What Would Our Economy Look Like? (Earth 2.0 Series)
Our latest Freakonomics Radio episode is called “Earth 2.0: What Would Our Economy Look Like? (Earth 2.0 Series)”. (You can subscribe to the podcast at iTunes or elsewhere, get the RSS feed, or listen via the media player above.)
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.
Below is a transcript of the episode, modified for your reading pleasure. For more information on the people and ideas in the episode, see the links at the bottom of this post. And you’ll find credits for the music in the episode noted within the transcript.
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Hey there. 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 Zanes and Friends. Every show is recorded with a live audience — so come see a taping. We’re in Minneapolis on April 26th and 27th, then Philadelphia on May 8; and at the Music Hall in Tarrytown, New York, on June 3. Then: six more shows in Manhattan in the middle of June. For tickets and info, visit TMSIDK.com.
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[MUSIC: Johnny Fiasco, “Transient”]
NARRATOR: What if we could remake earth?
Megan PLUNKETT: Hey Stephen and Freakonomics! This is Megan, down in Texas.
Andrew SHORT: Hi Freakonomics, my name’s Andrew Short…
Olgalucia HERRERRA: My name is Olgalucia…
Chris ADAMSON: My name is Chris Adamson…
Paul LUNGU: Hi, my name is Paul…
Dominique BUCK: Hello, my name is Dominique Buck …
SHORT: … and I live in Atlanta.
LUNGU: I’m from Romania …
BUCK: … small town in South Africa.
NARRATOR: What would you change?
ADAMSON: One thing I’ve always wanted to reboot is how we define adulthood.
BUCK: The thing that I would like to change …
ADAMSON: … what I’d like society to do is to treat adulthood the same way it treats …
HERRERRA: What I would change …
ADAMSON: And it would force every citizen to understand their responsibilities to themselves and to society.
[MUSIC: Collin Scudder, “You Don’t Know What’s Out Here”]
[MUSIC: Subsquare, “Scyphozoa Attack” (from Distortion Reigns Supreme)]
PLUNKETT: If I had to choose one system to reboot …
LUNGU: If I could change any one system it would probably …
[MUSIC: Gioacchino Rossini, “La Gazza Ladra – Overture” (from 100 Best Classical Masterworks)]
SHORT: If I could, I would reboot the human understanding of selfhood …
Satchel RAYE: One thing that I think is really messed up …
ADAMSON: One thing I’ve always wanted to reboot is …
HERRERRA: How we schedule education …
Matthew SELTZER: The system I would change if I could change anything would be the global mathematics system …
LUNGU: It just got way out of hand, and if it were up to me …
ADAMSON: Once you’re sixteen, you can legally drive a car. Once you’re eighteen, you can be drafted.
[MUSIC: Sleevenotes, “Shimmer And Float” (from Laval)]
[MUSIC: A New Normal, “Genesis”]
[MUSIC: Justin Marcellus, “Teslamecca” (from Adventures, Conquerors, Battles Untold)]
LUNGO: I would say, “Everybody, let’s stop. Let’s regroup. Let’s shut everything down, and let’s build the whole system up again from scratch.”
It seems like every other day, astronomers discover some new “Earth-like” planets …
Lucianne WALKOWICZ in a clip from Al-Jazeera News: A possibly habitable world orbiting the closest star to earth; and that’s a really big deal.
ZURBUCHEN in a clip from the European Southern Observatory: Finding another earth is not just a matter of if, but when …
[MUSIC: Zircon, “Genesis”]
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? 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? 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 the 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 …
Jeff SACHS: Well, that thought experiment’s not so far from how I think about things day to day.
We ask a Nobel Prize winner what he’d do as chief economist of Earth 2.0:
Angus DEATON: You know, I would turn the job down.
But we press on, undeterred. And the question is:
Claudia GOLDIN: And 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?” Often the answer would be yes, sometimes no.
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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 and 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, sometimes by diktat, 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 it in examples large and small:
GOLDIN: So the first thing is, “Why do the British drive on the left?”
That’s Claudia Goldin. She’s a labor economist and economic historian at Harvard . Her left-side-of-the-road riddle goes back to the Middle Ages.
[MUSIC: Mauro Giuliani, “Giuliani Rossiniana #3, Op. 121”]
GOLDIN: 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 a 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.”
Riding on the left, and showing the empty right hand because …
GOLDIN: Because 85 to 90 percent of the population, we believe, is right handed.
This, by the way, is why so many people still shake hands.
GOLDIN: We’re shaking hands to say, “Hey I don’t have dagger in my hand.”
