Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas - 84 | Suresh Naidu on Capitalism, Monopsony, and Inequality

Episode Date: February 17, 2020

Nations generally want their economies to be rich, robust, and growing. But it's also important to person to ensure that wealth doesn't flow only to a few people, but rather that as many people as possible can enjoy the benefits of a healthy economy. As is well known, the best way to balance these interests is a contentious subject. On one side we might find free-market fundamentalists who want to let supply and demand set prices and keep government interference to a minimum, while on the other we might find enthusiasts for very strong government control over all aspects of the economy. Suresh Naidu is an economist who has delved deeply into how economic performance affects and is affected by other notable social factors, from democracy to revolution to slavery. We talk about these, as well as how concentrations of economic power in just a few hands — monopoly and its cousin, monopsony — can distort the best intentions of the free market. Support Mindscape on Patreon. Suresh Naidu received his Ph.D. in economics from the University of California, Berkeley. He is currently professor of economics and international affairs at Columbia University as well as a fellow at Roosevelt Institute, external faculty at the Santa Fe Institute, and a research fellow at National Bureau of Economic Research. His awards include a Sloan Research Fellowship and the "Best Ph.D. Advisor Award" from the Columbia Association of Graduate Economics Students. Columbia School of International and Public Affairs page Santa Fe Institute page Equitable Growth page Google Scholar publications The Economy online textbook Twitter

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These statements have not been evaluated by the Food and Drug Administration. These products are not intended to diagnose, treat, cure, or prevent any disease. Hello everyone and welcome to the Mindscape podcast. I'm your host Sean Carroll and today we're talking about economics. Economics has always seemed like a funny field to me. I mean, on one hand, it can be extremely mathematical, precise, rigorous theorems are proven. On the other hand, it's extraordinarily relevant to the messiness of everyday life. And there's this ongoing tension between the pristine mathematics and the messiness of reality.

Furthermore, in the United States at least right now, people are wondering about, what kind of economics we should have. Of course, capitalism, I don't think it's possible to deny that capitalism has done good things. We have had enormous growth over the last several hundred years. On the other hand, it's also impossible to deny that unchecked capitalism can be extremely deleterious. We need a social safety net, etc. Some people, even here in the U.S., are looking at controlled economies like they have in China with a little bit of envy. There's a lot to be skeptical about in the economic performance of the U.S. right now. On the one hand, the stock market and GDP is growing. On the other hand, we have more inequality than we've had in a long time.

On the one hand, unemployment is low, but on the other hand, there's a lack of really good jobs. It's easy to get a job, but not one that really earns you a living wage. So some people are beginning to question the fundamental truths of received economics. Today I'm talking to Suresh Nidu, who is a professor of economics and international affairs at Columbia University, as well as external professor at Santa Fe Institute. Suresh is not a bomb thrower. He's not trying to overthrow the system or anything, but he's very interested in the relationship of economics to other big-picture questions about how societies function.

Does democracy promote growth? What was the economic influence of slavery? Can we have equitable economic growth? Is it possible to have booming economic growth while we still have? have equality and still take care of the people who are not doing well in our society. So we'll go into questions about capitalism, socialism, what's been good, questions about the labor market and inflation and monopsony as well as monopoly. It's a fascinating little intro to a whole bunch of big topics for people who are not experts in economics, including myself.

Hey, everyone, it's Cal Penn. I'm the host of Earsay, the Audible and I-Heart Audio Book Club. This week on the podcast. I am sitting down with Ray Porter, the narrator of Andy Weir's audiobook Project Hail Mary, massive sci-fi adventure about survival and science. And what happens when you wake up alone very far from Earth? I really had to make a decision because I caught myself getting that frog in my throat and starting to get teary as I'm narrating some of these sections. And it's like, okay, yo, yeah, yo, is this indulgent? And I really thought about it. I was like, no, at this point, it would kind of be betraying the trust the author and the listener have in telling this story if I don't go through it. But there's places in this book that deeply emotionally affected me and I left it on the

mic. That's great. Because it served the story. People will say like, oh my God, I cried at the end. It's like, yeah, dude, me too. Listen to Eursay, the Audible and IHeart Audio Book Club on the IHeart Radio app or wherever you get your podcasts. My best skin ever at 45?

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Remember to check out our web page at preposterousuniverse.com slash mindscape. One of the things you have to remember is that we have show notes for every episode so you can find links to things. So, for example, in today's episodes with Suresh, we're talking about a textbook that he and many other collaborators

have been working on, an openly available textbook in economics. You can find a link to that on the web page. So with that, let's go. So Resch and I do, welcome to the Mindscape podcast. Thanks for having me. I've been on record as saying that I want to have more economics on the podcast. I talk about lots of things.

My apologies. That's okay. There's a lot there, but it's a little bit intimidating. I've decided it's intimidating because what I do for a living, you know, dark matter, the origin of the universe, it doesn't affect people's daily lives, right? Their daily bread, their jobs, et cetera. But economics is relentlessly practical in some way. So so much economics is not the kind of high abstract theoretical stuff that I love so much,

but really down-to-earth trade and markets and labor and things. What is the division of labor inside economics like that? Is that an accurate representation on my part? So I would say that economics does have certain parts of it that are actually really are kind of about describing big and personal forces that wind up constraining or shaping what our everyday lives look like in the much in the same way that, you know, gravity or ecology or, you know, atmospheric pressure is a real thing in our lives. And we don't necessarily understand it all. But what physics and the rigorous study of these things do is that you understand these forces that

are just really important in your life. And then, you know, and I think many physicists also think this, that one of the things you learn when you understand these forces is that you get sort of some insight into what are the tools for manipulating them, manipulating them, what are the constraints on those tools, what are the orders of magnitude of scale that you can, like, humans can reasonably move with what kinds of instruments? And so I would say it's a, it's, at that level of abstraction, it's very similar. Like, there's a bunch of things in economics that are about describing patterns of global trade, macroeconomic forces that are really impersonal, big, big things that are kind of the aggregated decisions of billions of people showing up.

But then one of the benefits of understanding that is that you then understand how like, okay, well, what is the minimum wage going to do? Or what can central banks do with the interest rate? And what are the places that you have, these touch points that you can push a lever or do something and maybe make things a little bit better? And so I think it's, you know, not so far away, I don't think. Well, yeah, that's what I'm thinking is. Is there the economics equivalent, by the way, do you say economics or economics?

Economics? It depends what country? I don't know. Just checking. I wasn't doing a faux pa there. Is there the equivalent of, you know, string theorists or mathematical physicists who never look at data whatsoever, like never apply their stuff to the real world? Are there purely big-brain economists who just work out general principles, or does basically everyone dip their fingers into the muddy waters of reality? I mean, you must know the answer to that. Yeah, so, I mean, as you know, as you probably know, like the whole 20th century of economics was dominated by basically brilliant mathematical theorists. Yeah.

Everyone from Kenneth Arrow, who was a founder of SFI of the Santa Fe Institute, and people like Paul Samuelson and just people whose entire lens on the world was building these incredibly elegant theories that would capture some very deep fundamental truths about the way. markets worked or the way, you know, political institutions could work or just, just tools for understanding what it meant to have supply and demand equal to each other. So, and for, I would say, overwhelmingly for the 20th century economics was in this world where what it meant to do good economics was you built mathematical models. And what it meant if you weren't a really good mathematical theorist is that then you went off and like did empirical work and, like, did empirical work and looked at the world. But I do think...

So not only is there that distinction in economics, but it's the same status hierarchy. Yeah, you know, there's Axel Leon Hundvodold, he never pronounced his name, but he had an article about, like, life among the econs, where he kind of takes like an anthropological lens to the economists and sort of say,

you know, they have their fetishes, they're called models, and like, you know, you have the highest caste group who are like the manipulators and creators, of these models. And so that was really like economics, I think, in the, in the, in the, 20th century. And then I think what has been a slow, but I think positive development is that kind of social scientific data became our microscope and just made it that the, starting in like

the 60s and things, even with the rise of like labor market data, like the current population survey, like the individual files of the census and the computational power to process them, it became now a world where you really had to not, it wasn't enough to just have a kind of cute idea about how this theoretical force might work. You actually had to sort of provide some evidence that it mattered. And it also wasn't enough to just sort of say, well, supply equal demand and that that would obviously answer all of these questions because, you know, it became like something that we actually had to look at. Well, how important are these supply and demand forces relative to the background noise that's just going on in society and all these

other things? Maybe we're mathematically right, but quantitatively small. And that becomes something that we start to look at. So there's both a measurement angle of the rise of government surveys. There's a way in which like the operations of government themselves generate so much data running a UI system, Social Security, you know, administering in European countries, administering like corporatist wage setting between unions and firms. It's just like as those processes became more routinized and bureaucratic, they generated a huge volume of data that was then also kind of a great social science microscope. So it's a big data era basically.

