The Not Unreasonable Podcast

Alex Tabarrok on Innovation and The Baumol Effect

July 08, 2019 Season 1 Episode 38
The Not Unreasonable Podcast
Alex Tabarrok on Innovation and The Baumol Effect
Chapters
The Not Unreasonable Podcast
Alex Tabarrok on Innovation and The Baumol Effect
Jul 08, 2019 Season 1 Episode 38
David Wright
Alex Tabarrok on Innovation
Show Notes Transcript

My guest for this episode is Alex Tabarrok, the Bartley J. Madden Chair in Economics at the Mercatus Center and Professor of Economics at George Mason University, blogger at Marginalrevolution.com, co-founder of Marginal Revolution University and co-author with Eric Helland of "Why Are The Prices So Damn High?" which is short, free book and which we discuss on the show.
Alex has written many other books and papers and there is a theme of thinking about innovation throughout his work. Several years ago he wrote a book on the topic called "Launching the Innovation Renaissance" which we also touch on as well as how the era of a country's birth affects its institutional makeup, how national rivalries can generate positive externalities (pop quiz: what was NASA's budget as a % of US GDP at its peak?), whether and why there has been a decline in innovation (and what's the difference between innovation, entrepreneurship and economic growth?), where we might look for a model of education reform and how we might get there (what would a hollywood-style investment in education reform look like?) including Alex's own observations in launching his own education platform (marginal revolution university!), and much more!

See more at notunreasonable.com/podcast. Thanks for listening!

David Wright:
0:11
My Guest today is Alex Tabarrok, the Bartley J. Madden Chair in Economics at the Mercatus Center and Professor of Economics at George Mason University, blogger at marginalrevolution.com, co-founder of Marginal Revolution University and co-author with Eric Helland of "Why Are The Prices So Damn High?" which is a short, free book. And we'll be discussing that today among many of the things. Alex, welcome to the show.
Alex Tabarrok :
2:36
Great to be here.
David Wright:
2:37
Economics, I think is unusual among social sciences because the object of its study being Economy as a measurable magnitude and a pretty obvious direction of progress, I think, which is that more growth is better. So does this mean that contribution to economic growth is the most important thing Economists can do? And maybe what do you think is the most economically impactful idea that you've worked on yourself?
Alex Tabarrok :
3:00
So, I think one of the most important ideas that I've worked on is actually the simplest and that's the textbook. Tyler and I wrote a textbook of Economics. And of course, a lot of what we do on Marginal Revolution and Marginal Revolution University is teach Economics. And in one way that's not very impactful. Other people do it. You know, the ideas have been around. But I sort of think that a lot of the world has not yet caught up with Adam Smith. And so that by teaching the basic truths, actually go a long way. The very first course you take in Economics, it's probably the most important course you'll ever take. And the principles of Economics, understanding when the invisible hand works, which is when self-interest is channeled towards the social good. That is like a fundamental insight which a lot of the world still has not fully absorbed. And so I enjoy teaching that. And indeed, I get emails from students all over the world who have learned from some of these materials and that's very gratifying.
David Wright:
4:17
Well, what are making progress on those questions? So on the lessons of Adam Smith, is it sinking in at all? I mean, it must be on some level. I mean, you have a job today. Economists didn't exist when Adam Smith was around. So definitely direction is positive?
Alex Tabarrok :
4:33
Yeah, I think the direction is definitely positive. I mean, just take a look at what has happened in China since the death of Mao, to turn towards a more market economy. And that has lifted more people out of poverty than anything else has ever happened in the entire history of the world. I mean, hundreds and hundreds of millions of people have been lifted above absolutely abject levels of poverty. We're talking in 1970, in China, $400, $500, GDP per capita, per year. So this is really the lowest level that a human being can survive at. And you know, today China's looking more like $15,000 GDP per capita. So just a tremendous increase in human welfare. And we're seeing the same thing beginning a little bit later, but beginning of the 1990s in India. And so I think that has been a tremendous advance all over the world.
David Wright:
5:34
How much of that is self-aware in the sense of, these are economies and these are people in these countries, are changing their behaviors to more market-oriented kind of process I guess, or the way they live their lives. Do they know it? Do they understand it? Do the countries even understand it because we know, you see sort of the pendulum swinging back and forth occasionally and there's protectionism. And it's certainly, a topical thing here in 2019. And one of the things I wonder about is, how much of it is just emulation of other people that work and we don't quite understand it? And how much of it is a conscious merge towards more open markets?
Alex Tabarrok :
6:08
Yeah, I think a lot of it is emulation. The United States had the very great fortune of achieving its independence. 1776, at the very time that Classical liberal ideas were in the ascendancy. So this was also the year that Adam Smith published the wealth of nations. But these ideas about property rights, about freedom of expression and markets and so forth, that was what was in the air when we had the American Revolution of Independence. China and India in contrast, had their independence post World War II, when the ideas which were in the ascendant at the time, were much more socialist ideas. You know, the idea was that free trade was bad, that you wanted to protect your infant industries, that you wanted to have a large role of government even in the market economies. You wanted to have a large role of government to avoid extranalities and so forth to create better divisions, to avoid the Great Depression. The markets were blamed for the Great Depression. So India and China are having their independence at a time where there are all these anti-market ideas. And that showed and that was to their detriment. And so those economies did not grow for a long time until you began to see in the 1970s, kind of the renaissance with Mont Pelerin and kind of the pushback with Reagan, with Thatcher, Mulroney in Canada, this turned back towards markets. Hyde gets the Nobel Prize 73, 74 or something like that. I'm not saying that all these are-- there's a direct connection, but it's more that in all the world at the same time, you see things beginning to move in a different direction. And China and India finally benefit from them.
David Wright:
8:15
It feels like more than a coincidence. That whole progression really amazes me. So let's say a new country gets born today, what do you think it will be? Like what's the environment now?
