Freakonomics Radio - 3. What Would the World Look Like if Economists Were in Charge?

Episode Date: March 24, 2010

In this episode we speculate what would happen if economists got to run the world. Hear from a high-end call girl; an Estonian who ran his country according to the gospel of Milton Friedman; and a guy who wants to start building new nations in the middle of the ocean.

So if you would, please just tell me your name and what you do. I'm John Zogby Polster, and I'm the Zogby Pole. So, John, you know what Americans think about a lot of things. Now, what do Americans think about politicians, the people running our country right now? It's pretty much at a low point. Right now, members of Congress get less than 10% positive rating for performance and ethics. To give you an idea, when we're talking single-digit positive, back in 1995, OJ had a 16% approval rating. So worse than suspected murderers?

Maybe a tie. But whatever it is, it's not good. Now, what about lawyers? How do Americans feel about lawyers these days? Also not well. Lawyers, in fact, as of December, specifically, 13% positive rating. That puts them a couple of four points ahead of stockbrokers and members of Congress. Okay. So tell me this. We don't like politicians. We don't like lawyers. So why do we

elect so many lawyers to run the country? Our president's a lawyer, our vice president, our secretary of state, a whole lot of others, about six in 10 U.S. senators are lawyers. Why? I guess nobody who's self-respecting wants to run for Congress. This is Freakonomics Radio, a new podcast about the hidden side of everything. In this episode, Henry VI, a politician himself, said it best. The first thing we do, let's kill all the lawyers. And then, what if economists got to run the world? We'll hear from a high-end call girl, an Estonian who ran his country according to the gospel of Milton Friedman, and a guy who wants to start building new nations in the middle of the ocean.

Here's your host, Stephen Dubner. Steve Levitt is my co-author on Freakonomics and Superfreakonomics. He's an economist. Well, mostly economists just sit around in their offices, and they complain to other economists about the fact that no one listens to them, and if only we got to run the world, it would be such a better place. So the typical economist differs from the typical politician, let's say, how? Well, economists don't really care what other people think about them. I think that might be the first

and the biggest thing. The politicians have to say and do things that they think other people will like, whereas economists don't have enough social skills usually to actually realize that the things that they say and do offend others. I cannot remember going to a party with my wife where after we left, she didn't chide me for the fact that I had insulted or berated or challenged someone in a way that was completely and utterly beyond the social norm. And I had no idea. And every single time, we don't go to that many parties, but every single time we go,

I'm amazed that she tells me at this party, just like the last one, I did something wrong. Economists are by nature candid. Maybe too candid. That's because they base their arguments on what the data have to say rather than how politics or morality might dictate. A solution that might strike an economist as perfectly rational

might strike the rest of us as deeply repugnant. They have a lot of ideas to improve the world, but they're mostly ignored. So today, we have a modest proposal. For the next 20 minutes or so, let's put away the politicians, and let's put the economists in charge. We're going to start with a very strange case of Estonia. My name is Mart Lar. I have been vice prime minister of Estonia, and I'm not economist. Starting in 1992, Mart Lar helped change Estonia from a downtrodden former Soviet satellite

to what some people called a Baltic tiger. And while it's true that Lohr is not himself an economist, he did his job by channeling one of the most renowned economists in history. When you grow up in the Soviet society under the communism, then you heard about one man who is especially dangerous and especially crazy and absolutely mad and which will destroy all the human beings and economies and so on. And this man was called Milton Friedman. Milton Friedman, the University of Chicago economist, the 20th century's most passionate advocate of free markets.

When I first read Milton Friedman, free to choose, and to be very frank, this was my first book on economy that I ever have read. Then, of course, I was very influenced because I think most of the ideas were simple, they were clear, and they looked to work. And when I became the prime minister, then I decided, why not? As I was not so much informed what has happened in the world, so I was sure that most of the countries in the world have introduced some long time ago the Milton Friedman ideas. And then I decided just to follow them.

So you read Free to Choose by Milton Friedman. Yep. And you thought, well, this stuff sounds great, and it sounds very logical, and there probably wouldn't be a book like this if he hadn't gotten to do all these things. So since they did them in the U.S., I should do them in Estonia, right? That's the idea? More or less, yes. And at what point did you find out that much of what Milton Friedman advocated he never actually got to do, like a flat tax in the U.S.?

No, actually, I got it quite quickly. The flat tax I got on my first meeting with Margaret Thatcher, who I admired very much and who was a great admirer of Milton Friedman. I met her first when I was high-peen prime minister, I think some months and so on. And when I told her what I was planning to do, then she looked with these big eyes and said, You are one brave young man. And then a little bit introduced me on the realities in the Western world, which I was not very much informed, I must say. But I didn't stop.

