0:33 Intro. [Recording date: July 15, 2019.] Russ Roberts: My guest is... Arthur Diamond. He is the author of Openness to Creative Destruction: Sustaining Innovative Dynamism, which is our subject for today.... Let's start with your view of creative destruction. Describe what it is and why we should be open to it. Arthur Diamond: When I think about creative destruction, I think first about a phrase that Deirdre McCloskey used in her trilogy, Bourgeois Trilogy. She talked about the 'Great Fact of economic history.' And, I like that phrase because it gets you on the edge of your chair: 'Okay, what is going to be the Great Fact? What is it?' And, it turns out that what she's talking about is that for tens of thousands of years, people like us--homo sapiens--lived lives that were 'poor, nasty, brutish, and short'--to use Hobbes's phrase [Thomas Hobbes, "Leviathan"]. And then something spectacular happened--the Great Fact--somewhere around 250 years ago. The lives of many people, at first in Europe mainly but then throughout the world, got substantially better. And that's just the blink of an eye, in terms of the whole history of beings like us. And so that, the Great Fact, raises the great question, which is: How do you explain the Great Fact? And the way that I think the Great Fact is best explained is starting with Schumpeter [Joseph Schumpeter]--the idea of creative destruction. Schumpeter has this great book, Capitalism, Socialism, and Democracy, and he wrote it after he was depressed that what he thought was going to be his great book was not well-received and everybody was reading Keynes [John Maynard Keynes]. So he then wrote this off[?]. And in the 7th chapter, that's the chapter where he talks about creative destruction. And one of the goals he has is to try to say, in this whole book, especially this middle part of the book, is to say that capitalism has been mis-portrayed. That it is the force in the world that makes ordinary people's lives better. And, he says that capitalism has--the key, the essential fact of capitalism--is creative destruction. Creative destruction is the process through which old ways of doing things are replaced by new things. The creative part is the car. The destructive part is that carriages go away. The creative part is the plow, the mechanized plow. The destructive part is the wooden part goes away. And you can go example after example. I use that phrase in my book, in the title of my book. It's not my favorite way of describing what he's talking about. And I don't know if this is the time to get into that. But, McCloskey, when she talked about writing--one of the points she made--is that you should always put at the end of a piece of writing what matters most. So, if you talk about a sentence, the last word is what should matter. If you are talking about a book, the last chapter of your book is what most matters. And so the phrase, creative destruction--what's last in that phrase is 'destruction.' And one of the things I learned as I was working on this project--and it was one of the things I found most exciting in the process of doing this book--was that the creative part of the process hasn't been emphasized enough. It's been underestimated. And the destructive part has been overestimated. What I found is people are afraid of losing jobs. And some jobs are lost. But not as much as people think. And the jobs that replace them are much better jobs. So, whereas people are afraid of the destructive part because they don't understand that, they should--if they saw a more realistic picture of what it is, I think they wouldn't be quite as afraid. I'm saying they shouldn't be quite as afraid. So, I say openness is important. And the 'openness' is in the title because I'm trying to make the case that, yes, there is some--things could go wrong for some people. But not as often or as bad as most people think. And that the benefits are huge; the costs aren't as great. And I think openness gives us great benefits in terms of the quality of the jobs we have, in terms of the goods we get, in terms of how long and comfortable life is. But also in terms of an area that I don't think has been sufficiently emphasized, which is, in terms of the quality of the work we are able to do. And I think work is an important part of life. So, that would be my first pass, I guess, at answering that question.

5:18 Russ Roberts: So, I want to say a couple of things about, first, I think--I disagree with Deirdre that it should be the last word and the last page and the last chapter. It should be the most important thing. Because a lot of people don't get to that last chapter in the modern era. So, I go the other way. It's the first paragraph that's the most important. But I take your point. And I think your observation about destruction as being over-emphasized is, I think, extremely unfortunate. I think there are two things about the process of creative destruction that are misunderstood; that are extremely--extremely important. One is: It's crucial to remind us that life is not a 0-sum game. And I think our natural intuition is often that it is. And so I think it's extremely valuable that that phrase conjures up some idea of churning or a vitality. So, that's the first thing. There is the risk, though, that I think people misunderstand it to mean, 'Oops. Some things come along, and some things go away.' And that's really a misunderstanding of the positive-sum aspect of the process that you are writing about. The other thing that I think that's important--and I don't know if you spent enough time on this book for my taste, and just personal taste of mine--is that, I don't think people understand easily the connection between the creative and the destruction, and that it's actually creative-destruction/creative. The creative, destruction, creative destruction, destruction. That it's not a cycle, but an ongoing process, by which, by allowing things to disappear, we free up the resources--both human and financial that allow new things to come along. And I think some people just sort of assume, 'Well, when some jobs go away, I guess, yeah, I guess it's good fortune that some jobs do come to replace them.' But the actual process by which the jobs are destroyed--the companies that died, research that is no longer devoted to their products--is exactly what allows the new jobs to come along. And I think that isn't fully appreciated. Arthur Diamond: Well, I agree with that. Although, the creative process, by creating more stuff, means you don't have to do as much reallocation as you might think. You still have to reallocate as part of the process, so I agree with that. I do want to comment on what you said at the beginning, if I may, which is about, people think of the process as being a 0-sum game. And that is also something I talk about a little bit in the book, and maybe should have talked about more. One of the things I tried to do in the book and like about the parts where I succeeded is I tried to give a lot of examples and compelling stories that illustrate the points that I'm trying to make. And, on the point of the zero-sum game, my favorite--I think the favorite story--is about Brunelleschi [Filippo Brunelleschi] and Ghiberti [?Lorenzo Ghiberti]--the two greats of the Florentine Renaissance. Where they were competing to--there was a prize established to see who would get to design and make these brass panels for the doors of the new cathedral. And-- Russ Roberts: It's hard to correct you, Art. But, I think it was a tapestry. It's related to the cathedral-- Arthur Diamond: No, absolutely correct me! Because I--hugely better on those sorts of issues. So, I should have asked you rather than just say the wrong thing. I've seen them, but I don't know what to call them. But, so they had this competition. And a lot of people competed. But the judges thought both Ghiberti and Brunelleschi had done a wonderful job. And so, they said, 'We don't know what to do here. We're going to make you guys--you guys can each do half of the panels.' And Brunelleschi was appalled: 'So, if I'm not named the winner, I'm not going to do it.' So, it looks like, the way you first look at it, is, 'Okay, it's a zero-sum game. Ghiberti won; Brunelleschi lost.' But what Brunelleschi then did he thought, 'What other contribution can I make that will be worthwhile in the world?' He then did a little touring of some of the architectural greats in Rome and other places. And he came back, and he competed, and won the assignment to build the Duomo. And so, the way that I end that story is that, in the short run there are losers. But more often than not everyone can be winners in this process of creative destruction. And that's optimistic. But I think there's a lot of truth to it.