Alex Tabarrok :
8:28
Yeah, I'm worried. Yeah, I'm definitely worried. Because, you know, really throughout my lifetime as a, you know, academic or person interested in ideas beginning in my teenage years, I've seen an upward progression. You know, the Classical liberals were always in the minority, but we were growing. And now the Classical liberals are in the minority and they're shrinking. And so I'm worried that we are going to forget all of the hard lessons that we won in the past. And that we are seeing a rise of authoritarianism both on the right and on the left. And Classical liberal ideas are kind of being scrunched in the middle or attacked by both sides.
David Wright:
9:18
How much of this is cyclical, you know, like I was saying earlier, the pendulum is swinging back and forth. And how much of this is, you know, kind of a trend line? What do you think? That's a hard one.
Alex Tabarrok :
9:29
Yeah, I mean, I think, common on, people are never happy.
David Wright:
9:33
Yeah, right, right.
Alex Tabarrok :
9:33
You can never seem to satisfy them for long. So there is something. And people get used to things. I mean, so if you take it on a worldwide scale, the turn to Classical liberal ideas to more free markets and free trade and globalization, has just been immensely successful. Everything that Hayek Friedman said would happen, did happen. The world has become a much more peaceful place and a much richer place. But, there has been this kickback or pushback in some parts of the West, despite the fact that the United States today is richer than it has ever been. And the same is true for Europe.
David Wright:
10:21
So what's causing this current kickback? Well, one of the ways that I like to try and think about things is reduce it to really economic growth, wealth generation. So maybe one hypothesis here is, this is a reaction to what Tyler has called the great stagnation. And that you've commented on that in similar phenomena. Is that the underlying cause? Are we not doing good enough in growth?
Alex Tabarrok :
10:47
It's definitely the case that the faster you're growing-- the bigger the pie is growing, the less the fighting over the dividing the pie, right? And that is what we're seeing, I think in a lot of ways. With slower growth, there's a lot more emphasis on, you know, intellectual property for example, copyright and patents and things. And these are all about dividing the pie. And think about the debates we had over healthcare in the United States. Almost all of the debate is over Obamacare. No matter which side you were on, it was all about dividing the pie. There was very little debate about, well, how much should we put into research and development, right? How much for the NIH to develop new cures for diseases? You know, everything was about how much, you know, for the poor, for Medicaid and Medicare and the old and so forth. It was about like how much wealth is going to be redistributed. Very, very little debate about how much are we going to spend on creating a cure for cancer or developing new antibiotics and things of that nature. And I think that's really frightening in a way because when all of your debates are about dividing the pie, then--
David Wright:
12:08
You're taking your eye off the ball.
Alex Tabarrok :
12:09
Yeah, exactly. You're taking your eye off the ball. You're taking your eye off the ball because growing the pie is the only way everyone can win.
David Wright:
12:17
Yeah. Has the rhetoric, the debate ever really been about growing the pie? Is that something that gets debated or is that something that just kind of happens and everybody is okay with it?
Alex Tabarrok :
12:31
It might not be explicit, but I think there is a feeling and maybe I'm just getting old and look back with, you know, rose colored glasses of the past but it seems, for example, that it's a little bit of a cliche but think back to going to the moon, right?
David Wright:
12:51
Sure.
Alex Tabarrok :
12:52
That was a very forward thinking, very exciting. It was about growth. It was about spending money. And we spent a huge amount of money, you know, going to the moon. Something like 10%, I think is at the highest. 12% of the US budget was going to NASA. And that's like inconceivable today.
David Wright:
13:12
That is incredible.
Alex Tabarrok :
13:13
Yeah. I mean we would spend that much on unproven future technologies. So it does seem that in the past we had a capability as a nation of coming together in an optimistic way to do something which has never been done before. And I'd like to see more of that but it's very difficult.
David Wright:
13:39
So how much of our willingness to push ourselves comes from competition? In the case of NASA, very much competitive. In that case, it wasn't explicitly militaristic, but it kind of implicitly, so right. Rocket technology and the like. And so rivalry will generate some kind of technological externality. Do we need a rival? So, we're staring this China, US, kind of tension in the face. Everybody's worried, but might ultimately become a good thing,
Alex Tabarrok :
14:10
Right, yes. I am optimistic or hopeful that China-US rivalry can be channeled in a productive dimension. So for example, I'm kind of excited that, you know, the Chinese, for example, did these experiments with changing the genetics of kids, right? It's a little bit frightening, a little bit scary or whatever, right? But not that kind of is going to light I hope a fire under us saying, look we got to be on board with these future technologies. I mean, because changing genes, that's the only way we're going to keep up with the robots.
David Wright:
14:52
Sure. Yeah.
Alex Tabarrok :
14:53
Right. And so artificial intelligence and genetic engineering, I think these technologies are immensely promising and may even be able to change humanity itself. But in order to do that, we're going to have to need a rival who we fear is going to get there before us, right? I mean, if the Chinese are spending a lot on how to raise IQ, what are the genes for IQ? If we get frightened of that, then we might put some more efforts into that in the United States. And I think overall, that would be a good thing.
David Wright:
15:31
So bring it back to like a grassroots level, because this is the big picture supporting innovation on the state level. But you wrote a paper asking the question, "Is Entrepreneurship In Decline? Is it?
:
15:46
Yeah, unfortunately, It is. You know, there's been a long term trend, in a variety of measures of dynamism in the US economy, which includes like new startups. The number of startups as a share of firms is way down. Startups used to account for a small but significant share of all employment, like 12%, 10%, something like that, that's now way down. Contrary to popular belief, we were told that today, you know, people are going to have 10 jobs and they're going to change careers much more often than the past, that's just not true. That is just not true. Actually, we are changing careers less often. And more and more people today work for a big firm, for almost the-- For really the very first time a majority of Americans worked for firms which are big as like, you know, 500 people or more. And in one way, that's great. You know, it provides us stability and so forth. And big firms tend to have higher pay packages and there are benefits to all of that. But it does mean that there's less creative destruction. There's less entrepreneurship going on. And that is, I think, worrying.