Lahr treated Friedman's book as his Bible as he started governing Estonia. He abolished tariffs to encourage international trade. He privatized 90% of the economy. He particularly liked the idea of a flat tax, one tax rate for everyone, nice and simple, and promptly instituted it. My first meeting when I proposed to introduce the flat tax in Estonia, they looked on me as I am a little bit crazy and asked, do you know something on economy? And I answered, honestly, no, not so much. But I think this is a great idea because it looks to work. And I didn't know then that I would be the first one who would really do this. But I was 32, I was young and crazy,

so I didn't know what is possible and what's not, so I did impossible things. Mart Lahr's reforms were generally considered a success. And you know what? There are a lot of countries, more than 30, where the highest elected official has an economics background. But let's come back across the Atlantic to Washington, and let's dream a little. Here, economists don't get to be president.

It's true that Gerald Ford, Ronald Reagan, and the first George Bush were economics majors in college, but they all quickly moved on to something else. What if we took a real-life practicing economist full of good ideas and gave him the keys to the Oval Office? I'm getting goosebumps. I mean, it's so exciting. This is Russ Roberts. He's a professor of economics at George Mason University. I'd get rid of the Department of Education. I don't think that the federal government has any productive role to play in the school system.

I'd get rid of all tariffs. I'd let people be free to buy whatever they wanted from all around the world. What else? I'd get rid of the minimum wage law, which I think makes it hard for low-skilled people to find work. It makes them artificially expensive. Wow. Cutting the Department of Education. Abolishing minimum wage. Now you start to get the idea of why economists are so popular at parties. I'd legalize all drugs and that would, besides cocaine and marijuana,

which I confess to have never tried. I'm 55 years old. I'm the only 55-year-old. You still have time, Russ. You still have time. I know a couple of friends of mine who claim to be in the same virgin space. But so I just want to,

I say that only because people assume that if you're in favor of legalized drugs, you can get high all the time. By making cocaine and marijuana legal, we'd free up millions of dollars currently wasted on trying to keep it out of people's hands, which doesn't work. So it's a totally ineffective law. And we'd go back to a world where people would say it's legal, but it's still not a good idea. It's like TV. TV is legal. You can watch it all you want, but it's still not a good idea. It's like TV. TV is legal. You can watch it all you want, but it's still not a good idea to watch it too much. It's up to us as adults to try to figure out about TV and candy bars and marijuana and scotch.

How much of that we're going to use and how much is a responsible person going to consume? For some folks, it's zero. For others, it's way too much. That should be their choice. What would you do about prostitution? Should be legal. I've never gone to a prostitute either. I guess this is confession time. But it should be legal because I think activities between consenting adults are nobody's business but their own. All right. So that's the theory. Why don't we ask a real prostitute? Okay, my name is Allie, and I worked as an escort for about eight years in the United States.

I guess what people would classify as high-end escort, charging between $300 to around $600 an hour. And you've since retired, correct? I have. I retired and went back to school. Okay. And what are you studying? Economics. You were what just about anybody in the world would think of as a really good business person. You set up this business. Now, it happens to be an illicit business, but you set up this business and ran it well and ran it efficiently, and you made a lot of money, right? I did, yeah. I mean, you know, looking back, I didn't know all the terms, you know, I kind of learned by doing, but I, you know, I had huge profit margins, yeah. So in the entire time that you're working as a high-end call girl, eight years worth,

were you ever arrested? No. Did you ever come close to being arrested? Not that I know of. If there's one thing that people think is true about prostitution, especially at the high end, but it's not, what would it be? I would say that the guys are paying for crazy sex acts. I think you hear this all the time, like, well, if he's paying, you know, $1,000 an hour, no telling what he's doing to that poor

girl, right? And I've found that the more that the clients pay, generally, the less sex that's happening. They're paying for companionship and, you know, just company and to be able to relax and be themselves and sex. So the premise of this episode is what the world would look like if economists were in charge, okay? And most economists, as you probably know, would argue that prostitution should be legalized. Now, what if it were made legal? How would that change your business if you were still working as a prostitute?

Well, I think it would, you know, I think obviously it would probably make the prices go down a little bit. Although, I mean, people talk about maybe more girls would enter into the market. I think maybe a few would be. I mean, the things are that generally the barriers to entry for women to get into the business are more, you know, values and the way that they're seen in society. I think more than, I mean, obviously more than their cost because it's a relatively inexpensive business to get into. So that's what might happen to prostitution if an economist like Russ Roberts were in charge. There'd probably be more alleys, but they'd make a bit less money, and they'd pay taxes. People with moral objections wouldn't patronize her business.

The market would decide. A nation run by economists would be a nation where the government wasn't making as many moral judgments, which, interestingly, might mean the end of values voters. I wonder, is there anything else Roberts might want to take care of while he's still in office? I'd change the Federal Reserve. We spend a lot of time trying to find the right interest rate. That's a fool's game. It's contributed to the current crisis.