Riding on the left side of the road, meanwhile …
GOLDIN: 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.
Everything follows in Britain, at least. But not in America. Why not?
GOLDIN: We didn’t start with people on horses with swords and daggers and stuff like that. We started later. 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 then evolved, therefore, the reverse way, even though both standards evolved because the vast majority of people are right-handed.
Two ways of doing the same thing. Maybe one’s better; maybe not.
GOLDIN: 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 …
Right, that could be chaotic.
GOLDIN: Standards are put in place that serve a function at one time, and they persist even though occasionally everything around them changes.
That is the peril of path dependency: that when you’re locked into a way of doing things, you’re left hoping that the old solution will solve new problems. Goldin has seen this in her research into how the modern labor markets can punish women.
GOLDIN: 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. 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. Some firms are changing. Many of the changes are occurring because male workers, as well as female workers, are putting their feet down and saying, “This isn’t the way to work and have a family as well.” But some sectors — for example in finance and law, in many of the corporate sectors — are changing more slowly, if at all.
[MUSIC: Mark Ullrich, “Ready, Set, Fly” (from Revel Revival)]
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.
Angus DEATON: My name is Angus Deaton, or if you want the formality, Sir Angus Deaton. I am a retired or emeritus professor at Princeton.
Stephen J. DUBNER: 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. Knowing what you know about economics, what changes would you make? Let’s just start there with the broad question.
DEATON: Well, I’m actually quite hostile to the question. I don’t really believe in the sort of social engineering that’s implicit in the question. That can very easily turn into a form of tyranny, especially when it’s done in a non-democratic or non-organic way. I think, when you ask a question like that, you think, “Wouldn’t it be nice to have a world government or something?” The answer is, it would not be nice to have a world government. Local governments can be tyrannical enough before you start. I really do believe an organic development.
DUBNER: Rather than saying, “Let’s throw out Earth 1.0 and start from scratch and institute some” — as you disdainfully suggest — “centrally-planned-over economy,” how would you assess, overall, the success of this spontaneous order-ish series of economies that have evolved organically?
DEATON: Pretty highly. I thought you were going somewhere slightly different. Let me give the answer to that question too, which is that I’m also worried when people say, “Why can’t we be more like Sweden?” Or, “Why does Germany succeed whereas Japan doesn’t?” I think what is very important, and it’s part of the organic development, is that these countries are different from one another largely because people want it that way. For example, a health care system that works in Britain, may just not work for Americans because tastes, habits and things that people have accepted for a long time, and also their history. People [who] go through wars often feel differently than people who don’t. I don’t think Swedish tastes are fixed, or Scottish tastes are fixed. But I think they’re real enough. 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 as organic growth does.
DUBNER: Now, where did you think I was going to go with that question?
DEATON: Which country you think would be the template for a new nation 2.0?
DUBNER: Okay, which country would, then?
DEATON: Well, none!
DUBNER: Keeping in mind that I 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 task of writing up the 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 … Give me a few things on the plus side and a few things on the negative side.
DEATON: You know, I would turn the job down. Partly because I do have a track record of turning down similar — not quite so global — jobs. I do think it’s just a bad thing to do, especially on that level. I think it would make me into a tyrant. It would breed hubris. I’d do more harm than good.
[MUSIC: Phil Symonds, “Dirty Rice” (from New Orleans-Louisana)]
SACHS: That thought experiment’s not so far from how I think about things day to day.
We did find an economist who’s open to our proposition.
SACHS: I’m Jeff Sachs. I’m a professor at Columbia University and special adviser to the United Nations Secretary General on sustainable development.
Sachs has also been an adviser to the Vatican and many heads of state. He’s considered a sort of poverty-fighting superhero, having run economic and humanitarian rescue operations all over the world.
SACHS: I went into economics believing that it ought to be useful, and it ought to be useful for addressing big challenges.
To that end, Sachs has a clear vision of the goals that economists should be helping to achieve:
SACHS: Economic prosperity, social fairness, and environmental sustainability. And while that’s not perhaps the most abstract vision of the world, I think it is 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. I really believe that if we think together in our best mode as human beings, in the mode of problem-solving, these are solvable problems. Let’s get some shared goals. Let’s have them meet the morality and the ethics test. Let’s do something that became anathema for some market economists. Let’s hold ourselves accountable by measuring every year, “What are we doing? Are we more unfair or less unfair?”
DUBNER: Which country, at this moment in time, do you feel has the best blend of politics, economics, and social structure?