David Wright:
17:13
One really interesting point that I liked in that paper that you made was, call it drawing a distinction between three different things. So entrepreneurship, startups, right? Which is not quite the same as entrepreneurship and let's say productivity growth, right? So those are things which can get commingled a little bit in our thinking, but actually represent distinct phenomenon. One observation you made in that paper that was really unique was the growth of startups is not necessarily causing entrepreneurship and causing growth because you go to some very poor countries and there's startups everywhere, right? Entrepreneurship is just everywhere all the time and people are selling food on the side of the road, that's not necessarily a good thing. No, that's not what we want.
Alex Tabarrok :
17:56
Right.
David Wright:
17:56
Right.
:
17:56
Exactly. Yeah. Yeah. So that's exactly right. I spent time in India, where exactly as you say, there are lots of small firms because people are working for themselves and they do that because they have no choice because the labor market is so poor that firms cannot get big and so you don't have any stable employment. So part of this is, you know, a good thing. And so if that was all we were seeing, I would be less worried. What is worrying is that the decline of startups and the fact that people are changing jobs less often is occurring at the same time as productivity growth has been going down. Now, it might be that those two things are unrelated. It could even be potentially that, you know, this is a good thing or considered. But the fact that both of these trends are happening at the same time is at least suggestive that the decline in dynamism is one of the causes or perhaps as being caused by the decline in kind of basic productivity growth.
David Wright:
19:10
There is a criticism often, well, maybe not a criticism, but a concern or worry and anxiety that big firms are monopolies, right? They're constraining economic growth, they're holding us back. Lots of talk of the, I mean, I forget what the acronym is now GAFA, AGA or something, you know, the big--
Alex Tabarrok :
19:30
FAANG.
David Wright:
19:30
FAANG, right. And what do you think about that? Do you think SO there's something to those arguments? Are these organizations monopolistic? Are they hoarding resources and what evidence do we have of whether that's a real concern?
Alex Tabarrok :
19:45
I'm not worried about bigness per se. And I do think it's very strange to be going after FAANG, which is Facebook, Amazon--
David Wright:
19:54
Apple.
Alex Tabarrok :
19:55
Apple.
David Wright:
19:55
Netflix?
Alex Tabarrok :
19:55
Netflix, and Google, Yes, that's it. Yeah. Yeah. Because these are the big successes, right? These are the firms which are not only American successes, but are world successes. So why are you going after the place where there does seem to be a lot of dynamism, where there does seem to be a lot of growth, where there does seem to be a lot of incredible creation of consumer value. I mean, I love Netflix. I love Amazon. These are actually--
David Wright:
20:25
They're awesome companies.
Alex Tabarrok :
20:27
They're awesome companies.
David Wright:
20:28
They really are.
Alex Tabarrok :
20:28
These are awesome companies. So it seems crazy to be going after them. Instead, where I see the big welfare losses is in like land management. Okay. So we have a situation where you can't build, you know, 3-storey in San Francisco. This is completely insane that we have closed off. We have walled off our most successful cities and are preventing any building from going on. So it's not the new firms, it's not the new technologies where the problems are, it's the old sectors of the economy particularly, in management of land and housing that the really huge Welfare losses are happening, which is just dividing our side. It is creating inequality. Meaning that a huge portion of the benefits to the dynamism which is happening is flowing to absentee landlords.
David Wright:
21:34
Is there a firm size dynamic to that problem? And so one way of thinking about that is, are there, I don't know that there are any very large commercial land developers, call it kind of like the FAANG scale, sort of thing. This is much more regional, development there.
Alex Tabarrok :
21:53
Right, right, right. Yeah. The problem with housing policy is there's no big single evil landlord to point one's finger to and say, "Jeff Bezos, let's get him." Or something like that. Instead, the problem is us. Instead, the problem is that when we decide to make decisions collectively in our neighborhoods and in our cities, collectively, we act to conserve, to preserve, to be against this, to keep the status quo. Our people fear an apartment going up. "Oh, traffic is going to be so bad." Right? Or the fear, "Oh Walmart is going to come. That'll lower, you know, our property values. Or these foreign people, different people, they're going to come and live next door to us." People don't say that quite openly, but that's what they mean, right? These odd looking people with their funny smelling cooking. And, you know, they're going to move next door to us and, you know, going to ruin our lives. And the problem is we had given so much power to collective decision making that when millions of communities make decisions in this way, there is no longer any space to grow. You know, we have closed it off. And the real difficulty is precisely that no politician or few politicians are going to go after this problem because the problem is homeowners, the problem is us. The problem is not someone you can point to and say let's take what they have. You know, let's go after this rich guy, the problem is these decisions we have made in our local communities which prevent growth.
David Wright:
23:54
It is interesting. I hadn't really even thought of it so much this way. But there is a lack of, call it, national scale maybe because it's not a national scale problem really that housing prices are too high because it really isn't that few isolated cities probably has a disproportionate impact on economic growth because those are the most productive cities and the most innovative cities. But you don't get the feeling that this is something that is called a presidential scale debate, right. I guess they didn't really influence it. I mean, what would the president do about this? I don't even know. Maybe nothing.
Alex Tabarrok :
24:28
Yeah. I mean you're right. On the one hand, it doesn't seem like a national issue. And yet the work which Economists have done suggests that this is by far the biggest issue in the economy over the last 30 years. That if the estimate is,and I'll paraphrase a little bit here, but this is approximately what it says. The estimate says, "Basically that if every community had more or less the sort of housing policy of Houston or something like that, you know, one of the Austin taxes or something like that, that GDP today would be like 30% higher, that we would have grown much faster. GDP would be much higher." And that's just like moving to sort of the meme level. Because the big constraints have been in the fastest growing, most important cities, not the fastest growing, the most important cities.
David Wright:
25:36
One thing that we do see in the national debate, of course, is it quite, I don't know, fraught discussions of prices in healthcare and education. If we could maybe touch on your recent book, maybe outline the arguments in, "Why Are The Prices So Damn High?", Which prices are so high and why do we care?