10:00 Russ Roberts: Yeah; I think--especially when you look across generations. In any one generation, there are people whose fates don't turn out well. The competitive process turns against them. Consumers turn against them. They might lose out on just a change in tastes that has nothing to do with justice, or their hard efforts. But allowing resources to flow to their most valued use, which is the ideal of a competitive market economy, allows the next generation and much of the current generation to thrive. Because there's more available. Arthur Diamond: I've heard you make that argument. And I think it's a plausible argument. But I think you can make a stronger argument. I don't think you have to argue for openness to creative destruction based on, 'Yeah, we're going to put it to you but your children are going to be better.' I think we can say, 'Your children are going to be better, and most of the time you are going to be better, too.' I think if we have what I call a robustly redundant job market--and there's things we can do to make that more likely--then, people who lose their jobs will themselves find jobs that are as good or better in their lifetimes. And not just have to have the hope that their children will be better--which is a reasonable hope, a kind of reasonable point to make. But I think we can make the even stronger point that the odds are pretty good that they'll be better off. In this process. Russ Roberts: Fair enough. I agree with that. I don't--I bring up the next generation for the case where--you have a certain--I always use the worker in the auto-assembly line in the United States who is put out of work by Americans buying Japanese cars. And wants the government to protect their jobs. Which is understandable. And their next best alternative after they have invested a long time at a particular skillset may not be very attractive. They may have a diminished standard of living. But: You are right. Many of them won't. Many people in the, spread out through the economy are going to do better, while they are alive. I don't mean to suggest it's all about sacrificing for their children. So I think--yeah, I totally actually agree with you. Arthur Diamond: There is a book related to the example that I found compelling, called Janesville, by Amy Goldstein. And she embedded herself in the Janesville auto plant community when they all lost their jobs. And then she followed several examples of how people did. And there was a lot of suffering in that book. It was not an easy book to read. But, those people who were willing to move seemed to do better than those who stayed and took, quote--"what was the usual recommendation" of the authorities. Which is: 'Go to the local community college and sign up for one of the training classes.' Russ Roberts: [?] Arthur Diamond: Yeah. And there was a lot of government money put into that, too. They got a special grant, and such. And they were training--these people worked real hard to retrain themselves. But, the kind of classes they set up, they were like 30 people signing up for a job retreat[?] to teach you have to be a lineman for one of the utilities. Well, okay, so they go through the training and they get certified; and it turns out maybe there's maybe 2 jobs available for the 30 linemen, that all these people have put in the time, the money, the effort-- Russ Roberts: horrible-- Arthur Diamond: and they have nothing to show for it. The people who end up doing okay are the people who move. And one of the issues I know you've addressed in some of your other podcasts with others is the issue of: Why don't we have as much mobility? Russ Roberts: Yup. Arthur Diamond: And I think it could be people, the workers, who have lost their jobs are not willing. But I think there's also an element that there are policies in effect in some of the cities that might be natural magnets that discourage people from coming, to hire. And you've talked about that with--I can't pronounce French very well--'alab'-- Russ Roberts: Alain Bertaud. Yeah. Arthur Diamond: Yeah. Some of what he said was relevant to that--the size of the apartments is regulated. So, people who are poor and displaced can't get a foothold. But there's other issues, like restrictions on vertical building, tall buildings, and the actual expansion of the city geographically over greater territory. If we had the kind of boom towns that we used to have--you know, the rate of growth of Chicago was enormous when it was a boom town. In a whole bunch of different dimensions. That would provide a way for people who were displaced, like the people in Janesville, to go to a place where more jobs were more readily available, and there wouldn't be as severe suffering, I believe, as there is--

14:31 Russ Roberts: I don't mean to correct you. Because I know you--what I'm going to say next, you agree with-- Arthur Diamond: Oh, go ahead, Russ-- Russ Roberts: But, when we say a phrase like, 'Go to Chicago where the jobs are more available,' obviously the "number of jobs" is not a fixed number available in Chicago. If a large number of people move to Chicago and were looking for work, in a successful, robust economy or job market--and we'll talk about that in a minute--there would be an encouragement of entrepreneurs to start businesses there, take advantage of that opportunity of a workforce that was looking for work eagerly. So, it's important to remember: It's not--I always use the example of Musical Chairs. I think people think in their mind that there's a fixed number of jobs and when a plant closes, there are just fewer jobs--chairs for people to sit in. That's not how the labor market works. And I think your point about how retraining versus moving is extremely important. There's all kinds of different ways that we cope with economic change. And I think both you and I agree that our ability to cope with that doesn't seem to have--it seems to have diminished in recent years. And let's turn to this question about the job market. You can comment on what I just said if you want. But, this issue that you--the United States job market--appears to be less mobile. Less dynamic. Less flexible. Do you think that's true? And why do you think that is? What has changed? Arthur Diamond: The main problem, I think, is that we've increased the level of regulation of the labor market, and a secondary problem is we've increased regulations of those who are the main creators of new jobs. If you take this--and maybe I should--I think the second is probably as or more important so let me start with that one. The main--one of the points I make in my book that is known by some people but I don't think widely enough known--is that the main creator of new jobs is what are sometimes called the gazelles. And, it used to be thought, and what you still hear repeated over and over again is the main creators of new jobs are small firms so we've got to do things like subsidize and encourage small firms. Well, it turns out the vast majority of small firms are not job creators. They stay small. They don't last very long. It's the new firms that--the person who has done the most research, whose name is mostly associated with this line of research, is a fellow named Haltiwanger, and he has a variety of co-authors and has written a bunch of papers. But what he finds is, it's not small that matters: it's young and fast-growing; and hence the name 'gazelle.' And so, when there was a slowness in job creation, especially after the Crisis of 2008, one plausible speculation--I don't know how much of it--I didn't look into it further except to say that, 'Yeah, that's something somebody should look into'--but, yeah, one plausible speculation was that the gazelles were not being--there weren't as many gazelles being created as there had been in the past. So that the job creation was slowing, because these firms were not--there were fewer of them. There's evidence that that's the case. And so, if you want to encourage a robustly redundant labor market, one key thing you need to do is think about what's constraining these fast-growing entrepreneurial startups from doing their thing. And, I believe that one aspect of that is that we over-regulate innovative startups. But then there's also the fact of, okay, let's say, when you do have a gazelle, how many people are they going to hire to do whatever they are doing? And one issue that comes into effect is--this is a big issue today in policy debates: Are they going to put a robot in there? Are the going to put an algorithm? Or are they going to put a human being in? Well, if you have--the more you regulate the labor market, the more the incentive is, for what gazelles exist, to think about perhaps seeing, 'Can we automate this? Can we cut down on the expensive, inflexible labor, human labor, and have something that is not as regulated? Is not as expensive?' So, I think there's two factors. There's two things we could do. We could reduce the regulation of the labor market and we could reduce the regulations on the gazelles. And if we did both of those, we'd have a good shot at making the labor market closer to this ideal that I'm advocating.

