stephen J. Dubner? Of course, not everybody, not even all economists, agree with Jeff Sachs's assessment. He is pushing for a highly regulated and curated market economy, regulated and curated typically by a central government, whereas others advocate for minimizing the role of government.
19:41 Speaker 11 I am unapologetically in favor of free markets.
19:44 Stephen J. Dubner? That's Brian Kaplan. He's a professor of economics at George Mason University.
19:48 Speaker 11 I think free markets not only work well, but they're also just the fair and just way for people to deal with each other.
19:55 Stephen J. Dubner? This brings us to a central question for Earth 2.0 economics. Should we rely on free markets and Adam Smith's famous invisible hand? Or a more visible hand? And if the latter, just how visible should the hand be? And whose hand is it?
20:13 Speaker 11 People often think about free markets as being unfair to the poor or unfair to, you know, probably especially the poor. And what I would just say is if you really look at the regulations that really changed the world a lot, like immigration restrictions, they actually are a case of governments trying to stop the poor from bettering their own lives. My view is the single greatest loss to the world right now is the fact that most of the world's talent is trapped in poor countries where they can barely, they can only operate at a very, a small fraction of their productivity. You know, a basic fact is if you let one person from Mexico into the US, their productivity doubles or triples overnight. Let someone in from Haiti, productivity goes up by a factor of 10 at least. So I mean, just going and keeping someone in a country that is dysfunctional means
20:57 Speaker 11 that you are wasting all that talent. Because of immigration restrictions, of course, people generally don't move. And contrary to many people, these laws are actually very strictly enforced, which is pretty obvious if you just look at how much people pay to get smuggled in from one country to another. If you know, you know, someone doesn't spend years' worth of their income in order to cross a border if it's easy to cross the border.
21:18 Stephen J. Dubner? As Brian Kaplan sees it, these constraints are like driving on the left side of the road, a product of path dependency.
21:26 Speaker 11 I see the national identity as being maybe the most potent force in the political world, and yet it's all sort of based upon this illusion that what happened a few hundred years ago determines what we are today.
21:37 Stephen J. Dubner? Kaplan's point forces us to take a step back momentarily from talking about the economics of Earth 2.0 and thinking about basic geopolitics. I asked Jeff Sachs about that. So Jeff, let's assume that in Earth 2.0, there are still borders and countries as we have now. Maybe there won't be, but let's assume that for a minute. What are your thoughts on global economy versus existing national independent economies?
22:04 Speaker 07 I think we want a globally connected economy. Adam Smith said that then every part of the world could help to meet the needs of other parts of the world. But we also need borders because countries are not just economies, they're societies. But we need partially open borders in that people should also be able to move, but not to swamp other countries. So I'd like to see a world in which there's general prosperity. In general, people would like to stay in their home country. That's their home culture, language, ethnicity, religion, and so forth. But we also have openness to the world. We certainly don't want a descent into kind of rabid, crude, crass nationalism.
22:49 Speaker 07 That could get us all killed, by the way.
22:52 Stephen J. Dubner? It's interesting, if we think of Adam Smith as the forefather, the godfather of modern-ish, classical-ish economics. I mean, obviously, there's a lot of morality in Smith, but I feel like modern interpretations of Smith often don't acknowledge the morality. So I guess I'm just asking you to teach me a little bit about the moral dimensions that were present in the early writings of about modern economics.
23:18 Speaker 07 It's a very fascinating and very important moment. And in a lot of ways, modern economics embodies a vision of human nature and an approach to ethics that is a simplified and, in my view, deeply flawed reflection of that because in economics, the first thing you learn is people have tastes. Tastes are what drive them. Don't ask about their tastes. They're maximizing their tastes and markets help them to do that in a variety of ways and morals, well, that's your business.
24:01 Speaker 07 And I think this is a huge disservice to the truth about human nature, first of all, because tastes aren't just there and people change and they have a deep social connection and there are purposes and meaning to life that are beyond those tastes as consumers that economists hold dear. And while all of that may be pretty highfalutin if you're trying to estimate a demand curve for soap and may not be too relevant, if you're trying to ask what's good in a society, then the starting point of modern economics seems to me to be the wrong place to start.