Alex Tabarrok :
25:56
Right. So there are these big long run trends where education and healthcare in particular just seem to go up in price every single year. And people have been complaining about this for a long time. You can go back 50 years ago and people are talking about out of control college costs, out of control healthcare costs.
David Wright:
26:19
That's amazing.
Alex Tabarrok :
26:19
Yeah. You can go back to 100 years ago.
David Wright:
26:21
I'd love doing that. There's some arguments that this is so universal and I guess.
Alex Tabarrok :
26:27
Exactly. Yeah, exactly. So and it's not just that, it's also the arts are getting more expensive. You know, it's interesting that, for example, cars have gotten much, much cheaper, but car repair has gotten more expensive, right. So what's going on there? So Eric Helland and I decided to take a look at this. And going in, I thought, well, it's some combination of regulation, monopoly, some things of the sort of traditional explanations like that bloat. Plus there's something, about what's called The Baumol Effect. And after writing the paper, I think actually, mostly it's The Baumol Effect. These other explanations, they don't work over that long a time scale. And The Baumol Effect is a deep, kind of fundamental driver which has very little to do with policy. And in many ways is actually a good thing.
David Wright:
27:37
Do explain.
Alex Tabarrok :
27:39
Okay. So let me give you the classic story to explain The Baumol Effect. The classic story might not be the necessarily the best one. But I'm going to give you the classic story, which is take a Beethoven String quartet in 1826. It takes four people 40 minutes to perform that String quartet. Now do the same thing today. It still takes four people 40 minutes to perform exactly the same String quartet. So in nearly 200 years, there has been zero improvement in productivity in String quartet playing. On the other hand, there are many, many other sectors of the economy where productivity has increased tremendously. You know, in producing goods, automobiles, for example and producing major appliances in all of the areas which have made life so much better compared to 1826. So if we go back to 1826, and we then compare what's the cost of performing the String quartet? And by cost, I mean here, what the Economist calls the opportunity costs. What do we lose? What does society lose when we have an additional performance of a Beethoven String quartet peaced? Well, society loses four people doing something for 40 minutes, but in 1826, productivity in co-production was so low and in other areas of the economy it was so low, that's a low opportunity cost. Okay? You're not giving up a lot because those guys are not very productive in producing goods. They couldn't produce a lot four of them at 40 minutes. If you come today, four people at 40 minutes, they can produce a lot. They could produce some goods which are really valuable. It's gone in terms of wages, it's gone from a opportunity cost of about $3 in 1826 to more like $70 today at average wages. So the cost, the opportunity cost where we give up to get this String quartet has gone up precisely because other sectors of the economy have become more productive. So anytime you have a stagnant sector, a sector which grows slowly in productivity, the output of that sector will become more expensive over time, regardless of anything else.
David Wright:
30:19
It's a great idea. It's something I'd come across before but hadn't really studied that I suppose so deeply is this. One of the things that's amazing is the, I'm not sure the right way of putting it, is that the frightening effect that you have when you pair The Baumol Effect with a superior good. Right. So why don't you describe what is a superior good and maybe you have a couple of examples in the book that you can touch on education and healthcare.
Alex Tabarrok :
30:49
Sure. Yeah, exactly. Yeah. So, we had The Baumol Effect. So goods which are rising slowly in productivity, which are often labor intensive, right? Like the string quartet that the masseuse is not going to get more expensive until we have the robot masseuse. Education is like this as well because, you know, mostly it's a teacher in front of 30 students and that hasn't changed over 100 years. Healthcare often involves a lot of labor. So these goods are becoming more expensive, but it also turns out that particularly for education and healthcare, we want more of these goods as we get richer. We get a little bit bored with having too many cars. You know, okay, you've got one car, you've got a second car, but there's really no point having a third. You don't have time to drive it, right. You know, we already have Netflix and there's only so many movies you can watch in a day. So after that, you don't really want more Netflix. So what do you want? Well, it turns out that as society becomes richer, society wants more of the goods like education and healthcare, which are growing slowly in productivity. So in fact, one of the reasons that US growth has slowed, it's that we have shifted our resources towards more slowly growing sectors of the economy. And that is not necessarily a bad thing, it's just, that's our way our preferences are. But it does mean that overall growth declines because we've got lots of cars, we've got lots of goods, and now we're just trying to buy more of the goods which are growing slowly in productivity.
David Wright:
32:38
That's so, because a victim of your own success in some ways, right? You wind up doing such a good job squeezing efficiency out of all the goods production more or less and services production kind of like behind it. Maybe it's worthwhile actually touching on, let's say specifically education, the evidence there, how you evaluated that. I think the main graph in the book is one that just shows spending per student in secondary and elementary education. That's just basically been going up for a long time.
Alex Tabarrok :
33:11
Yeah, absolutely. So in real terms and in 1950 again, got to look at the book for specifics, I often forget. But we're talking about in real terms. In 1950 it costs about $2500 per student and today we're more like $15,000 per student. So it's gone up by a factor of certainly more than five, looks closer to seven. And that's again, inflation corrected. So the real value of the resources we are using in education has gone up. And again, that makes sense because highly skilled labor has become more valuable in our economy. And education uses a lot of highly skilled labor, but it's doing more or less the same thing that it was doing 100 years ago. You have a highly educated professor like myself, okay. And a lot of time I'm just talking to 10 people in a classroom. You know, I'm not talking to thousands except when I'm on the podcast, I'm talking to 10 people. And that's the same thing that professionals were doing 100 years ago. So there's been very little improvement in productivity. People are doing more or less the same thing. But my opportunity costs, the opportunity costs, you know, I could, or people like me, maybe not literally me, but people like me, they could be in the high tech sector. And so the opportunity costs of that teaching has gone up.
David Wright:
34:41
One of the things I noticed about the graph there and I don't think you touched on it any length in the book, but there has been a decline in the last kind of few years, I don't know, seven or eight or nine years or so per student costs. Do you know what's going on there?