It's a big data era. I would say it like it's a little bit. you know, in the style of economics that I sort of come out of, uh, we were always using the big, the biggest data, data sets you could get your hands on. And yes,

some things have changed with, with, with, with big data, but in some ways, like a lot of the principles that we had with small data are just, it's just a computational problem. It's not a conceptual problem.

Um, and, um, yeah, and I, I want to say an important part of that is like kind of a, I think also since the late 90s has been like a real attention. to what we'd say is causality and causal identification. So that it wasn't enough to, so basically there was a lot of sort of shoddy work around correlations

and saying, oh, see, this correlation shows that this theory is correct, but never, not nearly as much of the kind of paying attention to looking at the parts of the world that look like they're generating natural experiments or that there's like where something is just shifted all of a sudden and then that's like a particularly clean test of a theory. And so basically the rise of this kind of causal revolution in economics really sort of, you know, we also changed how we use data so that we really became attentive that you couldn't just mine a data set and look for whatever correlations that you wanted. You had to really commit to a design that was like, okay, here's a control group, here's a treatment group,

let's look at the difference and make sure that those things are comparable on every other dimension. I'm sure this is a very unfair question, but is there one big lesson that has been learned since we have been paying attention to these big data sets and causality and things like that, or is it many little lessons? I'd say there's a couple of big lessons, but what you all think of as big depends on what you kind of care about the world. So, like, one thing that's kind of been, you know, a lot of papers got written on and kind of like answered the question was just like, what's the rate of return to a year of schooling? Oh, okay. And basically, you know, 15 years of trying to estimate that using all sorts of clever things about lotteries and distance universities and trying to get this kind of experimental variation generates, you know, we roughly get a ballpark number between 9 and 12%. So that's that's... Nine and 12% in what?

In terms of like additional earnings. Additional learnings, yeah. Okay, salary rate of salary. Yeah. Another one, though, that's like kind of the... Sorry, and that was a difficult thing because, of course, education is correlated with a whole bunch of other things. Yeah, your decision to take school, go to school is correlated with your ability, all this other stuff. And your parents and your parents' income and all this stuff.

And so finding places where you could actually say, no, sending this person to school generated their, increased their earnings by 12%. I think that's a result. And we kind of have that's... And is that elementary school, high school, college, grad school, any of those? Places that we have the... It's a reasonably stable, I think. 12% is in the high school to college range. So that's sort of where, at least my familiarity with that evidence kind of lives.

But it sort of held up as one of the, as like a victory in labor economics is that we sort of know that like there's like a positive rate of return to schooling. Stay in school kids. Stay in school, yeah. The other, although not at any price. So there is like it's only 12%. It's only 12%. The other thing, I mean, which I'm happy to go into because I know a lot about it,

is like this endless debates on the minimum wage and how, you know, basically this almost as long as there's been a minimum wage economists have argued about whether or not it on net cost jobs. And, you know, I wouldn't say that it's like 100% settled now, but I think it's like, 80 to 95% settled now. It's super good in social sciences. It was super good, and who knows it might get over the turn. Like, we might get a whole new wave of studies that just flip this around. Let's see, particularly as the minimum wage starts, at some point it's going to, if you

just keep ratcheting up the minimum wage, I think at some point you start to see disemployment effects. But I think one of the other successes of this kind of causal identification turn has been kind of really getting clean estimates of like the lack of, okay, let's suppose the minimum wage does kill jobs. If it's, if it does, it's a very small number relative to what we thought. The result is that the minimum wage, roughly speaking, doesn't kill jobs. Doesn't kill very many jobs. It does not cause unemployment. Yeah. And, you know, so if it, yeah, so, you know, you can imagine that like a 10% increase in the minimum wage will cost no more than like 0.1% of jobs. Okay.

That's the kind of estimates we're after. And that is something that's incredibly cuts to the core of so many people's priors about what markets are like. And, you know, because if supply is equal to demand and then you impose a minimum wage, then that has to reduce employment. It's just what the graph says. Well, I mean, just to put that in other words, saying the same thing, if employees cost more money, you're going to have less of them. Yeah, it's like, and Gary Becker, I think, literally said this. It's like gravity goes the wrong way. And but I think one of the useful things about this transformation of economics into kind of a much more empirical, much more kind of what we call identification-based discipline has been that we are able to take things that were just kind of somewhat ideological articles of faith about how markets must work and just test them against the data, yeah.

And find that, yeah, in lots of markets, supply does equal demand. And in some markets, it's more complicated. I want to pause to talk about Joy Bird Furniture, because if there's one thing we know about Minescape listeners, they have style and taste. And when it comes time to buy furniture, the stuff that is out there might not match your unique sense of style. So with Joy Bird, you can create the kind of style and furniture that you want.

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And then there's like Econ 4, which is how like you actually, in order to fix the government failures, you might actually need a specific set of market failures to like, Anyway, so we can keep going, but I think that's roughly right at first pass. I mean, so if our intuition about why the minimum wage should cause unemployment is wrong, what's right? How should we think about the minimum wage? So I think this comes to the other thing that I want to talk about, which is just that, well, what do labor markets actually look like? And they look like a world in which, particularly at the bottom end, in which employers are not taking the market wage, is given, where they have some leeway to choose wages because they have to manage, because workers don't have perfect turnover across jobs.

Let me put that a different way. So when I cut my wage by 10% as an employer, what fraction of my workers disappears in the next, say, one to three years? And, you know, standard economic theory would say 100%. Everyone has to leave instantaneously. And it would, you know, get a better job elsewhere. I get a better job elsewhere. But what you see in the data when you actually get those kinds of experiments is roughly like 30%, which is not zero.

So it's like the market forces are there. But it's also not, and it's also not like everyone immediately. It's like 30% over a year. It takes a while. And so what that means is that employers have some discretion because they can be like, okay, I can pick a wage that's maybe a little bit lower than I'd be willing. I might be willing to pay because I'll save on payroll. might have to endure a little bit of higher turnover, but it's worth it to me in exchange for what I can save on payroll.

And so then if employers are then kind of trading off this wages and turnover, which is very intuitive, if you look at any HR textbook, it's kind of what they tell you to what. You know, it's like you're worried about turnover. You should think about the wage you're setting. Then that means that one of the things that happens when the minimum wage goes up is that you kind of get your force to raise a higher wage. and so you get lower turnover as a result, and then that offsets any additional cost of labor

that you might have faced with it, faced from the additional minimum wage. So you can think of it this way, and there's a paper that finds this. So sorry, that was backwards from what we were just talking about, because you were just saying if you lowered the wages, people should leave, but they don't. And now you're saying if you raise the wages,

the employers won't cut jobs. Sorry, so you're starting from a place where employers have set the wage, such that they're enduring a given level of turnover and they're paying a low wage. And so then imagine the minimum wage comes in and forces them to pay a higher wage. And so then they're like,

well, now they have to take that higher wage, but as kind of a byproduct, they get lower turnover. Okay, yeah. And so that's why you don't see necessarily so many jobs getting destroyed is because there's this offsetting force of the lower turnover. And they were willing to pay that much all along

as part of this theory. Well, no, it's costing them profits. It's costing them profits. And they're passing along some of it to consumers. for sure. Okay. So both of those things happen, but I think... There still is supply and demand?