19:20 Russ Roberts: I'm sympathetic to that, of course. As listeners would expect. But I think the challenge to make that viewpoint more convincing is to get into the trenches--which, I don't expect to get into every trench. You've gotten into some other trenches here, we'll talk about, which I think are great. But, you've got to get into the trenches and explain why it's gotten harder. What particular--it's easy to say 'This is more regulation.' I think there is. But, how much more? Is it really binding? Is it really make it that much harder? A counterview might be--and I thought about this a lot as I was reading your book; and I'm just--let me step back for a minute and talk about, you were mentioning before that you tell a lot of stories in this book. And I think they are fabulous. And, in particular, you honor a lot of great people who came up with brilliant things that made people's lives better. And, we don't know their names--most of us. And I think that's fascinating, that I know a lot more baseball players than I do entrepreneurs. I could name a lot more athletes and entertainers. And, they're fine. But it's interesting that they are not, outside of a handful of folks like Steve Jobs or Walt Disney or Henry Ford, we don't know many of the names of the people who changed our lives for the better. And I think--that's just a side-note-- Arthur Diamond: But it's a really, really important side-note. Russ Roberts: Yeah. I don't think it's irrelevant. Arthur Diamond: I wouldn't mind--I know that's [?]-- Russ Roberts: Go ahead. Interrupt. Talk about that. Arthur Diamond: Well, at some point--one of the things that I think is another kind of bum rap on entrepreneurial capitalism or what I call economic dynamism is the idea that people are debating now, more and more, about: Should we be in favor of socialism or should we be in favor of capitalism? And one of the things you hear is that socialism is where the idealists go. And the practical people go with capitalism. And there's a famous saying that gets repeated--I don't know who it's due to originally--you know, that 'Anyone who is not a socialist when they are young doesn't have a heart; anyone who is still a socialist when they are old doesn't have a brain.' Something like that. Well, I think that's selling the capitalist side short, because it implies that we can't be idealistic. That we're just kind of number-crunchers. And part of what I think people don't understand is that these people who are responsible for innovative dynamism--the inventors, the entrepreneurs, and some of the venturesome consumers that I think especially get short shrift--that these people are heroes in many ways. They are not perfect. They are flawed human beings. But, they--heroes are flawed. But they are people who do great things in spite of their flaws. And I think that one of the, some of the accounts we give, including economists, maybe we--well, not just 'including economists,' maybe mainly economists--is we've taken the entrepreneur out of our accounts of capitalism. You can read a lot of good textbooks of micro without too much emphasis on entrepreneurship. Maybe just a little aside in some box somewhere. But it's not part of the core message. And I want to make it part of my core message, is that, this system--that's why I have as a second chapter, I emphasize entrepreneurs, the innovative entrepreneur. And I want to say: This is not inevitable. This process is not inevitable. This is a process that is driven by human beings and their choices and their perseverance and their courage. And I think if that message got out more, it would be harder to make this case that one side has got a monopoly on idealism. Because I don't think that's true. I think that's a bum rap. Russ Roberts: I totally agree with that. We need a lot more idealism. I've often said we need an anthem for free markets. My Keynes-Hayek rap videos with John Papola--the second one--is something of a defense of that kind. Arthur Diamond: Though I want[?] you have Schumpeter and Keynes. Russ Roberts: There you go. Yeah. Schumpeter would be a--that's not a bad idea, actually. Plus you could bring in a lot of other aspects about his personality. You know, supposedly he wanted to be the greatest economist, the greatest lover, and the greatest horseman; and he got two out of three. But, anyway--I don't know if that was his self-assessment or the assessment of others. Anyway-- Arthur Diamond: it's said that--the economist[?] once said that economists are boring people. That, the only two people which you could make a good movie about who were economists, were Keynes and Schumpeter. Russ Roberts: Yeah. That could be true. Arthur Diamond: But they left out the one that was actually done, the--Nash [John Nash]. Although I don't know if you economists account-- Russ Roberts: that's a good point-- Arthur Diamond: You were going to go in a different direction.