SACHS: That’s easy because three countries come up at the top of every list, whether it’s happiness or sustainable development: those are the Scandinavian countries, Sweden, Norway, Denmark . They’re market economies, but they are 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. In my view, they work the best on the whole planet.
Of course, not everybody, not even all economists, agree with Jeff Sachs’s assessment. He’s 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.
[MUSIC: Eric Bolvin, “Nostalgic Love”]
Bryan CAPLAN: I am unapologetically in favor of free markets.
That’s Bryan Caplan, a professor of economics at George Mason University.
CAPLAN: Free markets not only work well, but they’re also the fair and just way for people to deal with each other.
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?
CAPLAN: People often think about free markets as being unfair to the poor. What I would say is, “If you look at the regulations that change 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 in the world right now is the fact that most of the world’s talent is trapped in poor countries where they can only operate in a very small fraction of the productivity. The basic fact is, if you let one person from Mexico into the U.S., their productivity doubles or triples overnight. Let someone in from Haiti: productivity goes up by a factor of 10 at least. Keeping someone in a country that is dysfunctional means that you are wasting all that talent. Because of immigration restrictions, of course, people generally don’t move. These laws are 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. Someone doesn’t spend years worth of their income to cross the border if it’s easy to cross the border.
As Bryan Caplan sees it, these constraints are, like driving on the left side of the road, a product of path dependency.
CAPLAN: I see national identity as being maybe the most potent force in the political world, and yet it’s all based upon this illusion that what happened a few hundred years ago determines what we are today.
Caplan’s point forces us to take a step back, momentarily, from talking about the economics on Earth 2.0 and thinking about basic geopolitics. I asked Jeff Sachs about that.
DUBNER: 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?
SACHS: We want a globally connected economy. Adam Smith said that, and 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 are societies. But we need to partially open borders. People should be able to move, but not to swamp other countries. I’d like to see a world in which there is general prosperity. 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 rabid, crude, crass nationalism that could get us all killed.
DUBNER: It’s interesting if we think of Adam Smith as the godfather of modern-ish, classical-ish economics. Obviously, there’s a lot of morality in Smith, but I feel like modern interpretations of Smith often don’t acknowledge the morality. I guess I’m just asking you to teach me a little bit about the moral dimensions that were present in the early writings about modern economics.
SACHS: It’s a very fascinating and very important moment. 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 drives 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. 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. There are purposes and meaning to life that are beyond those tastes that economists hold dear. While all of that may be pretty highfalutin if you’re trying to estimate the 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 be the wrong place to start.
DUBNER: Right. 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?
SACHS: Exactly. 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’s hard work. It means learning, studying, striving for excellence, becoming a good person within society. It’s not just [that] you have a utility function. You have to work at it, and you have to think about it. You have to cultivate it. That’s a standard idea in moral reasoning of almost every sort in human history, except for modern economics. Only modern economics says, “You are what you are, and leave me alone.” But having been working at this, 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.
DUBNER: I don’t mean to imply that you’re a traitor to the 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?
SACHS: I’ve been thought about as soft in the head in the following way. Part of my solution for extreme poverty is take money from rich people and give it to poor people to help them do things. For a long time, a lot of my fellow economists — as I’m sure you know — said, “You’re cheating, Sachs! What is this? There are budget constraints! You can’t just give them health care or give them bed nets and so forth. 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!”
That’s all good debate for objective behavioral observation. “How do things work?” “Can we make systems work?” But the question should we care about, I find, [is] a moral question. And [that is] one that I certainly, with libertarians, have a big disagreement. To me, this is where the economics profession is just weird, because we’re not living in a world like the world of Adam Smith — much less the world of Aristotle — where everybody was poor. We’re living an incredibly rich world. We’re living in a world in which people don’t have to die of their poverty. The fact that we can’t figure that out — that that is a moral call on us —is really a failing of our moral insight, not a failing of economic technique per se.
[MUSIC: Teddy Presberg, “Beneath the Burnside” (from Blueprint of Soul)]
Coming up on Freakonomics Radio : we’ll 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?
DEATON: I wish I knew the answer to that.
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Today, we’ve embarked on a thought experiment that we’ll 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:
[MUSIC: Rebecca Coupe Franks, “Break’n the Mold” (from 100 per cent)]
Chris ADAMSON: 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 back of it. They’re 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.
Dalya GAR: 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.
Matt SELTZER: 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 dozenal-based system . I believe more people understanding basic math concepts can only better society, but people struggle now because 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 would be understood faster by more people.
Suhani CHANCHLANI: The institution 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.
William SENNEWAY: 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.
Joseph SCHWARZBACH: 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.