There still is, yeah. There's still like... But one of the things you don't see is this immediate cost in jobs. Yeah, okay. Because of this, like, kind of offset in decreased turnover. And so what you actually see when you can see recruits and quits kind of separately is that you'll see that when you... There's a paper that looked at this in the U.S.

that found that like new hiring falls. but separations fall the exact same amount, and so that's why it's kind of a net wash. So you hire fewer new workers, but your existing workers don't quit nearly as much, and so you don't shrink in overall employment. So in both cases, in the fact that the workers don't leave immediately if their wages are lowered, and the fact that the employers don't hire far fewer people, if the minimum wage comes in, there's sort of a stickiness or a friction in sort of physics terms, right? Like there's an ideal system where things work a certain way,

but the world is far from ideal. Is that fair? So, yeah, let's talk about that. I mean, so I feel like that is often how we're taught economics, which is that the perfectly competitive frictionless world is analogous to the ideal gas. It's like this is the thing that, you know, without any other information, you should think that it looks like this,

and then you bolt things onto this apparatus in order to make it look more like reality. Yeah. And so I'm of mixed minds about that. I'm like, yeah, that's a pretty powerful way to work, partly because that perfect competition thing comes with a bunch of mathematical things that make it really tractable and make it like...

And you can communicate it very easily to other economists. Everyone knows what it looks like. So it is very powerful, but for certain things, it's also like terribly misleading. And such that, and particularly around, I guess this is just my hobby horse, is that particularly around things around the labor market,

but I would also say like, the land market and the credit market, like these markets where there's lots of these, it's complicated, that the perfect competition assumption does more violence to the reality than might be acceptable. And we don't yet have a benchmark

for, that's a substitute for that frictionless world, so we're still kind of hovering around it. But I feel like there's a, there's, if you looked at theoretical models now that are even trying to be, quantitatively made more accurate resemble the real world they have to adopt as

baseline measures departures from that frictionless world so let me give you a concrete example if you want a world in which there's any kind of role for monetary policy for example from the central bank you need a world in which prices are sort of sticky and so to get just like as a first pass these are what are called new Keynesian kind of models is that you need models where it's where not all firms can adjust all their prices instantaneously. And so there's like a couple of tricks for getting that one is like a monopolistic competition and like a staggered price setting.

And that's one modeling trick that is kind of becomes almost another benchmark in all of the models that need to talk about kind of monetary policy because it's really hard to get a role for monetary policy in a model that doesn't have that kind of like friction. So there's like one sort of mini canonical model that talks about that. Let me give you another example. Sorry, but the idea is that your underlying claim is that the very idea of a frictionless model being the good starting point is it's so far away from reality that it's just not even a good starting point. It's not even a good starting point or I wonder about it. Okay.

Yeah. I blame Galileo for all this, by the way. Oh, yeah. Well, you know, Galileo overturned Aristotelian physics. two objects, he says, will actually fall at the same rate. And you can do an experiment and drop a rock and a feather, and they don't fall at the same rate. And I think that Galileo gets credit for me the first one to say, but they would if it weren't for air resistance, right? And he sort of set the paradigm of physics that let's ignore as much as we can ignore and then put everything back in later.

That's very, very interesting. I hadn't heard it dated back to Galileo. I'm sure that there's a bit of, you know, selection effect of giving credit to famous. people, but he was synthesizing things that other people did. But I think that that paradigm of imagining a world without friction, without dissipation, and so forth, and then you can build on that to get the real world. I think Galileo gets as much credit as anyone. Interesting. That's very interesting. But there's no reason why it has to work where things are strongly coupled and nonlinear, like they are in economics. Yeah. And it's also like it kind of feels like it should depend on the problem that you're trying to solve. Like for some problems, air resistance is the thing that you

actually care about. Exactly. That's right. Yes, there's a whole other limit where you're moving through molasses, not air, which you can't start by assuming it's frictionless. So that's at least how I think about it. And I also want to point out there's, like, lots of ways in which this frictionless world is not just a theoretical construct.

It gets embedded into how do we construct various measures of national income and in government statistics construction. There's like a surprising amount of kind of folk theorizing. that goes into even like core economic measurement, that you're always like, is that, should we really believe that? And so I just want to flag that it's not purely theoretical things. It matters for how we actually measure the world.

Well, and closely related to this minimum wage question is the monopsomy question, which is, I just gave you the short version of that. Exactly. But we can use the technical term here because it's a useful one. I'm sure that everyone's heard of monopoly, where there's one company that has all the products. So what's monopsony? So first let me clarify.

So that monopoly power, I guess, is kind of just considered, you know, it's just that you have some ability to set the price. So that you don't have to take the market price as given. You can instead have some control over what price you set. So you're not, if you change the price a little bit, you don't lose all of your customers immediately. It's again like that 30% sort of thing. You'll lose some, but not everyone. And so that's kind of the, the monopsony is basically the flip side of that for the labor market. where you think about wages, you know, instead of a firm having to take the market wages given,

it instead has some discretion to set the wage. So let me give you some, and so that's this like, and one of the things, when they do have this discretion, they can manage it and say, yeah, you know, I'm going to pay a little bit of a lower wage and accept the additional turnover and that same thing I explained a little bit earlier. But let me just give some very concrete sort of real world evidence for this. So, for example, you can go online. You can find these leaked slides from Walmart's HR program. I'm talking about Sam's Club and how they set pay.

And so it turns out one of the things that's very interesting in that is that they talk about how if you actually, if a Sands Club needs to set a wage that's really different from the national wage policy, they need to apply to Bentonville, Arkansas for a special exemption. Okay. So that suggests that they do... That's the headquarters. Headquarters, yes. And so that suggests that it's not the case that every Walmart has to like exactly pay the wage in that in that labor market.

That's, in fact, a national wage policy. Another paper by a co-author of mine and his co-authors, Dubed, Giuliano and Leonard, was looking at this national retailer that basically had a policy that gave you a raise that depends. very discontinuously on your previous wage. So if you were making like one penny over some threshold, you were like got a very different raise than if you were making one penny below. Okay. And so what you can do is look to see what happens to quits among those, like do workers differentially leave just around that

based on the change in the raise that they got. Turns out not that many left when they didn't get the same raise relative to those that did, suggesting again that like there's, again, there's not just a huge responsiveness to the wage in the labor market. But I think what's also evidence about this is also evidence for is that, you know, the very fact that you could have this like weirdo wage raise policy where you had all these discontinuities in it is not the kind of thing that you think that comes out of like a smooth market-taking system where you would just have to naturally, it would look like, it would

look like airline prices. We'd have lots of round numbers and things would be like a much smoother distribution. But the fact that when you look at a wage policy and you see it, all this bunching and kinking and all of this stuff, suggest that there's a real, like, room for human decision-making. And isn't there also an information problem? I mean, we have the social more that we don't ask each other what we're getting as a salary, right? Yeah.

That certainly helps the people setting salaries. It does. It does. And there's some very interesting studies on this. By the way, I should flag, you know, there's been the great campaign by co-worker.org that's been to make these, like, kind of online spreadsheets where we're. workplaces can, like, share their salaries. And that's become, like, an important, like, kind of labor organizing tool.

I've actually seen that for science journalists with, you know, what magazine greats are. That's great. Yeah. They're not publicly available, but they're shared. They're shared, yes. Yeah. So that's kind of, that's exactly like creating information about what wages are. And there's also, there's kind of a great study done by these professors at UC Berkeley.

So if you're at Berkeley, wages are public. for a public employee. And so what they did is they actually randomized showing some workers a link to the pay of their coworkers and others not, and look to see the job search and quit behavior of those that got the ability to compare their wages to their peers. And they find that those that are making below what their peers are making are more likely to leave. A little more. Okay. Information is power.

Yeah, so I just think that that's like kind of some immediate evidence that the labor market doesn't look like the market for chairs. It's not frictionless, right. And there's not like this law of one price. And another piece of evidence that's sort of come out from this big era of big data is this availability of matched worker firm data where you can see like the same worker being employed by different firms over time. And you can see how much of their wage changes depending on what firm that they're at versus who they are. So you can imagine if the labor market was totally frictionless, the wage would just depend on you, not which firm you were at, because all firms should be in the same labor market. You have an intrinsic worth and they pay it. And they pay it.