Alex Tabarrok :
34:56
Yeah. So in 2000, with the recession, 2008 financial crisis, 2009, amazingly that recession was so severe that for the first time in 50 years, education cost per student actually fell because we didn't hire. We stopped hiring people for a short period of time. There's also something else which is going on and that is that The Baumol Effect because it's about the opportunity cost in other industries, the rising value of skilled labor in other industries increases the price of education and healthcare. The faster productivity is growing in other industries, the worst the so-called cost disease, right? The faster productivity is growing in the tech sector, the more expensive healthcare and education is going to get. So actually, the cost disease is the sign of a healthy economy. And what we're seeing with the great stagnation for the reasons also that you pointed out, now, we are so successful at producing goods that more and more of our resources are going into the slowly progressing sectors, into the stagnant sectors of the economy. So the growth rate is declining, that the cost disease is declining as well. So in other words, the price of education and healthcare isn't rising as fast as it used to. It actually rose the fastest in the 1960s. So we might think that the problem is getting worse, but actually that problem, if you call it a problem, is slowing. But it's slowing because we're not getting as much progress in other sectors of the economy. So it's unfortunately, overall not a good sign that teachers and professors are becoming, you know, cheaper.
David Wright:
37:03
Yeah. Another point you make in the book, which I thought was interesting was productivity growth is related to, call it, consumer satisfaction, right? So there are some industries-- we are choosing what we want, right? And when we are choosing something that isn't necessarily in the aggregate going to help the statistics, we're still getting what we want. And so in some sense that is making the economy more productive because we're producing goods that maybe it's not measured by GDP, but it's something that we like and so we want more of it.
Alex Tabarrok :
37:34
Yeah, that's right. You know, part of this shift towards the output of slowly growing sectors, as I said, that lowers our GDP, but it's still the best thing to do. You know, it's in the words of a colleague, it's sort of optimal stagnation. Now what we would like, of course, is for all sectors to grow faster than they are. But given the constraints that exist, it's better that we follow our preferences and consume more of the slowly growing industries, even if that reduces our GDP growth rate on paper.
David Wright:
38:15
One of the things that I was just come mulling over as I was reading this and after, was what's taken a big takeaway here? And here's kind of a thought that I have on that, is that this is in some ways kind of a, although it's a very neutral and neat paper and book, it's actually a kind of a condemnation of our lack of ability to innovate in some of these sectors, right? Saying, well, here's what you get when you don't innovate. It's not just you lose productivity, it kind of gets worse or appears to be getting worse at the same time. So do you agree with that? Did you find this a pessimistic kind of enterprise? What prompted the book? Is there something that made you think about this? You've done a lot of work in innovation.
Alex Tabarrok :
38:53
Yeah. Innovation probably in the long run is the most important thing. You know, we talked about lifting hundreds of millions of, you know, Chinese and Indians out of poverty. But we also would like to be richer here in the United States. And to do that, we have to push the cutting edge. We have to do things in a new way. Now, I think what this does illustrate and which I don't answer and which I can't answer, is ultimately why are some sectors of the economy growing slower? Why is it harder to increase productivity and services than in goods? Now, ultimately, this is something of a mystery. It's not regulation. I could sort of rule that out. It's not any policy, but there's an example I gave in the book and that is, strawberry production has increased in productivity like a thousand times. I'm probably exaggerating, but many times going back, you can look at the data from 1950 to 2000, 2020. And the amount of strawberries that we can produce from an acre has gone up incredibly. Now there are these other berries, huckleberries which I'm told are also great. They're also delicious. You can sometimes get them in the South, but they still have to be picked by hand. And the reason is we have just have not found a way to mass produce huckleberries. Now why that should be the case? It's like something to do with genetics and nature and, you know, the land, I don't know. It's like the Koala bears, they're real, like really hard to-- Or the pandas, you know, the zoos. Of all the things you would think that animals should do like having sex, would be like the easiest. But no, you know, the panda bears have trouble having sex. So we don't get a lot of panda bear production. We don't get a lot of huckleberry production. Why this is? I'm not totally sure. I can't answer it as an Economist. Same thing in services generally. Like why is it difficult to, you know, duplicate the services of a masseuse. You know, we have these chairs, right, but they're just not as good. What I'm hoping is that, you know, productivity, growth comes in spurts. And what I'm hoping is that what artificial intelligence and robots will do is they make labor more capital like. And once we can do that, if we can make labor more capital like, then all the advantages of productivity in artificial intelligence and in robots which we are going to see will then become advantages in the productivity of services, right? So if you can tie services, if you can tie a good to a progressive sector, then you're home free. So I'm opening that education as it becomes more like online education, that means education becomes more tied to things which are improving like the internet and computers. If we can have robots, then we can make the service side of the economy now advanced as quickly as robots. So my most optimistic take is that, at least, now there appears to be a kind of technology, which at least in principle is able to incredibly increase the productivity of services. And so maybe we're in for a big bub.
David Wright:
42:33
And that we should emphasize that the fact that you don't have any real clean answers for innovation and education is particularly denim because you wrote a book which is treated a lot, spent a lot of time on innovation and education and a lot of suggestions, recommendations. What's your view looking back on the book launch innovation renaissance? Look, it says published, was it seven or eight years ago maybe? Maybe what do you think about that book now, that work now?
Alex Tabarrok :
43:02
Well, still read it. Still buy it.
David Wright:
43:03
Yeah, definitely. That's very good.
Alex Tabarrok :
43:05
So, you know, one of the things which Tyler and I have tried to do in creating Marginal Revolution University, which is online education videos. We like to be the Khan Academy of Economics Education. So this was part of our vision is to tie education in our case, Economics Education to a progressive sector. And in many ways it has worked. As I mentioned, we've got thousands and thousands of students all over the world. And there have been a lot of interesting things which came out of that. So for example, early on we captioned our videos in English. And what we found to our surprise, we hadn't really planned on this, is that as soon as you caption the videos in English, Google automatically translates those captions to like 150 languages, so automatically. And so what this has meant is that every time Google improves its deep mind algorithms, we automatically get the benefit of that at Marginal Revolution University without us actually having to do anything. So, you know, students all over the world, if they're having trouble with a part of the text, part of the video, they can, you know, look at the captions in their home language. And typically they're not perfect, but they're good enough for the student to get a sense, "Oh, I see now what they're saying." And so I still am optimistic about online education. It's more difficult than I thought to spread it. And to get universities involved as widely as I had hoped. But I think we are moving in that direction.