24:02 Russ Roberts: Yeah. I want to go back to my other point, which is that, we were talking about the dynamics of the labor market and how much did regulation--and as an aside, which derailed us, how I think, how we don't idolize or glorify great entrepreneurs and inventors. And I think that's a shame. But the other point I want to make is that, you could argue, besides the, I think, the need, to get in the trenches and show why in particular it's hard to create a gazelle--not just, say, there's more regulation or there's more pages in the Federal Register. I think you need to show something akin to Hernando de Soto's work: Are there more permits you need? Is it that once you reach 30 or 50 employees that a certain set of regulations kick in? There are people who have done that. I don't mean to suggest it hasn't been done. I think to make that case you have to go down that path to some extent. But the other point I want to make is that, in reading the narratives of many of the great innovators and entrepreneurs that you chronicle, one is struck by how little they had when they got to America, say--how low their station was when they started, and how through dint of hard work and creativity and drive and stamina and grit they managed to create a great product and great, successful enterprise that employed hundreds or thousands or hundreds of thousands of people. And, I wonder--that's harder to do today. I think you'd agree. And then the question is: Is that because the rules and regulations of running and starting a business have changed, or is it because the nature of what is going to be done today is going to be different? So, let me explain: I think right now there's tremendous innovation. Where I'm sitting--I'm sitting at Stanford, where I am for the summer, and within a 50-mile radius there's just an extraordinary profusion of funding and creativity and enterprise. And, it's an amazing time to be alive in this area, to come to this area and be part of this transformation. And it's been that way for a decade or two; and it might continue. But it's also clear that there's a set of hurdles that a person has to clear to get here--and I don't mean physically: I mean intellectually, creativity-wise. The skills that you have to have aren't the same skills that it took to create a great enterprise in 1880. It's much more technical. The number of people who are capable of doing it might be a lot smaller. It requires an educational background. It's true you don't have to go to college to get that educational background: you'd have to figure it out for yourself or learn it online. But it's not undemanding. And I just wonder if some of the slowing of the pace of innovation in the rest of the economy outside Silicon Valley is not unrelated to what's already been done, and what remains here that is dynamic is dependent on a certain small group of people who have the capability to use the tools that are quite demanding. Arthur Diamond: Well, you know, this may be an example of something that I think we do naturally enough but that we should restrain ourselves from doing, which is to over-generalize from Silicon Valley of what might be true of entrepreneur in general. And it's natural to do that because in our time by far the most dramatic successes are in Silicon Valley. And so, when I was writing the book, a lot of my examples are Silicon Valley. That's what's available, and that's what is compelling. Again, I can't prove it and you're right: it would be better to drill down and be able to prove it rather than just say this is suggestively plausible. But that's all I've got at the moment. I think that part of the reason why we've got the spectacular success in Silicon Valley but not so much elsewhere is because there had been, and maybe still is but maybe won't be for long, less regulation of what's going on in Silicon Valley compared to other areas. And, that's why I try to find other examples of areas where there's dramatic entrepreneurship that's not Silicon Valley. I talk a little bit in the book about the fracking entrepreneurship. And these are people who are very different from the Silicon Valley and don't have to have some of the characteristics that you are sketching as being entry tickets to getting into Silicon Valley. And, I think you could have more people in more areas of entrepreneurship who wouldn't be required to have all the coding skills and the high education level of Silicon Valley needs, if we had less regulation. I mean, I give some examples in the book. What you, I think, would be looking for is if somehow the people who do the Regdata--George Mason or some group like that, if they could fine tune the stats to judge whether there was something that changed when we had the drop in entrepreneurship in the gazelles after 2008-- Russ Roberts: I'm willing to accept that-- Arthur Diamond: I think that would be neat, if they'd do that. I haven't tried to do that or asked Patrick McLaughlin and those guys whether they can do it or not. But that would be good. I do have a few examples where regulation has affected entrepreneurship. One of the ones I like a lot, because it's an example people like Tyler Cowen and Peter Thiel have made a big deal of and are quoted on, one of the things they say is, 'Where are the flying cars that we were promised when you and I were young--Jetsons and all of that?' And they say--they have their reasons for why they don't think we have all the flying cars. In the book, I have a brief vignette of somebody who actually had an entrepreneurial startup to make a flying car, and he complains about all the regulatory hurdles that have slowed him down so much in developing that. And, this other individual case is where you can see that there's been a lot in the papers and then there's also a nice kind of academic paper by John Chisholm where he's looked at drones, and how drones were originated here in the United States but a lot of the innovation now is being taken to other places, because of the regulatory obstacles we have here in the United States. One of my absolute favorite examples from my book is one of the regulations--I don't think they still have this; maybe they've taken it off--but one of the regulations they had is that there had to be an operations manual on board in every drone. Which raises a lot of questions. Russ Roberts: Yeah, there's a lot there. That's a rich lode to mine.

30:58 Russ Roberts: But, I actually want to defend your book--make sure listeners don't misunderstand. I don't think your book is particularly Silicon Valley-happy at all. In fact, I was struck by how many interesting examples of innovation that came from the turn of the century--turn of the 20th century and the pre-high tech world: containers, Standard Oil, automobile production, the production process itself. I think there's a lot of wonderful examples that you give that I think are important to give people an appreciation of the dynamism that you're trying to talk about. And I want to now--this is even crazier though--I want to defend--I want to argue against my claim about regulation. I think some of the--if I think about the people I've talked to on the program--Eric Topol particularly comes to mind about, say, the health field--there are so many extraordinary things that could be done in health, that would be done in health if government's hand was not all wrapped around every single aspect of it. One of the things that drives me crazy is when people say, 'Well, we know markets won't work with health care. Look at how horrible the U.S. health care market is.' Well, the U.S. health care is--it's not anything remotely--to say it's not a free market is almost comic, [?] me that I have to say that. It's highly subsidized; the prices are distorted; they prices are often set by government. Except in the areas where they're not, like pharmaceuticals where they're just left to run free, and pharmaceutical companies make, have an easier time getting money from taxpayers without their consent. So, I just--I think when we think about the areas of the economy we care a lot about--the other one I would emphasize would be education--the opportunities to be innovative in these two areas, it's not like there's a regulation that got passed on April 7th and signed into law in 2017 or whatever, whenever. It's just hard to get anything started. It's so complex. There's so many difficulties in getting to the consumer, in that the consumer is not the patient. And the case of health care I think is really the ultimate problem. Arthur Diamond: Well, I don't know if you noticed that I totally agree with you, because, what I placed at the end of the book is a discussion of an example from health care. Now, I was trying to save my biggest--according to your view of things I should have put it at the beginning. But, my agreeing with McCloskey has me putting it at the end. I hope people last to get to that part. And you've got me worried now that I may have made the wrong decision. Russ Roberts: You have good stories at the beginning, too, Art. Don't worry about that. Arthur Diamond: Well, yeah. I talk at the end about cancer and try to illustrate some of the messages in the earlier part of the book by looking at who were the sorts of people and what were the obstacles faced by the people who brought us some gains against cancer. And, the idea being that if we learn from that, we can reduce regulations and have a situation where we get more cures faster, and longer lives. I don't know if you want me to sketch any of that-- Russ Roberts: Yeah; go ahead-- Arthur Diamond: but it turns out that, yeah, they--I go through some of the sort of the stars of this process. And what they were doing--part of what I talk about early in the book without talking about so much the health example, but other examples, is I say, 'Okay, how are entrepreneurs thinking? How are they acting? What's the process of innovative entrepreneurship?' And I say[?]