Yeah, exactly. It's like your human capital captures this is priced, and every company has to pay the same price for that. But what you in fact see is that there's a considerable movement of individual workers' wages. So something between 15 and 20 percent of the wage variation that we see is explained by the firm that you're. at, not just you're who you are. And so that suggests that given this like reasonably important role for firms that again, there's like this kind of room for all these frictions because that's, that's a deviation. So I guess I don't know if that, I don't know if there's an analog in physics for the kind of person that's really obsessed with the frictions versus the kind of person that's

really into the ideal and into the frictionless model. Right. I mean you have to be. Some people have to do that. You've probably heard of Peloton. It's a game-changing cardio workout that you can do in the comfort of your own home. And now there's a new way that you can overcome that barrier to getting it done with a 30-day home trial. There's free pickup and full refund. So if you're interested in possibly seeing what life is like with a Peloton bike in your home, you can try it out and see what you think, free for 30 days. Peloton is super convenient. You can use the bike whenever you want. There's a great variety of workouts available. There can be live motivation, you can have a live class with a world-class instructor,

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and get $100 off accessories with the purchase of the Peloton bike if you use the promo code Minescape. That's OnePeloton.com and use promo code Minescape to get started. Restrictions apply. But so this leads into the real world question of low-wage jobs, right? There's been a lot less of rebounding in the low-wage sector than the high-wage sector since the financial crisis, if I understand correctly. And some people have blamed automation, other people have blamed globalization,

and this sort of labor market sickiness is a different explanation. Yes, yes. So I want to be clear that, like, a bunch of those other, a bunch of the explanations do you have, like, I'm not going to deny the trade with China has had a huge effect on American jobs, and that's like a big, that is a big factor. Automation, I think it's a little bit premature. I don't know that we have, like, really amazing evidence that automation has really leveled American employment. Andrew Yang is very worried about it.

We know that, right? Yes, well, yes. But I feel like it's kind of, I feel like it's this fantasy that like American capitalism goes through every like couple of generations is like in the 60s. It's like, the robots are coming. Yeah. Well, it seems to be like a perpetual belief that jobs will disappear because of automation. Yeah. It always seems to be true that other jobs pop up, but maybe that doesn't last forever.

And, you know, who knows? I don't know if that's like an iron law or like that that just might be a law insofar as there's things that humans have a comparative advantage. in relative to machines. But I do want to suggest that there's a way in which the, you know, and we also want to flag that we're currently at, like, record low unemployment, like kind of insanely low, you know, unemployment, hot, hot labor market. And yet we're seeing let us really difficult to pick up increases in wages in this period of.

Which again goes against our intuition from Econ 101. Yes, exactly. And that it also points against some of the automation and trade stories because it's like a lot of those stories were the main thing going on, then you'd expect it's also, you'd see it show up in unemployment as well as wages. Yeah. Well, if it's, oh, but if you have really low unemployment, but you're seeing, you know, low wage growth, it's kind of like, brings you to like kind of a what's a different category of explanation. And so I don't want to say that monopsony is like the only or main thing. going on here, I don't know. I do think it is interesting that

a lot of the forces that have countervailed monopsony have just been in slow decline. So a lot of the things that took the wage setting power out of the hands of firms have just like over 50, 70 years have just declined.

Because of changing in government policy or just... I would say some of it is changing in government policy, some of it is these other technology and trade things. So you can imagine a big chunk of the effect of trade is via hammering union

manufacturing jobs. And, you know, part of them were like relocating to right to work states and that got hastened by globalization. And once you have more and more of manufacturing For those who don't know, right to work is basically like right to not be in union.

Right to not be in the union. And and so just, you know, between and both like relentless government hostility to unions, particularly since like the 1970s. So you can think of those two things happening together and so that this erosion of this institution that pushed back against that sort of curbed monopsony but also made us think that it wasn't a big problem. So I, which is sort of, which is an interesting history of thought kind of thing that like in the 1940s and 50s

labor economists who are not like the high priests of mathematical theory, but these are the people that were working. You know, there were professors at, like, Harvard and Princeton and Berkeley, and they were also employed in the National War Labor Board to, like, involved in wage setting, involved in union firm negotiations. And they very much had the idea that the labor market, when it was not regulated, looked like monopsony. Okay.

And that in that firm's had to consider it. It's an old idea. Not exactly the new ideas. Yeah, I didn't invent it by no means. And it was not invented in the last 20 years. It's like Joan Robinson, who's in my mind. the greatest economist of the 20th century. I just want to say that so that more people look up who she is

and she just had a really interesting life. When was she working? So in the 1930s and 40s and 50s and 60s and 70s. So she was one of Keynes' compatriots in Cambridge and one of the people in that circle of British economics in mid-century. And so she comes up with it. She's also one of these economists

that partly because of who she is and stuff that's like always like arguing with the Marxists. And so it takes their ideas very seriously, but it's like like arguing with them. Constructive argument. You can kind of see monopsony as like kind of a sort of somewhat of a genesis of that coming out of some of those conversations.

And when labor economists heard about this theoretical thing, they were like, yeah, that's totally right. Makes sense. And you know, so there's a great, quote I love from this paper by Clark Kerr, who was a labor economist in 1950, which is like, yes, yes, yes, this theory of like what he called it natural competition, but monopsonistic competition, it might be relevant for, like, LES I FAA labor markets, but the labor markets of the future are going to be administered and unionized, and so this kind of monopsony thing

isn't really a relevant object of study because we're headed to a world where everyone's going to be in a union. So he wrote that in 1950. So he wrote that in 1950. So he wrote that the workers would prevent monopsy, basically. Yes, and so he might have got the effect of unionization on monopsony, right, but he got the time trend of unionization totally wrong. And so I think that that's an interesting history of thought,

partly also because those old, what they were called institutional labor economists, really got the idea that there is kind of a considerable amount of discretion that firms have in wage setting, that it wasn't just like the frictionless supply and demand, they had this idea that there was like a band of wages that, you know, wages could be set around in this band and that there was considerable leeway within that band. So that was like a way of adding frictions. Justuris or something like that. Yeah, yeah.

So I think, yeah, so how did I, not sure how I got back to the, to those, but I think this point that the labor market is a particularly a place where these frictions are important. And so if you really kind of care about studying low wages and labor market outcomes, you kind of need to depart from the frictionless model to get it right. And is my vague feeling correct that organized labor has just been declining in power for decades? Yes. Yeah, absolutely. It takes a particularly sharp downturn in the early 80s. And some of that's the 81 recession.

Some of that is just generic employer. Like employer hostile. It's something that's actually a paper I'm working on. is kind of just trying to document this change in norms that just seems like you get this like all of a sudden this tip in norms among employers where before they were kind of playing softball with unions, they'd be like, okay, well, you know,

you can go out on strike, we won't fire you, even though they had all kinds of legal powers to fight unions with more vigor, they didn't use them just because of the norms against them. And then that just flips in the 70s. They all of a sudden become like, all right, truce is off. We're now going to fireworkers during strikes and replace them with permanent replacements. And the Reagan administration is kind of like a green light to jump start that.

So I think that's all part of the, it's part of the sauce of what's going on. I don't know that anything, I mean, there's also structural ways in which American and British and Australian unions are organized that makes it hard to imagine how they could come back in the form that they existed. Because they're organized on like an enterprise basis rather than on a whole labor market basis. So in Europe, you know, unions are sector wide and they got everyone's in them or everyone's at least covered by them. And in the U.S., it's been this, like, firm-by-firm kind of organizing model, and that's just a really uphill battle for unions. So I don't know what the – I don't know that unions are going to come back in the form that they look like. I do think something like them needs to come back to sort of – if something that curbs the use of monopsy power by firms needs to, like – Well, I was going to ask, is that your prescription?

Is there a best way to fight against this monopsony power? Yeah, so I do think that like some sort of way of workers getting a substantial voice in how wages are set collectively. And what's important about, like, it's difficult for the government to do it. So the government can impose a minimum wage. But one of the things that the government can't know is exactly what's the, A, what's the mix of, wages and benefits that workers want. B, how much of that mix of whatever workers want are consistent with the firm's business model and like them making profits. So it's one reason why like kind of unions are kind of a better solution than government regulation in lots of places because they can

customize the terms of a collective bargaining agreement to the particular needs of that workplace and those workers. So it's still the free market. It's just that there's some organization on one side. Yeah. So you can think of it as the free. I don't know. I feel like Most people that would say that the free market would say, well, if you have to negotiate collectively, then it's not free. But you kind of want it to be collective because you need that kind of balance of bargaining power on both sides. It has to be all the workers at once. Maybe there's another term for it's not the government doing it. It's not the government doing it.