So I would change the Federal Reserve. I'd certainly, at a minimum, require it to only care about price stability. Right now it cares about price stability, unemployment, the health of the stock market, Wall Street salaries evidently. So I'd get all those things out. It's going to be hard to do legislatively, so I'd probably replace the Fed with Friedmanite fixed growth in the money supply or just abolish it entirely and let private money emerge. Ah, it all comes back to Milton Friedman. He died just a few years ago, the age of 94. Most people don't know it, but we're living a lot of his ideas today.

You know how your paycheck has taxes automatically withheld? That was a Friedman argument. Our 100% volunteer army? A Friedman idea. School vouchers? Friedman. The reboot of Estonia happened only because Mart Lahr believed in Milton Friedman's ideas. But when you look at Washington today, holy cow, politics has become so broken that Friedman's own grandson, all he wants to do is go out to sea. I'm Patryk Friedman, and I founded the Seasteading Institute,

a nonprofit which researches how we can let people build new societies on the ocean. Okay, now your father, David, is an economist, and two of your grandparents, Rose and Milton, were economists, and some people consider Milton Friedman one of the most influential economists who ever lived. So what would you think of a world where instead of politicians running things, the economists were in charge? That's kind of the world that I'm trying to create with Seasteading. So the way I see it is that the way to get economists to be in charge of government is to put businessmen in charge of government. That is, if we make government more of a market commodity where different citizens and different businesses are looking at different countries and picking the ones that really fit their values and work efficiently,

that the businesses that operate these countries will naturally hire economists to tell them what is the best way to run a country, and they'll run experiments. Patry, what do you dislike so much about government, particularly the U.S. government, that you're willing to go and invent floating cities on the ocean? Well, I'm one of those crazy libertarians, so I dislike most of the laws of the U.S. government. But one of the things that I love about seasteading is that it'll work even if I'm wrong about what makes a good society. I mean, while I'm out there starting my crazy libertarian society, hopefully lots of other people will be trying other very different types of societies. And if my crazy libertarian world turns out to be

a bit too crazy and not a good place to live, I can go switch and live somewhere else. If economists were in charge, what are some changes that would happen right off the bat? If economists took over, I think we'd see a lot of deregulation. I think we'd see the government doing a lot less. I think we'd see federalism. I think that school would be run by vouchers. And then the economists would quickly be out of power as the teachers' unions marched on Washington in their millions and seized the economists and threw them out of

high story windows. The defenestration of economists in Washington. Exactly. Economists think they have a lot of answers, and they probably do. But in a culture like ours, a lot of those ideas would be grossly unpopular. We seem to be stuck with a super partisan government with no real competition. Milton Friedman's own grandson thinks Washington is such a sclerotic oligarchy, he wants to leave civilization behind, start over in the ocean. Of course, we could send all the politicians out to sea instead, but that's another podcast for another day. In the meantime, maybe we should put a little more faith in economists. Or maybe not. Steve Levitt told me a story once about every economist's

favorite tool, the power of incentives. He and his wife were trying to potty train one of their kids, Amanda. She had been potty trained and then had completely lost the interest in it. And my wife had done everything that the experts told her to do and nothing had worked, gone on for six months. So I said to my wife, look, I'm an economist. Everything's about incentives. I understand how to incentivize people. Let me take control. I got down on Amanda's level. She was maybe three years old. And I said, Amanda, every time you go pee-pee in the potty, I'm going to give you M&Ms. Because M&Ms were the things she cared about most. And she said, really? I said, yeah. She said, well, I'll go right now.

I said, okay. She went right into the bathroom, goes potty. I give her the M&Ms, and I turn to my wife and I say, just let the expert handle the problem. Anyway, it worked great for about two days. Every time Amanda had to go to the bathroom, she would announce it publicly. She'd go in there, we'd give her the M&Ms. Couldn't have been better. Then on about the third or fourth day, she said again, oh, I have to go to the bathroom. And I went in there with her, and she just like tinkled out like two or three drops. And I thought, well, okay, she didn't have to go that badly. I gave her the M&Ms.

Not more than two or three minutes passed when she said, I've got to go to the bathroom. She went in there. She tinkled out a few more drops. I gave her the M&Ms. And it turned out that she was just going to do that to infinity, that my three-year-old daughter had figured out such bladder control within three days that she now was able to go on demand. And she had figured out how to game a system that a world-leading economist had come up with.

And really, it's a cautionary tale to economists. When you come up with incentive schemes that even your three-year-old daughter can undo in a few days, what does that mean when you come up with an incentive scheme? The whole world, you know, 300 million people are out there strategizing against it, trying to figure out how to beat you. You know you're going to get beaten. This episode of Freakonomics Radio was produced by Stephen Dubner with Amy Machado. Subscribe to this podcast on iTunes and you'll get the next episode in your sleep.

Go to Freakonomics.com to read more about the inside of everything.