David Wright:
44:56
Well, what have you learned about universities reluctance and maybe the underlying reasons why? What's going on there?
Alex Tabarrok :
45:03
So I think two things. One is that places like Harvard, they don't really want to do it. They don't want more students, right? I mean, Harvard could have created multiple campuses, you know, across the United States in the world and they could have done that 50, 100 years ago. But they want to be the place where the elite is going to be educated. And in order to do that, they just have to be small. So Harvard, really doesn't want to expand that much. So they're not going to go big into online education. Places which have done are, the actual, the for-profit universities like Phoenix. They've put a lot of effort into it. But for other reasons, their quality is low. So I think there's an opportunity for, sort of, mid-ranked universities, places like George Mason where I teach to really expand internationally in this, to create a global brand. But there's a lot of bureaucracy. And it's really difficult. In universities, there are a lot of Veto points. So it's a nonprofit and nonprofits are typically not run as efficiently as for profits. And there's no single person. Even the president of the university cannot just say, let's get it done. There are a lot of Veto players, a lot of interests, which have to be assuaged. A lot of groups you have to satisfy before you can get it out there. And so we haven't quite moved as fast as I had hoped, but we're still pushing.
David Wright:
46:51
So you're still pushing, that's a note of optimism on that. What do you think the future looks like? What will be the arrangement of the economic education process? Just education process, higher learning, lower learning, what's going to be the optimal amount of online education do you think?
Alex Tabarrok :
47:11
So, universities are very, very successful and universities are some of our oldest institutions. Oxford University is like over 1000 years old. It's older, I think pretty much than any firm. It's older than most countries. So these universities, one should not predict their demise anytime soon. Harvard is 400 years old. They're pretty stable. Now, what is happening is that it has become and is becoming very common for a student to take at least one online class in University. So students at George Mason as well as other places as well as any place in the United States, most of them will take at least one online class
David Wright:
47:56
While they're enrolled at the University.
Alex Tabarrok :
47:57
While they're enrolled at a University. Exactly. So it's become more of a compliment than a substitute. And that online class, it might still only have, you know, 50 or maybe 100 students. Right. So what we're not seeing is online four credit class where you can teach 1000 students or 10,000 students at once. So we're not getting all the full costs benefits that you would if you were able to scale this. Instead what is happening is that, instead of teaching a class of 25 students on campus where you need a classroom and you need physical facilities, we're instead teaching a class of 25 students online which helps the university because you know they run out of space but it doesn't achieve all of the cost manifests which are possible if you would really were to scale it.
David Wright:
48:55
How much of this is an innovation problem and how much of is a governance problem? Right. So have we found the right product? I don't know if online education classes have changed over as the market experimented that you guys have experimented with it. Is the best practice on online education kind of the same or is there stagnation in the innovation of online indication? You know, is it a product or is it decision making at Universities?
Alex Tabarrok :
49:18
It's both because these are really tied together. Because if you could have, you know, 10,000 students in a single online accredited class, well, then it makes sense to spend a million dollars making that an unbelievably advanced and good class. It's like 100 bucks per student, right? Then the economics of it makes sense. And we've never had in the history of the world, it's never made sense to spend a million dollars to create a class, teaching class. And yet we spend routinely millions of dollars to create a video game, right? So the creators of a video game, they hire voice talent, they hire computer programmers, they hire sound designers, they even hire psychologists who figure out, you know, where people get stuck and frustrated in the game until they make it so that people who are always in that flow level of enjoyment, they're always being challenged, but they're still moving ahead. So there's a huge amount of effort goes into creating a video game. But a class like an Economics class, Economics 101, that has all of the same economics as the video game, right, it could be online to just as many people. And so we could be spending millions of dollars to create really well-fine-tuned, brilliant Economics classes. But because we haven't got that scale yet, we're not doing that. So it's both governance and innovation. Without the right governance, we're not going to get the economies of scale which lodge you on that innovation trend.
David Wright:
51:01
How would you change the governance? So what other area of research for your voting systems, right. And so if you were to design the optimal voting system for governing a University with an eye towards innovation, what would you do? So I'm not sure exactly about the governance, but I will say that going back to China and competition, I do think that competition is going to make a really big difference. So the one place which has done this is Georgia Tech. Georgia Tech has an incredible Master's Degree in Computer Science. They are teaching thousands of students. It's the biggest Computer Science degree in the country, indeed in the world. And it has taken 100% seriously. If you want to hire someone and if they have a Georgia Tech Masters in Computer Science, no one cares whether it was online or whether the person was like literally there, there's no difference. There's no grading differences, no material difference, there's no difference on your transcript. They've been very, very successful. So I think that that kind of competition is really going to push things. We've only seen it with Georgia Tech in Computer Science, but it seems to me that that it won't stay that way for very long.
David Wright:
52:23
So, but here's an underlying problem one of governance so there, where so you have a success and you're saying it's success, it sounds like a success to me, we don't even have any copiers. I mean there's the roadblock there. And it just seemed like if the meta problem really is the government's problem here, then, so this is the innovation of the day. And let's say we can crack this one Virginia Tech just takes over all the Universities in United States, whatever it is. Then the innovation of tomorrow given that we haven't changed the governance system, won't be adopted either. It will take too long and the rest of it. Can we do anything there?
Alex Tabarrok :
52:53
I'm not sure. Just, maybe one of these things where nothing seems to change until everything does very rapidly.
David Wright:
53:00
Yeah. Yeah.