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 …
CAPLAN: I am unapologetically in favor of free markets.
… and a more hands-on approach, guided by governments.
SACHS: They tax a lot, and they guarantee access to a lot of services: health, education, daycare, childcare, vacation time, family support, and so forth.
Before we go forward, let’s take a quick look toward the past. If I were to ask you about the share of the global population living today in extreme poverty, what would you say? Would you say it’s gone up over the past few centuries, or gone down? By a lot, or by a little?
Max ROSER: That’s really something that very few people actually know. If you do surveys, maybe 12 percent of the population actually knows that the share of the world population living in extreme poverty has decreased.
That’s Max Roser, an economist at the University of Oxford. If extreme poverty has decreased, how bad was it a couple hundred years ago?
ROSER: 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 percent of the world population. But even in the beginning of the 1980s, more than 40 percent of the world population lived in extreme poverty.
ROSER: And today, there are roughly 10 percent of the world population still living in extreme poverty. That’s, of course, a tremendous achievement. But it still means that 10 percent of the world today live in extreme poverty. The name “extreme poverty” is really appropriate. It is a very, very low poverty line. It’s no reason to be complacent about that and there still are a lot of work to be done.
Yes, there’s still lots to be done. And while the share of people living in extreme poverty has fallen to 10 percent, that’s 10 percent 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 much like our thought experiment of rebooting our economic system.
DEATON: I’m actually quite hostile to the question. I really do believe an organic development.
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 2:
Alice RIVLIN: Our tax system is scandalously inefficient.
Tavneet SURI: I think of immense transaction costs as a market failure.
Erik Olin WRIGHT: One crucial policy would be an unconditional basic income.
CAPLAN: I’m very strongly against the universal basic income.
RIVLIN: We are not paying a living wage to people who take care of children.
CAPLAN: That’s just the kind of thought that needs to be suppressed because it leads to a world of poverty and misery.
DEATON: I’ve been focusing much more about issues of rent-seeking …
That’s Angus Deaton again.
DEATON: …and 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. We have a health care system in the United States, which is not very well set up to save lives or to keep up the healthy, but which does make a lot of people very rich as it’s terribly expensive. We’re in a terrible place as far as that is concerned.
DUBNER: Unless you’re an economist or econo-nerd, the phrase ‘rent-seeking’ — I’ve found — means almost nothing to you. I’d love you to talk about it. I’m curious to hear whether you feel it is an inevitable byproduct of a certain kind of economy or a certain kind of economic/political set up.
DEATON: 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. I talked about rent-seeking and crony capitalism.
DUBNER: That was brave.
DEATON: Very brave. People were falling around hysterically laughing. But it was quite safe, in fact, because the translators translated it as something nonsensical. I’m sure they had no idea what I was talking about at all. But another term for rent-seeking is ‘crony capitalism;’ or more precisely, directly unproductive activities. What rent-seekers do is they go to government and they get special favors like monopolies, or 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. They get protection from the market. It’s an anti-market thing. In a rent-seeking society, if you’re running a business — say a pharma company or something — you could invent new drugs which would make people live longer, and [it would] make you worthily rich. Or you can go to Washington and beg for special favors. That’s a much more profitable activity, but it doesn’t provide anything for anyone. Mancur Olson, who was an economist and political scientist, wrote a very wise book about how this would bring down capitalism in the end, and that as societies got richer, these groups would form, whose main purpose was simply to enrich themselves at everybody else. Of course, that reduces economic growth. It also causes the political system to be captured by rich people. 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. Of course, it’s complicated because the inventors turn into rent-seekers very quickly if you don’t watch out.
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.
DEATON: I really don’t know and I wish that you could recommend me a good book that treats that question. I read a fair amount, but I’m not sure that that question has been that well answered. These rent-seeking and crony capitalism ideas are not that widespread in economics, or maybe I’m missing it.
DUBNER: I may be misinterpreting … I seem to hear you say that rent-seeking is an inevitable result of an economy or in 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 being able to do anything about it.
DEATON: No I don’t believe that. I don’t think. You could take, say, Sweden. They’re as rich as we are. It has a very large government and there’s lots of regulations. You would have thought this would be an opportunity for more rent-seeking, but people in Sweden trust the government, and don’t seem to think it’s being undermined this way. It may be worse in the U.S. because people distrust government. I don’t know. I really don’t have a well-thought-out hypothesis here.
[MUSIC: Justin Marcellus, “Distant (Guitarscapes Mix)” (from Transitional Motions)]
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?
Abhijit BANERJEE: I have no idea. I don’t know how to stimulate growth.