24:42 Stephen J. Dubner? Right, well, you're implying or stating in a subtle way that not all tastes are created equal and that if you assume that, as many economists do, then you're ignoring the potential downstream effects of an economy that may promote certain tastes that are maybe less pro-social than others, right?
25:00 Speaker 07 Exactly, and I go back to my favorite philosopher Aristotle, whose view was that we aim for happiness and we achieve happiness through the cultivation of virtue. And that that's a hard work. It means learning, studying, striving for excellence, becoming a good person within society. It's not just you're you have a utility function, you have to work at it, you have to think about it, you have to cultivate it. So that's a standard idea in moral reasoning of almost every sort in human history except for modern economics.
25:44 Speaker 07 Only modern economics says, you are what you are and leave me alone. But having been working at this now, studying this for 45 years, I came to realize that what I thought was wrong, you can't avoid the deeper questions, in my view, you have to get back to the questions of human nature.
26:05 Stephen J. Dubner? Are you seen as, I don't mean to imply that you're a traitor to the fraternity of economists, but are you seen as a little bit soft in the head for thinking that morality should have such a prominent role in economics?
26:17 Speaker 07 I've been thought about as soft in the head in the following way. You know, part of my solution for extreme poverty is take money from rich people and give it to poor people to help them do things. And for a long time, a lot of my fellow economists, as I'm sure you know, said, you're cheating, Sacks, you know, what is this? You know, there are budget constraints, you can't just take that and give them healthcare or give them bed nets and so forth. You know, your ideas are flaky because by the time somebody gives the money for this, it's going to get stolen for that and the bed nets are going to get waylaid into a black market and it's never going to do any good.
27:01 Speaker 07 And that's all good debate for kind of objective behavioral observation. How do things work? Can we make systems work? But the question, should we care about that? That I find a moral question and one that, you know, I'm sure that I certainly with libertarians, I have a big disagreement. But to me, this is a part of where the economics profession is just weird because we're now, we're not living. In a world like the world of Adam Smith, even in 1776, much less the world of Aristotle, where everybody was poor, we're living in incredibly rich world. We're living in a world in which people don't have to die of their poverty.
27:46 Speaker 07 And the fact that we can't figure that out, that that is a moral call on us, to my mind, is really a failing of our moral insight, not a failing of economic technique, per se.
28:02 Stephen J. Dubner? Coming up on Freakonomics Radio, we will get into some of these economic techniques. Which ones are worth porting over from Earth 1.0 to Earth 2.0? And which ones to kill off?
28:13 Speaker 10 I wish I knew the answer to that.
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31:05 Stephen J. Dubner? Today, we have embarked on a thought experiment that we will revisit over several episodes over several months. It's called Earth 2.0. If we had the opportunity to reboot our planet and create new systems and institutions from the ground up, how would they be better, or at least different, from what we've blundered our way into through trial and error? We asked you, our Freakonomics Radio listeners, what you think is particularly ripe for reinvention. Before we get back to our discussion on economics, let's hear some of your ideas.
31:36 Speaker 03 One thing I've always wanted to reboot is how we define adulthood in America. When you turn 16, you can legally drive a car, but you can't consent to have sex in the backseat of it. There's sort of arbitrary milestones, and they don't account for the fact that people have different levels of maturity. There are really mature 17-year-olds and really immature 25-year-olds. So what I'd like society to do is to treat adulthood the same way it treats marriage, as a contract between individuals and the state.
32:01 Speaker 12 The first institution I would like to give a serious restart is the academia, where a typical professor wears four hats: the researcher, the teacher, the advisor, and the bureaucrat/politician. As one rarely excels in all four domains, this system tolerates mediocrity and pushes talented people out.
32:19 Speaker 02 The system I would change, if I could change anything, would be the global mathematics system, from a decimal-based system to a duodecimal or dozinal-based system. I believe more people understanding basic math concepts can only better society, but people struggle now because a base-10 system is hard and pretty messy. You can't even divide by 3 evenly. A base-12 system is a much cleaner system, which means more concepts of division and multiplication will be understood faster by more people.
32:45 Speaker 13 The institution that I believe desperately needs to be overhauled is the modern legal system. I believe it is unnecessarily elaborate, it looks down upon simplicity, and is far removed from the understanding of common people.