Alex Tabarrok :
53:01
I guess that's my hope.
David Wright:
53:05
Well, we can be optimistic I think, because another area of your work is in this city in India, a private city. I mean, holy cow, that's an experiment you wouldn't have thought would have happened, right? Maybe you can talk a bit about that. What the city is and what you learned there?
Alex Tabarrok :
53:19
So that's Gurgaon in India. And what makes India interesting is that, you know, the world is rapidly urbanizing. And the United States, the urbanization story is mostly over. You know, some of our big cities are going to grow bigger, but some of the smaller cities are actually going to grow smaller. Most people in the United States live in an urban area and that's not going to change. But in India, depending upon how you measure it, more than half of the people still live in rural areas. So over the next 30 years, India is going to move hundreds of millions of people into cities which do not exist today. So that provides a tremendous opportunity to build new cities with entirely new governance of structures. And Gurgaon is one example of that. It was, you know, 30, 40 years ago, literally just fields, today it's just one of the most advanced cities in India with high rises and golf courses and you name it, and it's almost entirely privately run. So it has private security, it has private roads. All of this has been built privately. That has created some tensions. It's difficult, for example, to build private sewage because you have to get everybody to kind of agree. Instead you had all of these high rises, they're wonderful, they're beautiful. And the sewage goes to the tank.
David Wright:
55:00
Or the cross didn't work.
Alex Tabarrok :
55:01
Exactly. The toy that just sends the garbage to a tank, which is then trucked off and dumped in some, you know, river somewhere.
David Wright:
55:08
Gross.
Alex Tabarrok :
55:10
Gross. Exactly. So we need to get the advantages of private development, but over a wide scale in order to create these private cities.
David Wright:
55:20
And are there any lessons that we can learn here from that? I mean, what recommendations would you take from the private city to an American city?
Alex Tabarrok :
55:30
So the United States did some advances in this area. Finally enough, Disney Land is a fantastic example of a private city. You know it houses tens of thousands of people in any given day. It has its own security system, it has got its own transportation system, they've got the modern rail. You know, it's got its own underground pneumatic system of tubes for taking, you know, garbage away. So there are some examples of that. Reston which is nearby where we are now is another example of a privately built city in the United States. So I would like to see more experiments like that. Google at Sidewalk Labs, has made a deal with Toronto, to create a new test bed for advanced city designs along Toronto's waterfront area. So I'm pretty excited about that. So I think there are some opportunities. We have to allow big experiments, right? If you do it too small, like block by block, then you have this problem that you don't internalize all the extranalities, which was Google's own problem. You don't get a single company able to build sewage and electricity. So you got to make it on a bigger scale so that a single company has the incentives to produce everything which the city needs. But I'd like to see more examples or experiments on that scale.
David Wright:
57:03
Who pays for stuff at that scale?
Alex Tabarrok :
57:05
Well, actually this goes back to what we were talking about. One of the big problems in the United States right now is that all of the advantages of high tech are flowing into the pockets of absent landowners. Because you have a city like San Francisco and San Jose, Silicon Valley, so you add all of these tech workers, they're going there because wages are high. But because you can't build, that pushes up the price of land. So a huge amount of the workers return to education and skill is actually going to the land owners. So if you could create a city where you would tax that increase in the price of the land, you could then use that to fund all of this infrastructure. So it becomes a mutually beneficial and a dynamic system whereby, you know, you build a subway system that increases the value of land near the subway stops and you tax a portion of that value, you value capture a portion of that value to find the subway system. So everyone is happy then because the landowners, they get some of the value but not all. And you also have a city which is growing over time because you've got lots of revenues to fund all of this infrastructure, which benefits everyone.
David Wright:
58:36
So we're running out of time. And I wanted to come back to the big question in the book that you wrote a few years ago on innovation. What's your favorite one now having had time to reflect on it more, maybe there are new ideas if you could, and you could pick two if you want to. But policy recommendations or even just things that individuals can do or think about or influence, what should we be thinking about to improving innovation productivity?
Alex Tabarrok :
59:05
Well, let me give you something a little bit different which we haven't talked about but which I think is also worth talking about and that is policing in the United States. So quite a bit of my work has shown that policing is really quite effective. That the police really do reduce crime so much so that it would pay,. Even if we were to double the number of police in the United States, it would be worth it in terms of the crime of reduction.
David Wright:
59:39
Really?
Alex Tabarrok :
59:39
Yeah. We are actually an under-policed country, which seems weird. But we spend relative to other countries in Europe, for example. We spend less on police and more on prisons.
David Wright:
59:49
Okay. Yeah.
Alex Tabarrok :
59:49
And I'd like to see us spend more on police, avoid the crime altogether and then we can spend less on prisons because prisons I think actually are not all that effective. They're not as effective as police. So part of the problem we have in the United States is that a) we're under-policed but we're also badly policed. And we are badly policed often in the areas which are most under-policed, right? So there is, I think a problem with policing and race and policing and minorities and stop and frisk and the use of fines, these kind of frankly bullshit fines to support the police, which is becoming more common. So, you know, tinted windows, the police will stop you and find you for having the wrong tint on your windows or for not mowing your lawn properly. There's a whole bunch of these really outrageous uses of fines and forfeitures to support local government activity. And I think that's a big problem. So I think that's a kind of a dilemma which we face in the United States, but which is solvable. The dilemma being that we are both under-policed and poorly policed. And in order to get more police, we've got to convince people that it's got to be good policing, right.
David Wright:
61:18
Yeah, right. More than nonsense.
Alex Tabarrok :
61:20
Exactly. Less of the nonsense. You know what, Chicago last weekend, it was like 50 shootings, 10 people died. That's outrageous. That should not happen. That is not necessary.
David Wright:
61:30
And more police would stop that?
Alex Tabarrok :
61:32
More police would stop that. Yes. More police would stop that.
David Wright:
61:35
Prevent it.
Alex Tabarrok :
61:36
Prevent it. Exactly.
David Wright:
61:36
That's a better way of putting it, right?