--I have a section called, kind of pompously, I suppose using a huge Latin word, 'The Epistemology of Entrepreneurship,' where I'm trying to say, 'Okay, how do they think?' And I focus on three aspects. One is, they often benefit from and make use of serendipitous occurrences. And they often have what Steven Johnson called, I think, well, slow hunches, where they have sort of a vague idea that they have to mull over and sharpen over a long period of time. And they also do nimble trial-and-error experiments where they're not sure where it's going to go or how long it will take till they reach their conclusion. And I give illustration of that in the second chapter. But then some of that is repeated again--some of those same characteristics are important to the big advances over cancer that I talk about at the end of the last chapter. For instance, in terms of the serendipity: In World War I, mustard gas was unfortunately used against some of the soldiers. And they suffered a lot. But there was a benefit that came to medicine from that, because when people investigated the effects of mustard gas, they saw that, some of them saw that there were effects on red blood cells. And then a later set of researchers thought about that, scratched their head, and said, 'But hey, if that happened through this horrible part of World War I, maybe there's some way we can harness that when we actually do have cells--in other words cancerous blood cells--that we want to get rid of.' And that started, that was one of the jump starts or inspirations for chemotherapy. So, then, one of the next big steps was a guy named Sidney Farber. And Farber was somebody who was looking for some kind of chemical that would cure the blood of children with leukemia. And he had noticed that for some diseases where people weren't making red blood cells, enough of them, they were able to be improved by being given folic acid. So, he tried that. And his peers were already skeptical of it. He tried that. And it turns out the children died faster--the leukemia was accelerated, not stopped. And he just about got shot down by his peers when that happened. And you can understand that, right? Instead of helping the children, the children were [?]. But, fortunately, he was able to hold on. I mean, they took away all of his support staff; he was doing all the steps in the research himself. They were giving him facilities underneath the stairs and right by the restrooms. But he was able to hold on. And, so then he scratched his head and said, 'Okay, if this accelerates it, maybe there's something that's the opposite of folic acid, that would stop it.' So, he had one of his friends, an introvert who hadn't gotten tenure at Harvard but who was really good at making chemicals to order--he said, 'Can you find something that is kind of the opposite of folic acid? That hooks on to the same places but doesn't have the same effects?' And he came up with this drug. And he gave that to the children--the next set of children, unfortunately--the next set. And it resulted in remissions. And that was wonderful. Except it was short. A few months. But they got a few months more. And it was proof of concept: It showed that this can work. What he was doing though, it wasn't easy. It was trial and error. It was taking use, making some use of this original serendipitous event. It was sticking with a hunch that this could be done. The next step was--there were other intermediate steps--but there was a guy named Freireich [Emil Freireich] and his team, decided: 'Let's take some of these chemicals, like the antagonist to folic acid that had been used by Farber--let's take some of these chemicals, put them together in a combination, and maybe the combination will have some effect.' And their colleagues--they were sometimes called cowboys. One cynic, when he was viewing the meetings--they used to have weekly meetings, the committee, to decide what chemicals to put in and what dosages to use--one person, one wag said, 'That's a society of jabbering idiots,' hearing them yell at each other and grab the chalk from each other. But what happened was, they actually started to cure childhood leukemia in some cases. Not just remission, but to cure it. The way they did it was by these weekly meetings making adjustments: seeing how things were going and trying nimble trial-and-error experiments. The same kind that I talk about in that second chapter. And, one of the young cynics, friend of the guy who said, 'society of jabbering idiots,' he was attending the meetings just for entertainment. He thought these guys were foolish. But after a while he kept going and he said, 'You know,' it suddenly occurred to him, 'I'm not going to these meetings because I'm being entertained any more. I'm going to these meetings because these people are curing cancer.' So, a guy named Vince DeVita, and DeVita started working on this program, and he shows another disease, Hodgkin's Lymphoma, and used the same trial-and-error techniques to come up with a chemical cocktail that had success in some cases with Hodgkin's Lymphoma, in curing it. Now, he's written a passionate, wonderful book that talks about a lot autobiographical, interesting stuff about his [?] life. But the last chapters he talks about policies to encourage faster, quicker, better cures of more people for more diseases, especially in the era of cancer, which he knows best. And, what he says is: The current policies of the Food and Drug Administration [FDA] are blocking the kind of process that succeeded in curing cancer in the past. So, what you have to do now is you have to have a protocol, that's approved by the FDA. The protocol, you have to say what you are going to do, and you have to stick with it throughout the trial. Well, that's not what Freireich was doing when he cured childhood leukemia. That's not DeVita himself was doing when he cured Hodgkin's Lymphoma. They were making the kind of nimble trial and error that in general, very often, is what entrepreneurs do. So, he, at the end, says--and he's somebody who has spent a good bit of his time working for the government. He's not somebody who, like a true-blue core libertarian who would never contemplate that. But he's saying this is one aspect where the government is really losing--causing--people to lose their lives unnecessarily. And, he makes a very strong case that they need to take account of how progress has been made in the past. And you might say: Okay, well this might have been a special case--the case of chemotherapy. We've now moved on to some other therapies that people think are going to have less side effects and have more promise. They are now, people are excited about immunotherapies. But you also look at some of the main people who have been doing the immunotherapy work, somebody like Steven Rosenberg, wrote a book several years ago called The Transformed Cell about his early work trying to get immunotherapy to work. And, he's got passages in that book where he talks about how much he was slowed down. And sometimes slowing down isn't just a matter of the time. He had certain cells he needed to inject in people, but he had to get approval from the FDA, and the FDA wasn't giving approval. And if you wait long enough then those cells are no longer usable to do what he wanted to do. And he talked about how much it slowed down his progress in immunotherapy. He's finally beginning to be able to get results after decades, just now, he's started to get some more positive results than he'd ever been able to get before. But he said, not only did it slow him down, but it was enormously demoralizing. Just the science of what he was trying to do was so hard, that's enough to tire a person out and to get him discouraged occasionally. But then in addition he had to go down and fight this bureaucracy. And, you wonder how many people--he stuck with it; and there are people who will stick with it no matter what. But you've also got to think how many people there are out there who would be curing things for us, who just give up at some point. And, so I think you are absolutely right. Part of the reason I emphasize health so much is that some of the benefits of creative destruction, the innovative dynamism that I emphasize, I think I make a really strong case--like for automobiles, for air conditioning, for video games. But reasonable people can disagree with those. I haven't found very many people who are in favor of cancer. And so, it seems to me like this is an extremely powerful, important case. And, I think it can be made very strongly that in this case the regulation has had huge harms on a lot of people.