33:02 Speaker 14 The financial incentive for doctors to provide expensive tests and procedures, which may not be in the best interest of the patient. Like any first-year student of economics or Freakonomics would know, a misalignment of incentives can cause major problems for any system.
33:17 Speaker 15 I think there's an institution that badly needs an overhaul, and it's democracy itself. Everyone says the system is broken, but I would say that it's simply antiquated, and that the advances of artificial intelligence can bring a solution.
33:36 Stephen J. Dubner? All right, maybe we'll look at some of those ideas in future episodes. For now, let's get back to Earth 2.0 Economics Edition. So far, we've been talking about the tension between free markets guided by the invisible hand. I am unapologetically in favor of free markets. And a more hands-on approach guided by governments.
33:56 Speaker 07 They tax a lot and they guarantee access to a lot of services: health, education, daycare, childcare, vacation time, family support, and so forth.
34:07 Stephen J. Dubner? So let me ask you a question. What share of the current global population do you think lives in extreme poverty? Go ahead, pick a number. Also, would you say that number has gone up over the past few centuries or gone down? By a lot or by a little?
34:23 Speaker 16 That's really something that very few people actually know. If you do surveys, it's maybe 10%, 12% of the population that actually knows that the share of the world population living in extreme poverty has decreased.
34:37 Stephen J. Dubner? That's Max Roser. He's an economist at the University of Oxford. So if extreme poverty has decreased, how bad was it a couple hundred years ago?
34:46 Speaker 16 If we go back 200 years, then we have basically the entire world population living in material conditions that we would call extreme poverty by the standards of today, so 80, 90% of the world population. But still, even in the beginning of the 1980s, more than 40% of the world population live in extreme poverty.
35:07 Stephen J. Dubner? And today?
35:08 Speaker 16 And today, they're roughly 10% of the world population still living in extreme poverty. And that's, of course, a tremendous achievement, but it still means that 10% of the world today live in extreme poverty. And the name extreme poverty is really appropriate. It is a very, very low poverty line, so it's for sure no reason to be complacent about that. And there's still a lot of work to be done.
35:34 Stephen J. Dubner? So yes, there's still lots to be done. And while the share of people living in extreme poverty has fallen to around 10%, 10% of a population that has ballooned to 7-plus billion is a lot of people. That said, it would be foolish and ungrateful to deny this massive economic progress, which is why some economists, like Nobel laureate Angus Deaton, don't really like our thought experiment of rebooting the economic system.
36:04 Speaker 10 Well, I'm actually quite hostile to the question. I really do sort of believe in organic development.
36:10 Stephen J. Dubner? But that doesn't mean there aren't plenty of problems to address. Here are some of the ones we'll be talking about on this episode and next week on part two. Our tax system is scandalously inefficient.
36:22 Speaker 17 I think of immense transaction costs as a market failure.
36:25 Speaker 01 So I think one crucial policy would be an unconditional basic income.
36:31 Speaker 11 So I'm very strongly against the universal basic income.
36:34 Speaker 18 We are not paying a living wage to people who take care of children.
36:39 Speaker 11 That's just the kind of thought that needs to be suppressed because it leads to a world of poverty and misery.
36:47 Speaker 10 I've been focusing much more about issues of rent seeking.
36:52 Stephen J. Dubner? That's Angus Deaton again.
36:54 Speaker 10 It seems to me that in an economy like America's today, we have whole sectors in which rent seeking is very deeply embedded, the healthcare sector being perhaps the most obvious one, in which, you know, we have a healthcare system in the United States, which is not very well set up to save lives or to keep people healthy, but which does make a lot of people very rich and is incredibly expensive. And, you know, I think we're in a terrible place as far as that is concerned right now.
37:25 Stephen J. Dubner? Unless you're an economist or kind of econo nerd, the phrase rent seeking, I've found, means almost nothing to you. So I'd love you to talk about it, just define it for a moment. And then I'm really curious to hear from you whether you feel it is an inevitable byproduct of a certain kind of economy or a certain kind of economy slash political setup.
37:49 Speaker 10 I wish I knew the answer to that. Those are great questions. I had the opportunity to talk to a bunch of cardinals in Rome, and I talked about rent seeking and crony capitalism.
37:59 Stephen J. Dubner? That was brave.