That’s Abhijit Banerjee.
BANERJEE: I teach economics at M.I.T., and I’m director of the Abdul Latif Jamil Poverty Action Lab.
When Banerjee says he has no idea how to stimulate growth …
BANERJEE: I’m not sure. There are many good things we could do. I know how to destroy growth. North Korea knows how to destroy growth. What we can do is avoid disasters. Having an underclass that’s resentful and excluded is a disaster. The salient issue of today is income distribution. If we did not do something on income distribution, we continue this promise that, “In the long run, it’s all going to be good for you. You just have to bite your lip and bear it.” That’s what we’ve been telling the poor for 40 years now. “It’s going to all be better, because we know what it is.” Again we’re giving them the same recipe, which is basically, “We’re going to do a few things, like bully some companies to not move abroad or something.” But then, 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 even if we raise growth rate from 3 percent to 4.5 percent, we’re not going to change the big problem of a massive unequal income distribution.
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, for instance, is firmly in favor of a helping hand more than an invisible one:
SACHS: Part of my solution for extreme poverty is take money from rich people and give it to poor people to help them do things. We’re phenomenally rich. It’s unbelievable. We, therefore, have solved — in the macro average sense — what John Maynard Keynes called the “economic problem.” We don’t need extreme poverty. We don’t need suffering from deprivation anywhere in our world.
Meanwhile: Angus Deaton, while hardly opposed to alleviating suffering, sees financial aid as a slippery slope, especially on the national level.
DEATON: I don’t think we should be spending large amounts of money inside other people’s countries. That’s not an argument against aid. I think it was Jagdish Bhagwati who coined the term: we should be giving aid for Africa, not aid to Africa. It’s very difficult. Smaller countries and much of Africa gets the better part of all government expenditure comes from abroad. That means the government is basically in hock to the donors, and need not pay much attention to its own people. It converts governments into rent-seekers, as it were. Even if you start out with good leaders, 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, entrepreneurs, and doing something. Even if you start with good leaders, they are likely to turn into bad leaders. And if you start with bad leaders, 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 just so that I don’t go down in an entirely negative way: we could spend a lot more money in Washington D.C. or in London on researching diseases that don’t really affect Americans very much: — malaria, for instance — but which do make life miserable for millions of people around the world. We could make their lives a lot better. 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.
[MUSIC: Clay Ross, “Army For You” (from Entre Nous)]
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’ll get more granular. We’ll talk about the future of work …
Rosabeth Moss KANTER: That not only did something great for the employees, it also set a standard for other businesses there.
The future of taxation …
RIVLIN: The main problem is that we exempt so many things from income taxation that we end up taxing only a small part of income.
And the future of economic problem-solving:
CAPLAN: Any time you’re trying to analyze a complex problem, forget all the other stuff at first, and just say, “What does this do to the productivity of mankind?”
That’s next time, on Freakonomics Radio.
Freakonomics Radio is produced by WNYC Studios and Dubner Productions. This episode was produced by Stephanie Tam. Our staff also includes Shelley Lewis, Christopher Werth, Merritt Jacob, Greg Rosalsky, 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.
Here’s where you can learn more about the people and ideas in this episode:
- Abhijit Banerjee, Ford Foundation International professor of economics at Massachusetts Institute of Technology; director of the Abdul Latif Jamil Poverty Action Lab.
- Bryan Caplan, professor of economics at George Mason University; senior scholar at the Mercatus Center.
- Sir Angus Deaton, 2015 Nobel laureate; professor emeritus at Princeton University.
- Claudia Goldin, Henry Lee professor of economics at Harvard University .
- Max Roser, James Martin Fellow in economics modeling at the Institute for New Economic Thinking, the Oxford Martin School, the University of Oxford.
- Jeffrey Sachs, university professor and director of The Earth Institute at Columbia University.
- “The Place Premium: Wage Differences for Identical Workers Across the US Border,” Michael A. Clemens, Claudio E. Montenegro, and Lant Pritchett (2009).
- “Global Extreme Poverty,” Max Roser and Esteban Ortiz-Ospina (2013).
- “A Grand Gender Convergence: Its Last Chapter. ” Claudia Goldin (2014).
- The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities by Mancur Olson (Yale University Press, 1984).
- The End of Poverty: Economic Possibilities for Our Time by Jeffrey Sachs (Penguin Books, 2006).
- Building the New American Economy: Smart, Fair, and Sustainable by Jeffrey Sachs (Columbia University Press, 2017).
- “Why do some countries drive on the left and others on the right?”