43:10 Russ Roberts: I'm going to put a twist on that. Although I sort-of agree, I agree for probably a different reason, maybe, than you do. You and I both came to the U. of Chicago; we were both trained to believe that the FDA kills people because they make it harder to get stuff approved. And until recently that was sort of the end of the story for me. But the more I've thought about the way we've structured health care--and this is sort of a meta-argument about the cost of regulation, I guess. Or, I wouldn't call it regulation: I would call it the costs of the way government has structured the health care market. Basically, what we've done is, we've said, we're going to highly subsidize it through Medicare, Medicaid, and the employer--subsidized via tax breaks of insurance: we're going to highly subsidize it. We're going to create a legal environment where, if you do not pursue best care, you are vulnerable to suit. And, everybody expects to get the best treatment available. Without having to pay for it, of course. Because that's immoral, according to many. So, what that does is it creates a way, as I alluded to a way back, for players in the medical field to put their hands in taxpayers' pockets without the consent of taxpayers to benefit--sometimes, but not always; sometimes it doesn't benefit the consumers--the so-called consumer, which the patient doesn't have as much skin in the game as they normally would. And the entity with the most skin in the game, of course, is the taxpayer. But, we're busy. And we're not paying a lot of attention. But the people who are paying a lot of attention are deeply committed to paying attention, because they have skin in the game to make them money. So, those are the two people with skin in the game. We don't realize it as taxpayers. It's too complicated a process. But the other folks are deeply focused--the people who make the devices, who come up with the pharmaceuticals. They are wisely paying a lot of attention. In that world, you can't allow stuff to just be innovated the way it normally would in a normal market, because a tiny improvement is going to get approved by hospitals, which are not really competitive. And as a result, the world we live in now is the world where we spend too much, in my view, on health care with not enough return, because of the incentives that the players in the system have. And the FDA is kind of a mixed bag. It's a bit of a brake. It's a restrainer of unneeded, unnecessary, not sufficiently good interventions [?innovations? inventions?]. It's not very good at that. But it does do that a little bit. But, as a result, of course, the downside of that is that it kills off a lot of potential innovations that would normally take place. Arthur Diamond: Well, I think you are giving too much credit to the FDA. I think that part of the reason we have so many not-very-good innovations is due to the--what some of the processes of the FDA. For instance, they mandate a very expensive kind of research as the only kind of research that will be accepted as knowledge of the effectiveness of drugs. They mandate the randomized, double-blind research. And, my view of that-- Russ Roberts: clinical trials-- Arthur Diamond: Clinical trials. Exactly. And these are extremely expensive to run. And they also, they favor the incumbents. And the incumbents, or so I argue in the rest of the book, are not as likely to do the breakthrough innovations, for a variety of reasons. So, if the only people who can make it through the screen of the FDA's methodology are the big incumbents, that's going to result in a lot of small, unimportant-in-general, innovations. I think that part of what you ought to do is say that venturesome consumers can be venturesome. If they--this is something that I saw an interview with Milton Friedman a couple of years before he passed away, and he was asked about the FDA. And he was not very enthused about it. I mean, back when he was at Wabash [Wabash College] and Rogge [Ben Rogge] brought Friedman down and asked him--if you press, 'If there was a button in front of you, Milton, and that button, if you push it the FDA would just disappear, would you push that button?' And Milton Friedman got this huge grin on his face. Huge grin. And he said, 'Yes!' with enthusiasm. But when I saw him interviewed decades later, a couple of years before he passed away, they were asking about it; and he was more restrained. You know, he said, 'We have to think about what's politically possible.' And what he thought was politically possible is that you have the FDA limit itself to evaluating safety, but not efficacy. And that would allow venturesome consumers to make more choices-- Russ Roberts: Yeah; I'm all for that. I'm all for consumers being able to take risks and take dangerous products. The problem is, is that when they are paying for that with my money instead of their own, it's a really destructive system. It encourages innovation that's not necessarily worthwhile relative to the cost, because other people are paying for it. That's the problem. Arthur Diamond: Why are the other people actually paying for it? If you didn't-- Russ Roberts: So, let's change that. Let's change that, and then we can decide whether the FDA is worth having. Arthur Diamond: Yeah. Well, I mean, I think people are scared, because of how expensive it currently is. They don't want to take the government out of it, to go toward the kind of system that you're talking about. And, part of the problem is that it doesn't have to be so expensive; but people are scared of, 'Okay, we take that on faith from you guys.' Russ Roberts: Yeah. Correct. Arthur Diamond: If you had a free system, there would be more competition to provide less expensive ways to do some of the things that we're now doing expensively. There's work by a--there's probably a bunch of people, but the one I'm familiar with is Clayton Christensen, couple of other people, have made some plausible suggestions about how many of the costs could come down and you'd actually get better treatment. If you had, let's say, nurse practitioners doing the parts of medicine that have become routine, they would actually be better at those parts they do over and over again, and it would be less expensive, to boot. So you'd have the best of both worlds there. And, we have now--we have credentialing issues that keep that from happening and keep innovation of that sort from happening. But, I think you'd also have more drugs that would also be more effective. What we've got coming in now is we've got these drugs that extend life, and not a very pleasant life, for maybe three months. Russ Roberts: Yeah. Horrifying. Arthur Diamond: And that costs all of us a huge amount to develop those drugs; and it's not clear how much the patients are better off. There was a neat article that I saw in the paper just in the last few weeks, where they were talking about--some new head of one of the drug research efforts was going to try to focus their research on early-stage drugs for cancer. And then in the article, they said something that for me was an epiphany, because I hadn't thought about it; it makes sense to me: is that the current set-up strongly encourages development of new drugs for later stage. And, the reason is that it's a lot cheaper to do that, given how hard it is to do these double-blind clinical randomized trials. Because people will sign up. If they've tried everything else at the end, they'll sign up for a trial for the final stage new drug. Why not? What have they got to lose? Whereas at the early stages, it's harder to get people--if they might get it, and they might not get it, and they haven't tried some of the other drugs. So, it's much--plus, one of the big costs is the number of years before you get the drug approved. If you try at an early stage, these people just in the normal course of things are going to last longer. So you won't know the results of the new drug until much later, which means it's going to be much more costly to do it under the current procedures. And, so the conclusion of this article was: people wonder, and sometimes people think, 'Well, the reason why we're getting all these little innovations is because we've picked all the low hanging fruit,' or whatever. And I think that's not the reason, here. It seems like the incentives are set up so that that's what we are developing. But that doesn't mean that there aren't something approximating magic bullets out there to be found. It's just that we've set up the incentive structure so that that's not where it makes sense for them to invest their resources.