It's decentralized, I would say. It's decentralized and it's bottom up. Right. It's decentralized. But it's not free market. Mindscape listeners love to learn, but there's not enough mindscape to fill. the day, frankly. So you might want to consider the Great Courses Plus. This is a streaming service that gets you college-level courses directly to your home, whether it's your laptop, your mobile

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Go to the greatcoursesplus.com slash mindscape. that's T-H-E-G-Courses-P-L-U-S dot com slash Minescape for a full month of college courses all over the map for absolutely free. Good. This raises a whole bunch of deeper things. We've successfully covered what I wanted to be the second half of the interview in the first half. So that's good, that's fine.

We can come back to the first half. That's how we roll here in Minescape. We just follow the flow of the river. I mean, the free market, capitalism. how do you feel about these things? How should we feel about these things? Let's be big picture and ask, you know, certainly there's been enormous successes,

there's been dramatic failures. I feel that there are people who are very, very pro-free market who love to bring up spectacular failures of central planning, and there are... Power planties. And there's exactly the opposite. There are people very anti-free market who love to bring up the spectacular failures of capitalism.

And there's fewer people sort of talking to people who are very, who are close to them, but slightly different, you know, across one divide. Do you have a big opinion about this stuff, or does the economics profession have big opinions about this stuff? Yeah, no way. The economic profession does not, I think it's almost like, it's almost like a condition of membership is not allowed to have an opinion about capitalism. No, I thought you're, you love capitalism.

Well, yeah, generally it's like pro, but like it's the kind of thing that like, oh, we're trying to be scientific, we're just going to say. It's like cosmologists, because. being asked about the existence of God. Yes, yes, yes. So, okay, so a couple of things. One is, no one should deny that, like, the success of capitalism in raising material standards of living has been kind of amazing and a world's historical break.

And, you know, Cosmoshalese, another SF5 professor, has a great line, which is like the singularity already happened. And it was the Industrial Revolution. and we basically let these Eldridge forces loose, and one of those is kind of letting people buy and sell stuff at an arm's-length transactions, and that kind of being a really great way to coordinate people's wants over very long distances.

People can look online. There's this charming short video with you in it where you're complaining about the lack of Wi-Fi on the train in London. and then you go, well, but then again, 800 years ago, they were dying of dysentery and eating gruel, so I shouldn't be complaining. Exactly, exactly.

So that's part of this textbook project, which we should talk about. So that's why, like when what irritates me to no end is when anti-capitalists sort of somehow pretend that it was better before capitalists. So I have no sympathy for that argument. What an argument I do have some sympathy for is that, you know, that's not the right counterfact.

The counterfactual we should always be thinking about is how does it performing relative to some other thing that we could have. And so looking to the past doesn't generate the right counterfactual. What you want to think about is another possible future. And do there exist other economic organizations, ways of organizing the economy that given the technologies that we have that might actually be like a better fit and might result in more human flourishing, less inequality, more environmental sustainability, all of these good things that we want, could we do better? And I feel like we don't do ourselves a lot of favors by pretending that the thing that we've got is the best that it could possibly be. And a friend of mine, Glenn Maw says it's like an engineer looking at the telegraph and thinking,

this has got to be the best way to communicate, guys. We've perfected it, yeah. We've got it. And so we should, as social scientists, as citizens, be thinking about doing things better. And so some of that is just policy fixes within the orbit of capitalism, and we can talk about lots of those, and that's things like healthcare and like antitrust and like minimum wages. And some of them might involve, like, things that are kind of strike more to the core of what makes capitalism distinctive, which you can think of as like making private property a little bit more of an elastic concept. So you can imagine in an economy where the biggest resources are like ideas that putting those in the shackles of private ownership and in patents and in monopoly rights is kind of not necessarily doing ourselves the best, giving ourselves the best chances of success. Well, and these days when you can patent or copyright genes or algorithms and things like that, it seems bizarre to me.

It seems like that maybe that's exactly what you're saying. not a comfortable fit where we, to these concepts that were brought up in the context of, you know, farms and cows. Yeah, yeah, or even like trading widgets. And that when you have these goods that are like, you know, as San Bolz calls them as like fugitive resources, they're like a high fixed cost, zero marginal cost kinds of goods, that shackling them with the institutions of capitalism, you know, maybe it's not a great fit. And then other people that are pro-capitalists will say, yes, that's what's been said at every technological change, is that capitalism is no longer a good fit.

And what you'll always see is that it winds up sort of still doing a better job than any other system. I mean, because private property and property rights are like the central tenant. They're definitely like a big part of it. I mean, I do think, let's just be a little pro-capitalist for a second. I think of it as a search strategy, right? In some way, capitalism is a way to find a certain kind of equilibrium that has good properties. People are innovative. They try to do better.

They have incentives pointing in the right direction. What is your pro-capitalist sales pitch for someone who's never heard of it? I think that's right. I think it's like the idea that you, the way that you get prestige and status and material resources in capitalism is by making things that other people want to buy. Yeah. And that's a real break from like how human history did it before. which was like you killed lots of people or like or you conquered lots of territory or something.

And so a real institutional break is making the basis of social reward providing useful things to like anonymous strangers. So it's more of a win-win. It's more of a win-win. You benefit yourself by doing things and benefit other people. I mean, if you put it abstractly like that, it's like what a great thing. I think the limitations of that is that like there's other things that you can do that are really profitable under capitalism that don't involve making useful things for other people.

Well, I wanted to sort of talk about the term rent seeking because it's used as sort of an epithet, but I think probably most people in the street were like, you know, well, yeah, people own property and they rented. What's wrong with that? So we should back up and define concepts. So rent, technically in economics, is just defined as like a payment for something above and beyond its next best, it's a payment that it would guess and there's the next best alternative. So, you know, I'm making rents as a professor

if I'd be willing to do this job for, you know, one-tenth the salary. And so then everything above that one-tenth of my current salaries is rents. Okay, that sounds like a bizarre construal of the word rent. Yes. But it's not completely alien to the traditional use

of like payments for land because the idea was that an opportunity cost of land is zero. It just sits there. And so that's why landlords are like often, you know, the worst people in history. It's like why they're like that. We've all met them. Yeah. It's just like like you're, and why they've often been called like social parasites is that you're just there's a pure landlord and pure landlord and pure form is just sitting there collecting rent while like the land that they own purely by virtue of a property right doesn't actually.

they're not actually doing anything to produce that value. And you can imagine in the real world they're developing and doing stuff, but that's not the pure landlord function. That's like a developer function. I mean, just be fair, if there's any landlords, in fact, my friend Karen, if you're listening out there, you know, like, of course, real world people are often much better than just sitting in their home, in their home, collecting the rents. But I think conceptually you can split apart the like, it's a different role. The, the, the development and maintenance of a house with ownership rights of the land on top of that house. Yeah, that's right. And so, you know, and so that's why it's like the opportunity cost of land, pure land, was zero.

And so all the payments going to land were considered rent. And somehow, but it's become a way of conceptualizing a certain kind of bad behavior under capitalism or a certain way it doesn't work. I don't know what to say. Sometimes it's used that way. I mean, I think in core in this textbook project, what we try to say is that, you know, this productive and an entrepreneur starting a new business. seeing that there's like some service that could be offered that's not being offered and starting a business to do that they're rent seeking but that's because there's like a rent there that's like a gap between what the the things that are that that person's time and the cost of those materials and

all of that and what they could be getting by producing this good and selling it so they're getting a rent by supplying this market thing it doesn't sound like it's such a bad thing so i think there's productive rent seeking in that like a lot of innovation and a lot of entrepreneurship is in fact chasing rents as a part of making the market work. And that's part of how markets work is that people inside the market are like chasing rents all over the place and trying to meet people's needs and lower costs and things like that. And so there's a very, so I don't, we shouldn't prejudice the term rent seeking as necessarily that thing.