37:59 Speaker 10 It was very brave. And there were people were just falling around hysterically laughing that, you know, I would dare to say this, but it was quite safe, in fact, because the translators just translated us something nonsensical. And I'm sure they had no idea what I was talking about at all. But I mean, another term for rent-seeking is crony capitalism, or more precisely directly unproductive activities. And so what rent seekers do is they go to government and they get special favors like monopolies or, you know, protection from people who would compete against them, or especially high prices for their products, or rules that say no one can bid down the prices of their products.
38:44 Speaker 10 So they get protection from the market, so it's this sort of anti-market thing. And in a rent-seeking society, you know, if you're running a business, like say a pharma company or something, you could invent new drugs which would make people live longer and, you know, make you worthily rich. Or, you know, you can go to Washington and beg for special favors, and that's often a much more profitable activity, but it doesn't provide anything for anyone. And you know, Manfred Olson, who was an economist and political scientist, he wrote a very, very wise book about how this would bring down capitalists, capitalism in the end,
39:26 Speaker 10 and that as societies got richer, these groups would form whose main purpose was simply to enrich themselves at the expense of everybody else. And of course, that reduces economic growth, and it also causes the political system to be captured by rich people. And so, you know, if we could wipe out rent-seeking at a stroke, we would reduce inequality by enormous amount, because a lot of the people really rich are rich because of rent-seeking, not because of stuff they invented. And of course, it's complicated, because the inventors turn into rent-seekers very quickly if you don't watch out.
40:05 Stephen J. Dubner? Can you talk about what you see as the kind of sane blend of open markets and government regulation? Maybe there's an example from today where you think there's a good symbiosis, or maybe from history, maybe even antiquity?
40:20 Speaker 10 I really don't know, and I wish, I mean, if you could recommend me a good book that treats that question, I would love to read it. But, you know, I've read A Fair Mind, but I'm not sure that that question has been that well answered. And it's also these rent-seeking and crony capitalism ideas are not that widespread in economics, or maybe, again, I'm missing it.
40:44 Stephen J. Dubner? It sounds, my interpretation, I may be misinterpreting it. I seem to hear you say that rent seeking is an inevitable result of an economy or a political economic system that grows so rich and prosperous and fat that there's plenty of people who can come in and extract some of that fat without anybody really being able to do anything about it.
41:05 Speaker 10 No, I'm not, I don't believe that, I don't think. I mean, you could take, say, Sweden, that's as rich as we are, very close, and has a very large government, and there's lots of regulations. So you would have thought this would be an opportunity for more rent seeking. But people in Sweden trust their government and don't seem to think it's being undermined this way. And it may be worse in the US because people mistrust government? I don't know. I really don't have a well-defined hypothesis here.
41:36 Stephen J. Dubner? You've got to respect and appreciate Angus Deaton for not pretending to know the solutions to hard problems like rent seeking. The fact is that economics, as much as it considers itself a science, is often not very scientific. If it were, there'd be a clear answer to a straightforward question like, what's the best way to stimulate growth?
41:58 Speaker 19 I have no idea. I don't know how to stimulate growth.
42:01 Stephen J. Dubner? That's Abhijit Banerjee.
42:03 Speaker 19 I teach economics at MIT and I'm a director of the Abdullah Tiv Jamil Poverty Action Lab.
42:10 Stephen J. Dubner? When Banerjee says he has no idea how to stimulate growth.
42:13 Speaker 19 I'm not sure. There are many very clearly identifiable good things we could do. I know how to destroy growth. North Korea knows how to destroy growth. I think what we can do is avoid disasters. I think having an underclass that's resentful and excluded is a disaster. I think the real... You know, salient issue of today's income distribution. And I think if we did not do something about income distribution, we just continue this promise that, you know, in the long run, it's all going to be good for you. Just you just have to bite your lip and bear it. That's what we've been telling the poor for 40 years now. And it's going to all be better because we know what it is.
42:58 Speaker 19 And again, we're giving them the same recipe, which is basically we're going to do a few, few things like, you know, bully some companies to not move abroad or something. But then most of it, we're going to give tax cuts to the rich. We're going to get maybe some growth. But the big picture of it is that, you know, even if we raise growth rate from 3% to 4.5%, we're not going to change the big problem of a massive unequal income distribution.