51:53 Russ Roberts: Yeah. I totally agree with that. And I think the other obvious piece of this is it's just a lot harder to do an early-stage solution. It's much riskier. And given the costs of getting approval, you are going to push your resources toward a tweak rather than a transformation. Let me use that to go back to your book, which is our subject. I know you like your book, so I'm going to go back to it. It reminds me--one of the themes of the book we haven't talked about which I really love is this idea that some of the great innovations in history come from outsiders: people who aren't formally trained, people who are skeptical of the received wisdom. And you quote Lord Kelvin, that, apart from balloons, he did not have "the smallest particle of faith in aerial navigation." It reminded me of this wonderful quote from Gordon MacKenzie. He wrote a book, which I recommend, called Orbiting the Giant Hairball, which is a book on corporate culture and creativity. It's a fabulous book. And he has a chapter in there--and this is the only--I don't know if I've ever quoted this; one of my favorite things--it's the only line of the chapter. It's a one-page, one-sentence chapter. Here it is: "Orville Wright didn't have a pilot's license." The idea that you can change the world without being an expert, without going the way everyone knows is the right way is just extraordinarily important. And, there are examples in my conversation with David Epstein and his book, Range, about this phenomenon. It's an incredibly important phenomenon that in actual life that problems are often solved by non-experts. The challenge is, is that non-experts have really goofy answers that will not solve the problem. So, I think we have a natural skepticism about non-experts--people who go against the received wisdom of the day. Those people are often the ones who transform a field. And, you talk about that a lot; and I think it's really important. Arthur Diamond: Yeah. It's important partly for the regulatory issue, but also on the issue of: How do you fund science? With a regulatory issue, if you think about, if you were going to set up a regulatory agency of human flight, who would be your perfect person to put on the Board? Well, you couldn't pick anybody better, could you, than the most distinguished physicist of that century, which was Lord Kelvin. And yet you had the quote, there, about him saying the only flight we'd have about being balloons. So, the most distinguished scientist of the age was saying it was impossible. Who, who is going to allow Wilbur and Orville to go and risk their lives doing something that the best authorities say can't be done? And so that, I think, is a strong argument for not regulating people who have these new ideas that seem crazy to us, that go against the accepted theories of the day. Marconi, what he did, was against the theories of the day. It wasn't as dangerous for him personally as it was for Orville and Wilbur. But he went against the physics when he tried to send the telegraph waves against the ocean. But, the self-funding issue is important, too. Because, it's really hard for people--the more unusual, the more break-through the breakthrough is, the harder it's going to be for any entrepreneur to have any expert or a possible funder understand that it's a plausible, possible thing. There is a wonderful scene in a play by Aaron Sorkin--I think I've got his name right--called the The Farnsworth Invention--where Farnsworth is one of the people for inventing television. And he is appearing before the Community Chest[?]. And he's telling them--'Well, what is it you want money for?' And he says, 'Well, I've got this idea for sending video signals through the air.' And then these two people, the Community Chest, their mouths are open; their eyes are bulging. Like, 'Do we call somebody to come and take this person out and lock him up?' And then he says, 'And if it would help any, I've thought of a way to synchronize it with sound.' And so, the guy says, 'Oh, you have?' And you see that--you know, we're used to television. It's [?] everything. But when you think about how it felt before it existed to hear about somebody thinking they could do it, that's a crazy person. Right? And there were centuries--there were thousands of years when there was a crazy person who thought they could fly. And so, it's a--the point that you are making is a strong argument for allowing people to accumulate the funds to self-fund, because they are the only ones who are going to see that there is a plausible case to be made for pursuing this innovation. They are going to have the knowledge, and they are going to have the skin in the game. It's a combination: knowledge and skin in the game, both, to pursue some of these things that, if they work, are so spectacularly beneficial to us. So, it's partly that, but it's also partly the regulations. The regulators are never going to know what's possible, even if you get the best people you could, like Lord Kelvin.