Although I think when it is used in a prejudiced way, it's often referred to kind of like artificially raising barriers to entry, you know, like engaging in the kind of activities that are like zero sum so that you're like trying to like raise your share of a pie at the expense of someone else's rather than trying to grow a pie. But I think that's how it's used in a pejorative way. But I think conceptually we can sort of say it's just like trying to get something, trying to get a flow of income that's higher than your opportunity cost. And just to put a pin in it, that opportunity cost is a pretty metaphysical idea. So it's very, so it's, it's, you know, we say it, we say rents very casually, but actually

operationalizing what's a rent and what isn't is, uh, uh, well, I mean, this is an issue, um, I think it's an issue in physics as well, where we use words like energy and dimension and time in a different way than people use them on the street. In economics, we also use words and struggle over their definitions. There's a very related word I wanted to get to that I know you and other people were feisty about on Twitter recently, namely neoliberalism. And of course it starts with the word liberalism, but then it's neo. And I think that maybe it goes back to Reagan and Thatcher era things, but some people use it to mean Bill Clinton and Tony Blair. And some people just use it to mean everything good or everything bad.

So I find it's a very clear statement of it is a 1950 article by Milton Friedman, where he actually just literally, explains what the doctrine of neoliberalism is. And it's not libertarianism, importantly. It is not just like... So libertarianism would be the more pure free market. More pure free market. No need for a state even. Like, we don't even need police. For the night watchman? Well, so I think the night washman state might be on the outer edges of neoliberalism. But then, you know, in Milton Friedman's article, he really does talk about like the functions of government should be to not distort the market. And but that also

means that it needs to provide like antitrust and and might need to do some sort of basic income provision. And so that's why I think. Like a UBI, like a universal basic income. Yeah, so I don't think he uses the term, but I think he's not unopposed to the idea that the government's doing some non-distortionary redistribution. But what... Milton Friedman, radical leftist. Well, yeah. But I think it's very important, and this is sort of where we started with that like Econ 103 and Econ 104 is that the,

The broad view of neoliberalism is like the open markets is just like of free money. And it's just always like going to be a, it's both good for prosperity, it's fair on its own rights. Like what you get in the market is pretty close to what you might deserve. And we might need to fix it like with these very particular tools. like we might need to, in some places, make it a little bit more competitive, or we might need to undo the worst successes of it by redistributing to the poor. But the idea that you would, like, broadly have to have the government intervene in a variety of places inside the economy was like, they were like, no. And, you know, so in particular, like, regulations and things like that were, like, seen as not, not particularly necessary because, you know, the market would fix it. But I guess, yeah, I'm still a little unclear.

Yeah, so let's talk through it. I don't think that the word should even be used because people mean different things by it. But, okay, so let me give you, I think, a very clear, which is just this broad confidence in markets as the baseline mechanism for organizing the production of business services. But I guess what I want to get at, if the government passes a rule that, you know, is sort of a safety standards for factories. Yep. Does that distort the market? Yes. So explain why.

I mean, imagine, let's take a ridiculous example. Because I'm trying to contrast that with like literal central planning that says, you know, here is the cost of this good. Yep. So, so, you know, because we can come up with ridiculous regulations. And so there's some regulations that, that, so, you know, a good example is zoning restrictions in California. Oh, my goodness. Where, you know, endless numbers of people have pointed out how like these restrictions on where and what you can build are causing all these other problems.

And so, you know, there's a very neoliberal take to them, take on that, which is like, give rid of them. And then there's like a less confident and less articulate thing, which is that, well, some of them might be there for a reason, and we can't just necessarily presume that they're all bad because they are restrictions on markets, that there's some restrictions on markets that are, in fact, good, even though. they are distorting, and even though they are deviations from this, from, you know,

some sort of a more efficient benchmark, because of either the kinds of communities that they support, because of the political coalitions they allow, because of something else, potentially non-economic, and that that's an argument that we can have

is, you know, the new... So if I'm, maybe I'm beginning to get it in the sense that something like a safety regulation, or a zoning restriction counts as a distortion of the market because it's saying here's something you can't do in the market. Here's some voluntary mutually improving transaction that we, the government will say that you cannot do. Right, because I could build a really, really deadly factory and people might want to work in it and the government's saying you can't do that. Yeah. Okay.

Yep. Got it. And, you know, my favorite, just to come back to, it's like my favorite example of like a bit of the Constitution that like rules out some of this is actually the 13th Amendment, which says that you are. I'm literally not allowed to indenture myself. I cannot say... Even though I might be willing. That was very conscious at the time because there was like Mexican peons in the New Mexico territory

that were in debt bondage. And, you know, that was one of the things that was coming up was like, are they covered under the 13th Amendment? Because they had voluntarily... So you have issues with neoliberalism? Yeah, I guess so. I think it's also like kind of one of these things that's way past its sell-by-date.

It was also just like when I just think of the origins of so many of the kind of social problems that we've got now, I just feels in my, like it just feels like the history is kind of borne out that a lot of those can be laid at the feet of policy reforms that were conducted in the name of neoliberalism in the in the 70s, 80s and 90s. And even up and through the Bush and Obama administrations. So that's why that ideological label is, some people see it as so elastic, but some people say it's like, no, there was a real tendency and a real commonality that went through all of those administrations, and this is the name that we give to it. And, you know, one of the things, this is just my physics prejudice showing through, but one of the things that fascinates me is the relationship of various economic doctrines, capitalism and neoliberalism, for example, to time, right? And one of the big counter-arguments against neoliberalism or capitalism maybe is that it has led to disasters of climate change because of tragedy of the commons kind of things. And we need to move beyond this sort of just adjust to what the market wants if we're going to serve future generations. But then there's a big philosophy question. Like on the one hand, how much do we owe to future generations?

And on the other hand, a previous guest Astra Taylor brings up this question. question of why do we pay so much attention to the wishes of previous generation? Uh-huh. When people, you know, have their wills that are distributed in certain ways or inheritances in so-women. Yeah. Is there a way that, has this been properly theorized, the relationship of economics to future and past generations?

So there has been a lot of theory about, you know, so here's an intuition from economics that probably other people haven't thought of is that one of the things that you also again is that future generations are also going to be richer than us, just because of technological change. One hopes, yes. Yeah, yeah. And so, so for any given level of climate change, you know, there's some ways in which, like, future generations might be actually better off, might have more tools to deal with it, or in any case, might be richer. And so some, I mean, I'm not going to, I don't necessarily think this, but there's, there's, there's some arguments for saying that if you are going to do this tradeoffs across generations, you might want to also

take account of the kind of income inequality across generations because we are poorer than our future generations are going to be. So maybe we've earned a little right to, so. Unless we destroy the planet. Unless we destroy the planet. So that's like the, it's a good that you said that because it puts a finger on like a real deficiency of the way economists think about things, which is that we're always thinking in terms of like smooth optimization. problems. And so there's like, oh, there's always some margin on which you could like shift a little bit more here versus there. But if you're dealing with these systems that have these big nonlinearities and cliffs and things like that, then that kind of like thinking at the margin that economists are

kind of trained to do doesn't work super well. It's less appropriate. It's less appropriate. Yeah. And so that's, I think, like a pretty deep, I think, criticism of economics is that this, this like really focus on thinking about what you can do at the margin where you have these kind of, you can always move a little bit from choice A to choice B, and so you just have to pick in between them fails when you're just like, nope, it's like a big gap in paths. And so you need some other decision calculus to account. Well, yeah, I mean, that's the opposite of, I guess, Tyler Cowen was a previous guest on the podcast. And he has this point of view that the best thing to do, the morally best action, is just to maximize economic growth. Because compound interest, right? You know, it catches up. And also,

we should not discount future generations at all. They're people just like us. I made him slightly disgruntled by calling him the temporal version of Peter Singer. Because Peter Singer says we should count people far away just as much, and he's counting future people. But I think it makes sense to me to discount future generations because of so much uncertainty about what things will be like.

Like how can we possibly think that we're accurately judging what the future generations are going to have or not have? Yeah, so I think the uncertainty makes it complicated. But then you get into these like insane kind of calculations that effective altruism people kind of do of like the risk of AI. So basically when you start discounting far enough in the future. I'm sorry? They're insane but we also have to do them in some sense. So we do have to do them.