Alex Tabarrok :
61:37
Yeah, exactly. So what my work with John Click shows is that more police on the street means the crime never happens. It's not that you get more arrests, arrest actually go down. And so just having more police on the street means that the crime doesn't happen in the first place. So what we do today is absurd. We make it unlikely that you're caught, but when you are caught, we make the penalties so high.
David Wright:
62:05
We really give it to you.
Alex Tabarrok :
62:06
Yeah, we really give it to you and I think that's a problem.
David Wright:
62:10
So that's deterrence as I guess an overemphasis on the deterrence theory of police, well, the wrong way of putting it, I suppose. Because you're saying the presence of police acts as a different kind of deterrent.
Alex Tabarrok :
62:19
Right. So you can deter in a variety of ways. You can make the deterrence more sure, more certain, right? Which is like having more police on the street or you can make it more severe, right? And we've gone for severity, right. And I think we should go for certainty. So if people are more sure that they will be caught, that actually is much more effective. And it's just like parenting. Right? If every single parenting guide will tell you that punish quickly but lightly, right, not ignore it for the first five times that happens and then go crazy on the sixth time, you know, randomly. We need to make punishment more certain. And I am somewhat optimistic about this in that both the right and the left are coming to this point of view. Even Donald Trump passed a crime law which reduces Federal imprisonment. It's a start but it shows you that there isn't this pushback from the right which you might've seen 20 years ago. The right actually seems to have come round on, hey, maybe mass incarceration isn't working. Now we need to be careful. We need to tread really carefully because we have to get both sides on board, both the left and the right. And if we go too far one way or the other, then we're going to lose one of those sides and we're going to lose all hope of fixing the problem.
David Wright:
64:04
Who's the model? What country does it best?
Alex Tabarrok :
64:07
What country does it best? That's a good--
David Wright:
64:09
Let's not talk of Japan having a lot of police, right. Singapore, I feel like, I've traveled there a couple of times. People are scared of something--
Alex Tabarrok :
64:17
Right, yeah, yeah.
David Wright:
64:17
-including dignity, just the kind of the rules are kind of wacky.
Alex Tabarrok :
64:21
Yeah. Japan is very weird because nobody knows quite what's going on in Japan because you have like 95% of people confess. That doesn't seem quite right.
David Wright:
64:33
Yeah. That's not coming here soon.
Alex Tabarrok :
64:34
Yeah. But some of the European countries I think do quite well. And it seems that, you know, people make fun of some of these European prisons which look sort of like dorm rooms. You know, they're not quite what we think of as US prisons. But that actually seems to punish pretty, pretty well. I mean, you and I would find that plenty punishment.
David Wright:
65:03
Yeah, sure.
Alex Tabarrok :
65:03
You know, right? And it does seem like a bad idea to me to brutalize people who we know are going eventually to get back out on the street. And treating them a little bit more humanely and preparing them for a return or reintegration with society. Right? So I think it's nonsense though that, we don't allow ex-felons to vote, right? I mean, you can argue about whether they should vote while they're in prison, I think that's going too far. I think that's the case where we're going to lose the right. Okay. Lose the right side of the political. But once you have served your time, that is the time to reintegrate with society. We say, "Okay, you've served your time, now come back." Instead what we say is, "No, no, no, it's not over. You've got to follow your parole board. You got to do whatever your parole officer tells you. You got to take all these drug tests. You got to a space, you know, and you can't get welfare. You can't get into government housing."
David Wright:
66:15
All kinds of things you didn't realize when you're --
Alex Tabarrok :
66:17
Right. So you didn't realize it. So it can't possibly have influenced any deterrent. And now it actually makes it more difficult to live a normal life. You're out of prison. You would like to reintegrate with society, but society is telling you, "No, you are still an other." Right? You're not a citizen because you can't vote. Okay. And you can't get, you know, food stamps. I mean, it's insane. It's insane. So I believe in punishment. Okay? I don't have any problem with punishing but it needs to stop at some point. And we say, okay, let's try again. Now you're one of us. Join back with us, reintegrated into society and become a model, you know, a citizen again, right? Reclaim your right to be a citizen. You have been punished. Now, once again, you're a citizen and I think that would be a much better way of approaching crime.
David Wright:
67:16
So what's the upside on that? So what would your prediction be? Let's say you got a chance to draft a bill, goes through both houses, signed by the president. What's the economic outcome or social outcome? What variable do you watch? And I don't just mean arrest rates, but what's the externality to society on that, on this policy?
Alex Tabarrok :
67:37
Yeah. I think it's big. It means people can live in more places. You know, there are large parts of cities which many people don't want to live, right? Because crime is too high, you know. People that aren't going to complain about gentrification and blah, blah, blah, blah, it's another story, I think where we're going to lose people. Gentrification is a good thing. Okay. But yes, we can pacify. If crime are lower and the streets were more passive, the cities, especially the inner cities would become much more pleasant places to live. And that is a way of reducing inequality. Race relations would be much better, I mean, this does. Mass incarceration harms minorities more than it does whites. And accends a continuous message that there are two classes of people in society and you're in the lower class, when you could not escape as a black man, when you cannot escape no matter what you do. Being pulled over by the police, that is sending a message, right? And I think that's a message that it's not necessary for us to send in order to be a low-crimes society. There are other ways of doing these kinds of things. So I think on a whole bunch of measures on education, like if you see a way out of the inner city, if you see a way out, then you're less likely to become a criminal in the first place, right? I think, lower crime, better city living, better streets, get education back under control because in some places, you know, it's crazy that in almost all of the schools now have metal detectors, right? Some of them in the suburbs like where I live because people are crazy scared about, you know, terrorists, which is insane or the shooter. And then others of them have, you know, metal detectors because they're scared of the students. You know, neither of those is a good solution to the problem at all. But that's one area where I think we actually could have some success.
David Wright:
70:03
My guest today is Alex Tabarrok. Alex, thank you very much.
Alex Tabarrok :
70:05
Thank you for having me.