57:26 Russ Roberts: I don't want to leave without chatting a little bit about Mariana Mazzucato as a guest on the program. And she's become associated with this idea that government, and government funding, is a crucial, plays a crucial role in innovation. I was skeptical of that argument, for a variety of reasons. But, I'm curious on your take. Arthur Diamond: Well, in general, I think that government has had a, not a great track record, at picking the winners. And, I think there's a few cases where the government, by pouring a lot of funding, has achieved a particular goal, particularly when people had a strong sense of mission-orientedness, like with the Manhattan Project. Especially that's true when the fundamental science and the fundamental knowledge that way has already been worked out, and you don't have to make huge gains that way. But, in general, I think that what it does is it takes a lot of resources. There's opportunity cost. If you take tax money and you put it into the projects that the government anoints, that's money that's not left for the Wilbur Wrights or the Marconis, or those people who are working in their garage and have a great idea. Because the tax--the money to fund these things--doesn't just come out of thin air. And if I'm right that it's these outsiders, these people with these passionate ideas, these people who have experienced the serendipitous that gives them an advantage--if they are the real sources of most innovation, then taking resources from them is exactly the opposite of what you should be doing. Now, in the book--I had to cut out a lot out of the first version of the book. And I had more on this in the penultimate version. But, in this version, I have a little that's related to your question. I look at two of the most prominent examples, briefly, for people who advocate the government should be more involved. I look at MITI [Ministry of International Trade and Industry]--Ministry, International Ministry for Trade and something in Japan. And also I look at DARPA [Defense Advanced Research Projects Agency] a little bit, which was an example in the United States. And I think in both those cases, the benefits, the successes, have been exaggerated. In the case of MITI, the two big projects that they pushed during their heyday, one was a system of high-definition TV [television] that turned out to be inferior to the system that eventually was used. They also were putting a bunch of money into supercomputers. And, what they missed--what did they miss when they were doing that? Well, what they missed was personal computers. So, they were putting their bets on these other two things, when the thing that really mattered was something that they had ignored. George Guilder thinks they weren't a total loss, because he thinks at one key point, they did advocate lower taxes for innovators. And that, when they did that, they did something positive; so, you've got to give them credit where credit is due. In the case of DARPA, that's a routine case, where what's routinely said is that they are responsible for the Internet. Well, one of the key people who was responsible for the Internet was a guy named Bob Taylor. Bob Taylor was at DARPA. And he was involved in the networking they did. The networking they did, which is what people think of when they are thinking of this, is they connected together some very large mainframes at some major research universities. But, in terms of Internet--what Internet means is connecting all the little local area networks around. That's what we think of when we think of what the Internet has been. And, it--according to what I've been able to find out on that--they weren't very interested in doing that. And they weren't doing it--it was not high on their agenda to do that. They wanted to connect the scientists--you know, Carnegie Mellon wanted to connect with the scientists at Stanford. That, they weren't interested in connecting with all these little local area networks; so they weren't developing that. To develop that, that had to come out of Xerox PARC [Palo Alto Research Center;]. Bob Taylor got so frustrated, for a variety of reasons, with DARPA, he went to the private sector. And he was the key person behind what had been done in networking with DARPA. And he had it with DARPA, and he went to Xerox PARC. And he was legendary in pulling in a lot of good people who made a lot of discoveries--things like the mouse, the person who came up with Ethernet, which was a key component to the Internet, was done at Xerox PARC with the private money that [?] provided. And, he wrote a memo, a famous memo, because he was so annoyed with people saying that DARPA is responsible for the Internet. And he said, 'No. You are misunderstanding what the Internet is. And you are misunderstanding what was key.' And I might mention one other example that she made in the podcast with you, which was that she took credit--gave the government credit--for fracking. And I looked into that, because that really puzzled me. When I heard that, I thought, 'That's a real surprise.' Because I'd read this wonderful, wonderful book called The Frackers, by Gregory Zuckerman-- Russ Roberts: Yep. Guest on EconTalk. Arthur Diamond: In that you don't see--I don't remember having read any key roles for the government. You had--he did focus in different chapters on particular entrepreneurs, people like George Mitchell in Texas and people like Harold Hamm in Enid, Oklahoma. People like that. But these were roughhewn rednecks who worked their way up through the oilfields and were doing trial and error experiments. Russ Roberts: I think you mean 'roughnecks.' I think not 'rednecks.' But, yeah, go ahead. Arthur Diamond: Okay. Yeah. That's right. Although--yeah. And so, I looked into what was the source of the claim that the government was important to this. There was somebody--I don't remember being in The Frackers too much, but somebody who had work for Mitchell's group in Texas, and who had in some interview had said that the government had done some preliminary research that had been useful. And apparently they had sent some foam[?] down into some of the oil wells somewhere in a study, and then published the results, and it had had a positive effects. He said, though--the way that his quote had been used--and he was annoyed when Obama used it in his State of the Union Address saying the government was responsible for fracking. When he heard that, he was annoyed. He said, 'Yeah; some of what they did was useful.' But, at the end, what he said, 'At the end of the day, George Mitchell would have developed fracking without the government.' The government would not have developed fracking without George Mitchell. And, I mean, what entrepreneurs do is--entrepreneurs, unless they are pure free marketers on principle, they will take resources where they can get them to pursue their dream. So, Elon Musk--I think he's willing to take subsidies to get his electric car going. But the question is: What's the key? What are the key people in getting this process going? What would happen is the government of a--was it necessary or was it just along for the ride and getting some credit for something that would have happened anyway? And I think that in the case of fracking, for sure--and I still don't know if it's going to happen with Elon Musk--but with the case of fracking, and the case, certainly, of the Internet, certainly personal computers, many of the major innovations of our time, the keys were private entrepreneurs and inventors, not the government. Russ Roberts: Yeah, if you are going to make a case for government involvement and contribution--I don't think we talked about this with Mariana Mazzucato but I think the, you could argue that some of the university systems, the agricultural colleges, played an important role in innovations in agriculture. Certainly, I don't think we'd have an atomic bomb without the government. Whether we'd have gone to the moon--we wouldn't have gone as soon. Those are the ones that come to my mind. But, I think your earlier point is extremely important here. Which is that a lot of times, the biggest innovations, the biggest changes, the biggest transformations come from outsiders--people who are skeptical of the received wisdom. And, the government structure of research from my understanding of it at NIH [National Institutes of Health], in the NSF [National Science Foundation] as well, National Science Foundation--it tends to have a groupthink issue. It tends to be, as you pointed out with Lord Kelvin--a board of people who represent what we know now. They are very good. They are extraordinary, great scientists. Often. But their natural impulse is to fund their friends. Not literally their friends, maybe, but their intellectual friends--people who think the way they do. And they're not going to be as open to the innovator who is outside the mainstream. And, a lot of the money is going through those organizations. So, non-mainstream approaches are going to struggle to make it. And, of course, you know, independent, private entrepreneurs have started to fund some of those transformations, because they understand that. And, I think that's really important.