But I think the idea that you can, it feels like you're a lot of doing a lot of like division by small numbers. And so you can make small quantities blow up by dividing by like a really, really small number. Or you're multiplying really big numbers by really small numbers. Yes. You get any number you want. You get any number you want. Right. So you're in that space with a lot of these future discounting calculations.

So it feels like, again, the tools of trying to think about the tradeoffs aren't really well suited to that because the scales are just like up in the air. So we just have no idea what the magnitudes are. So like thinking quantitatively about tradeoffs at, you know, 10 generations from now, I'm not sure it's super productive. Yeah. So I take your point that. there's sort of an attitude that says that future generations will, on the one hand, be better equipped. And on the other hand, know more about what the situation is. So maybe they should handle it.

But I also think it's moot for climate change. Like, we're here now. Like, we're like, we're here. We're already feeling it. Like, yeah, I'm like, my life is materially worse because of climate change. It's like, oh, I live in California. Yeah, you live in. Yeah.

So I feel like all this, like, oh, how much we wait the generations of the future? It's done. That was the 15 years ago conversation. And like, yeah. Okay. Fair enough. But I like the, I like the, I like, Still, the analogy of inequality of, you know, the present to the future because, you know, so let's go back to the present and there's inequality now.

And this has been a longstanding thing among economists, right? You know, they measure progress by GDP or something like that and less by how the worst off people are doing. Is there more – am I crazy in thinking there seems to be more attention now paid issues of inequality? Yeah, absolutely. I mean, absolutely. In a Nobel laureate in my first year of grad school, 2004, at Berkeley, I went. I was like, I'm interested in studying inequality. And he was very smart.

He said, he's like, ah, you know, nobody really cares about studying inequality, except the French. The French really likes studying inequality. And he was absolutely right about one of those things. And so, but I think obviously that's changed. I think Occupy Wall Street plays some role as I think Bernie Sanders. I think the actual just continuing increase of inequality has done its own work. So, and I think actually one of the, sorry, go ahead. Let's not let that go by too quickly.

It is fairly agreed upon that in the last some number of years, and maybe you should tell me, rather than me guessing, inequality has been increasing. Yeah. No, I think nobody can deny that inequality has increased over the last like 40 years. Yeah. In the U.S.? In the U.S., in the U.K., in almost everywhere,

although the magnitude of the increase is much muted in the continental countries. People will argue about exactly how much, and there are calculations you can do that kind of get you a range that looks like, oh, it wasn't so bad, or it was enormous. But it's gone up more in the more neoliberal countries. Yes, it has gone up more on the more Anglo countries, almost for sure. It's also gone up a lot, though, in developing countries. So countries that have grown a lot.

No, but I said neoliberal countries. Yeah, yeah. So, yes, I think that's that. And so one of the interesting, I think, recent areas of research is the stuff pursued by Piquetti and Syyes and Zuckman that's kind of come out of that whole French research program, which is the idea of distributional national accounts, which is that instead of just keeping true, track of like the aggregate GDP of a country, let's keep track of it by percentile. And so then you get an easy statistic.

It's just look at median GDP instead of like mean. And median will just get you like pretty much the sense in which the 50th percentile is doing. And that's like a not a bad proxy for also capturing how evenly distributed the growth is. And it's a nice kind of marketing ploy because no one can argue with collecting more data or paying attention to more data. Well, people can are like it. It's not normative. So you'd be, because like, again, just like it comes in with the national accounts, you can, a lot of folk theory goes into the construction of the measures. And so you have to argue a lot on both sides.

Lots of people are arguing about what are the folk theories that are going into constructing these statistics. And so that's where there's like an active argument on Twitter and things like that. And so choosing what to pay attention to is a big choice. It's not innocent. Yeah, yeah, exactly. It's, yeah, and what assumptions you make about allocating dollars and things that gets into the weeds and it matters. Okay, but anyway, inequality is increasing. Yep.

Probably we should do something about that? I mean, I guess people's opinions will differ on how much it's a problem. Yeah, I think there's lots of people that think, like, no, we shouldn't do anything but inequality. We should just fix poverty. Lots of people think that. What do you think? I think you don't get, you don't get a flourishing society where, you don't get a flourishing society with like insane amounts of inequality.

So let's just again lay it out there. You know, there's certainly, I think, that my youthful self would have been guilty of saying, look, if everyone is better off, it doesn't matter that some people are way better off. It's still better, right? Yeah. So is there an intrinsic value to equality?

I just think there's lots of things in, there's lots of dimensions of things that are important that are in fact zero sum. And so when you have this kind, like it's things, even if just something very big, like relative status in society, is basically kind of,

of a thing that you, because it's relative, it's got to be zero sum. And so when you have enormous income inequality and it's roughly correlated with this, it means that some people have very low status. And that's just not great for like a good, healthy, democratic society. And so that's itself is like a reason. Once you have some things that are zero sum that are correlated that come along with income inequality, that's a good reason to reduce the income inequality. And so those zero some things can include relative status. They can include political power. They can include cultural representation in society. There's a bunch of things that are not just expanding the pie,

but where the distribution of the pie really means that some people are made worse off. And is the solution to this as simple as changing the tax code, wealth taxes or inheritance taxes or just a more progressive tax system? I hope so because the only other thing is like we either do it through policy. Like here's the bet is that the only way in which we've seen inequality of this type, fall in the past is with like social catastrophes. Yeah, okay. And like it's either an internal revolution or it's external war or, I mean,

Walter Schneidel has the book, this great leveler that kind of makes this point. But here's the bet, which is that we are progressed enough as a society, as a civilization. We have enough tools of government and enough tools of reason in the society that we can actually use policy to reduce inequality without having to go through a war. Right. So that's, hope slash aspirations. Yeah, that's the,

and that's one of the reasons for, like, thinking about the goals is, like, a wealth tax and these things. It's like, look, guys, we don't have to, you know, worry about millions of dead people if we can actually get these, like, relatively mild policy things into play. And you can imagine the same, similar with climate change.

It's like, you know, one way or another, like the climate is going to like fix us. Yeah. But the human brain just isn't meant to think, to reason on these time scales, right? I mean, if someone is very wealthy right now and has never seen a revolution in their lifetime, the prospect just doesn't seem real to them, right?

They would rather keep their money. And so maybe it's for their own good that we'll take it from them. But, you know, I think that's the thing. It's like, yeah, they will fight it. And hopefully the end of the end. idea is that if that doing it through the democratic process is a way to get it peacefully, uh, to do it like while maintaining democratic institutions. And so, I mean, we've certainly seen, uh, the eyes grow wide among the cohort of wealthy democratic donors at the prospect that

Elizabeth Warren could get nominated and start taxing their wealth. Yep. Um, and I mean, good. It's, it's good. I mean, I think it's, uh, they... Someone said on Twitter, you know, if, if the rest of us had as much class solidarity as the billionaires do, we'd be better off. I mean, they call each other on the phone and tell each other to run. Yeah, exactly. Yeah, so, so, um, I'm not, not, I, and, you know, one of the great, so one of the things about the wealth inequality thing that I think Piquetti and others have sort of made kind of apparent

is that, which is actually something I learned at Santa Fe Institute a long time ago, which is this idea of like, um, um, you know, um, you know, um, um, you know, um, um, like Gibraltar's law for wealth that like basically because assets have these like stochastic multiplicative returns so they just kind of grow at a random rate that that can get you like an extremely skewed like power law distribution of wealth and and so these these power laws are just very natural outcomes of sort of networked processes building on each other. Yeah, it's cumulative processes. Yeah, yeah.