43:30 Stephen J. Dubner? This points, once again, to a central conflict among economists and others. How to strike the balance between free markets and a more paternalistic state, between creating opportunities for everyone without tamping down the incentives to innovate and work hard? Jeff Sachs, as we've heard, is firmly in favor of a helping hand more than an invisible one.
43:53 Speaker 07 Part of my solution for extreme poverty is take money from rich people and give it to poor people to help them do things.
44:01 Stephen J. Dubner? That is, he wants to address an economic failure by exploiting our collective economic success.
44:08 Speaker 07 We're just phenomenally rich. It's unbelievable. And we therefore have solved, in the macro average sense, what John Maynard Keynes called the, quote, "economic problem", meaning we don't need extreme poverty, we don't need suffering from deprivation anywhere in our world.
44:31 Stephen J. Dubner? Meanwhile, Angus Deaton, while hardly opposed to alleviating suffering, sees financial aid as a slippery slope, especially on the national level.
44:42 Speaker 10 Well, I don't think we should be spending large amounts of money inside other people's countries, which is not to say, that's not an argument, it's against aid. It's just, I think it was Jagdish Bhagwati who coined the term that, you know, we should be giving aid for Africa and not aid to Africa. And, you know, it's very, very difficult. But smaller countries and much of Africa, you know, gets the better part of all of government expenditure comes from abroad. And then that means the government is basically in hawk to the donors and need not pay much attention to its own people. And it sort of converts governments into rent seekers, as it were.
45:25 Speaker 10 And, you know, even if you start out with good leaders, you know, opening up this giant fire hose of money in their country, that's a much easier trough to feed at than actually setting up firms and entrepreneurs and actually doing something. And even if you start with good leaders, they're likely to turn into bad leaders. And if you start with bad leaders, you basically, you're forming an alliance with them to exploit their own people. And, you know, we've seen that over and over again. But, you know, just so that I don't go down in an entirely negative way, we could spend a lot more money in Washington DC or in London on researching diseases that don't really
46:07 Speaker 10 affect Americans very much, you know, malaria, for instance. But which do make life miserable for millions of people around the world and where we could make their lives a lot better. So, I mean, I accept the obligation. I really do think if people are suffering, we all owe an obligation to do something about that if we can. But we don't have an obligation to hurt them in the name of making ourselves feel a warm glow.
46:43 Stephen J. Dubner? Big sigh. Looks like life on Earth 2.0 won't necessarily be any simpler than on 1.0, at least as far as economics is concerned. Still, we're going to keep this conversation going next week, and we will get more granular. We'll talk about the future of work.
47:00 Speaker 01 That not only did something great for the employees, it also set a standard for other businesses there.
47:06 Stephen J. Dubner? We'll talk about the future of taxation.
47:09 Speaker 18 Well, the main problem is that we exempt so many things from income taxation.
47:18 Speaker 18 That we end up taxing only a small part of income.
47:24 Stephen J. Dubner? And we'll talk about the future of economic problem solving.
47:29 Speaker 11 Anytime you're trying to analyze a complex problem, just forget all the other stuff at first and just say, well, what does this do to the productivity of mankind?
47:36 Stephen J. Dubner? That's next time on Freakonomics Radio.
47:40 Stephen J. Dubner? Freakonomics Radio is produced by WNYC Studios and Dubner Productions. This episode was produced by Stephanie Tam. Our staff also includes Shelley Lewis, Greg Rosalsky, Christopher Wirth, Merritt Jacob, Eliza Lambert, Alison Hockenberry, Emma Morgenstern, Harry Huggins, and Brian Gutierrez. You can subscribe to Freakonomics Radio on iTunes, Stitcher, or wherever you get your podcasts. And you can keep up with everything we're doing at Freakonomics.com. Thanks for listening.
48:19 Stephen J. Dubner? Freakonomics Radio is sponsored by Ozempic. Innovation happens through rethinking what's possible. And when it comes to GLP-1s, Ozempic pill does just that. Learn more about Ozempic semaglutide tablets, 4 and 9 milligrams, by calling 1-833-OZEMPIC or visit Ozempic.com to view the medication guide and ask your doctor what's possible with FDA-approved Ozempic pill.
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