And that explains why like a good old revolution is the best way to increase equality. That is the other way you get it. Or you can think that what you do is you damp down the growth parameter. And so you're like kind of, you're never going to get rid of it, but you can like slow, by taxing the rate of, by taxing wealth, you're kind of curbing that growth that's happening every year and sort of letting, you know, it'll still like get out into like a power law, but just the thinness of the tail will be less. Okay. So the sales pitch to the wealthy donors is you'd rather have a wealth tax than the guillotine. Yeah. I mean, I think they know that.

level. I think at another level, they're like, this isn't the society they themselves grew up in. And I think they feel some, you know, some of them at least feel, might feel some guilt for that. I mean, at a more practical level, do you have a favorite strategy? Maybe wealth taxes serve some purpose, but there's other things to do also. Yeah, I mean, like I said earlier, I think something like the labor movement has to come back. And both for political reasons, because it was a way for so many regular people. to have their voices aggregated to be expressed politically. It trained so many working class people to run for office. It was just like this broad-based kind of institution that when in the 50s had 35% of the American workforce in it,

that just did a lot to compress the income distribution. I think when I think of what I'm sort of like committed to is trying to figure out how to use social science and things to help sort of resuscitate something that looks like at a labor movement. Are you personally in favor of basic income? I think not really. Actually, I mean, it's an interesting idea to play with. I wouldn't be opposed if we got it. But I do think there's a way in which we'll, A, see a lot of the gains undone by, like, monopoly pricing.

And secondly, that there's, like, a real sense in which work and, like, the fact of having to go and interact productively with people that are not like you. is just like a real great glue for... But don't you think... I mean, I'm completely open to this possibility. My mind is very open about UBI, and I'm glad that certain local jurisdictions are experimenting with it because you can collect the data, right? But I think almost everyone will still work,

even if they had a basic income. In which case, then... Well, but... So I think that's fine. I mean, then it just becomes like a... It's not actually a transformation of society in any way. It's just like a little extra. cash. You raise the floor for the people who don't. You raise the floor, but if you're not

raising the floor enough to get some people to like opt out of the late, to get, you know, to people opt out, then you're not raising the floor that much. Yeah. So it's attention. I'm literally thinking of people on Skid Row in Los Angeles that, you know, who could afford a studio apartment if there were UBI. So, yep, I think, I think there's a lot of that. I also would, you know, my optimist aside would also think that a lot of the other pathologies and like pain. that comes with being poor would be less if you were just less poor. And so, giving people money.

You know, not a bad, not a bad idea. But it is expensive, I get it. Yeah, it's not that. I mean, you could do a UBI, you know, maybe not like this year, but like in 10 years, American society could easily afford like a reasonable UBI. In fact, there's a very easy way to do it right now, which is just take the earned income tax credit that we already do. and then just like, so my friend Aaron Dubei propose this,

it was just like make it so that you don't get zero if you're not working. You're just getting some positive amount, but then if you work more, you get even more via the EITC. And so then that disincentivizes, like then people get a basic income, but there's still some additional incentives to work. And so that might actually be both the kind of the best of both worlds. Yeah, okay. All right, I want to, it's time to wrap up.

I want to give you an opportunity to promote at least two different things. one is the idea of economics for inclusive prosperity. Did I get that right? Yep. So the idea of that was we, me and Danny Roderick and Gabriel Zickman were at a conference with intellectual historians and sociologists. I was at Caspus at Stanford. And it was kind of about neoliberalism and all of these other social scientists were like, economics is responsible for neoliberalism. And we were like, what are you talking about?

And basically, so we started this initiative to kind of just collect policy ideas and get like a group of economists that we're kind of doing progressive policy, that we're kind of doing work in progressive policy circles. But it just wasn't getting heard in either policy makers or even other social sciences. And so we're like, let's put up this flag that just suggests that there is, in fact, like at least a community of economists that are non-nealiberal. and good branding goes a long way. A good branding goes, yeah. And see what comes up. And so that was kind of our, and we've gotten some really, I mean, some of the policy memos are really fantastic. And it's also giving people like economists that have really great ideas.

Sorry, what does it mean? Sorry. What does it mean, it's a generic nice thing. It's like, who could be against inclusive prosperity? But the idea that like the economic growth, it's not enough to just. consider the level of economic growth. You also want to consider its distribution, and you don't just want to consider, like, economic growth narrowly as GDP. You want to consider the broad measures of human flourishing. Yeah. Yeah. But, yeah, and the price of entry is kind of one of these

like five to ten page policy memos that kind of, like, builds on your research or something you've worked on and sort of talks about, like, an idea for either a policymaker to run with or just kind of a view on a way to make the world better. And so these policy briefs that have come back have been kind of really fantastic and really interesting. So I just encourage everyone to go check it out at econfip.org. All right. We will link to it in the show notes.

Okay. And what was the other thing you wanted me to? Well, sorry, before we go on the other thing, it does remind me. I wanted to just ask a little bit about the duty that you have as a social scientist or an economist in particular. I mean, there was just a conference in Santa Fe. I don't know if you were there. No, no, I missed it, yeah.

It seemed to be from the live tweeting, there seemed to be a lot of ragging on economists on the basis of abandoning their social responsibilities. You know, Jeffrey West said, like, why aren't economists leading the battle against climate change? And so I've always thought that it's perfectly okay to be a scientist, even a social scientist, who just tries to describe what happens in the world,

but it's also okay as a third. field, there might be an obligation to intervene constructively in some ways. So what is, okay, so what's the social obligation of economists? Well, I don't know. Is that what you ask me? I mean, do you think that if you have, if... Do no harm. Well, yeah, do no harm would be a good one.

I mean, I guess the argument I buy is that there are experts who have a certain kind of special expertise. And if it's clear that that particular kind of expertise, could be deployed to make the world a better place than at least some fraction of people who had that expertise should do that. Yeah, so I think that's true. And I think that does happen.

I mean, I think you'll find that economists are much more involved in policymaking than almost any other social science. And some of them are, I think, like real, like working on climate change, like my colleagues here, work on climate change all the time. I don't know that we have more of a responsibility than physicists. And...

Yeah, no, actually neither do I. I think the philosophy that I just outlined, and I don't necessarily hold very strongly. I'm trying to figure it out myself. But I think that for the most part, academics, intellectuals, scholars should try to say true things about the world. But that's right next to doing good things in the world. And I admit that there's a connection there.

I would be happy if we just restrict ourselves to saying true things about the world. So, I mean, it's partly that the field has been so, has been, like, it's ideologically driven in a way most fields are not. Partly it's ideologically driven because there's actual conservatives in economics in a way that there aren't in like lots of other fields. And so there are actually like political disagreements and they're often, so I have a paper on this how like you can actually predict using the language of an academic article. You can like do a pretty good job predicting someone's campaign contributions.

Interesting. And in economics because there's just. Well, because it really reveals from their values in some sense. Yeah. So there's like, and so you're going to have people with diverging values inside the same discipline. And I don't know that the discipline should say like, no, everybody should be doing one. And, you know, if you have these divergent values and real disagreements over things. Well, but, I mean, the valence goes either way.

Like, if someone legitimately believes that there's something that would make the world a better place, the question is then, you know, whatever that thing is that they think would make the world a better place, is there some obligation to do it. I don't think that there's a sort of individual level obligation, but maybe there is a discipline-wide obligation. Yeah, so I think if the discipline agreed on what those things were, it would be a decent. I don't know that we agree. And the other thing was, you many. a textbook. Oh, yes. So I'm part of this big,

me and Sam Bowles and others, and many other people in the circle of Santa Fe, the Santa Fe Institute, have been for a long time involved in a textbook project called core. It's core-econ.org. And it's basically a big online open source textbook that's not just like a usual way of teaching, it's aimed to be an introduction to economics textbook, but it really sort of presents introductory economics in a way that's really different from every other textbook. And every other textbook is kind of the same to each other.

And what we're really trying to do is trying to say that economics is not just supply and it. It's not just the frictionless model. And so how we try to teach it. And Simon Deo, another SFI person, drew the analogy that core is kind of to traditional economics, what the Feynman lectures were to like the physics teaching of the day. Might as well try to say. Which was like, yeah, to like grab sort of the things that are happening on the research frontier and make them intelligible and useful to, like, people that are encountering it for the first time.

The idea that if you're never going to take another economics class, should you think the world looks like the frictionless model or should you get this kind of like library of gadgets for thinking about the world? Okay. All right. That's good. Is it out? It's out. It's online. And you can just go and look at it. You can order it from Oxford University Press. Like a real book, a real book. A real book. Yes. It's also online. It will always be online and for free, but if you also want, it's a...

I'm a big believe in real books as well. All right. So, Resch and I do. Thank you so much for having me. Great. My grandmother slept on a futon her whole life. Lived a 96, walked every day. I thought that wisdom was lost.

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