0:33 Intro. [Recording date: October 19, 2017.] Russ Roberts: My guest is the legendary Mike Munger of Duke U., the all-time leader in EconTalk appearances with over 30 to his credit. I didn't even bother counting them up--he's got such a lead on the 2nd-place person it just doesn't even matter. He's the Tom Brady of economics podcasting guesthood. Mike, welcome back to EconTalk. Michael Munger: It is always a pleasure, even if it is deflating. Russ Roberts: Yeah, well, that's a very clever response, especially since Tom Brady is the all-time regular wins leader--it's 187; and Brett Favre and Peyton Manning have 186. So, it's not really--in playoff wins he leaves everyone in the dust, but in regular season it's a bad example. I apologize for that. Michael Munger: Well, I appreciate the fact that I've been able to be on as much as this, and I do ask the indulgence of the listeners to put up with another one. But, I'm looking forward to our talk. Russ Roberts: As am I. And, of course, it's too late: Many listeners have already turned their phone off. Having heard your name. But, whoever is left out there listening will, I'm sure appreciate it, a small selection bias there but what can you do? Our topic for today is a recent essay of yours, which we will of course link to. And you open that essay with the question, you say you are often asked, which is: What is the most important concept in political economy? And, I want to let our listeners think about that for a minute, what you might, out there, think about as the most important concept in political economy. But, your answer, Mike, really surprised me. What was it? Michael Munger: Well, I would claim--and I'm not sure I would have said this 5 years ago, and I certainly would not have said it 10 years ago--but I now would say that it's permissionless innovation. Now, to be fair, I'm talking about political economy. If you had asked me what's the most important concept in economics, I would say, 'Opportunity cost.' It's a hard concept. We don't always understand it. And the reason we use prices is as a measure of the opportunity cost of resources. But, in political economy, in the thing that we use to understand why it is that some nations grow and prosper and others bump along near the bottom of the possible range of growth paths, I think permissionless innovation is the most important concept. Russ Roberts: And that essay, by the way, is at LearnLiberty.org, and we will put a link up to it. I could derail our entire conversation here for the next hour by saying 'Opportunity costs'. It's in my top five. But it's not number one--who would be emergent order, market forces, competition. Which would be one. That's my first one. But I'll grant you that it's in the top 5, and I won't derail it. We'll stick with the most important concept in political economy. I would have said the rule of law. And then, my second would have been that there is no will of the people--a concept I've really learned a lot about from talking to political economist Mike Munger. That's a previous episode where you talk about your book, co-authored with your son, Choosing in Groups. I recommend that listeners. And we have Richard Epstein and others, maybe you, Mike, also, talking about the rule of law.

3:59 Russ Roberts: But, today we are going to talk about permissionless innovation. Make the case for me why it's in the Top 5, or maybe even Number 1. Michael Munger: Well, it is interesting that you would raise Rule of Law, because, Rule of Law, potentially is the same thing. It would just depend on what the content of the law is. Rule of law means that we are governed by principles, not by individual discretion; and that those rules apply to everyone without any kind of privilege. But it would still depend on the content of the laws. So, if you have stupid laws that apply to everyone individually, Rule of Law wouldn't be that much help. Rule of Law is necessary, but not sufficient. Permissionless innovation means that we are able to insulate innovations from having to ask permission and, as I say in the essay, there's two sources of permission that an innovator might have to get. They are different, and each of them is really damaging. One is from the government. Let's suppose that the government does have rule of law, and the rule of law says: You need to fill out all these forms; and you need to get the permission of these experts--because they are, after all, experts, in order to go ahead with this innovation. So, if you had asked experts in computers in, say, 1979, 1980, should we spend society's resources on microcomputers, on personal computers? They all would have said no. Politics works at the median, and experts are inherently conservative. So, you could have rule of law but still fail permissionless innovation. The second kind of permission that's damaging--and it's amazing how often we do some version of this--is that you have to get the consent of competitors before you do something that's going to harm them. So, the kind of permission that we have to get is either from experts who work for the state and are inherently conservative--they try to protect the status quo because that's what the conventional wisdom is. And the other is, permission from competitors, who might get to make something that's going to harm your profit position. And we have to get away from both of those. Russ Roberts: I mean, the other issue with getting permission from regulators is they might have political interests in preferring one group to another. Which is where the Rule of Law breaks down-- Michael Munger: [?] at best. Russ Roberts: Yeah; I accept the point. But, I think that just--I think that's worth mentioning. And I think it's hard--many of our listeners, of course in the United States, in general, we tend to think of regulatory bodies as somewhat impersonal. Whereas in a less developed economy, the General's Uncle could get special privilege. But, of course, that's true in the United States as well. Right? There are people who pull strings for you. I'll never forget talking to a restaurateur who told me--this was back when I lived in St. Louis--that he donated--he had a restaurant; he had a chain of restaurants; and he donated to people of both parties. And I said, 'Why did you do that?' And he said, 'Well, because I need them. Because, every once in a while things are going to be trouble for me.' And, the rent-seeking aspect of regulation is a way to encourage people to give money so that you can untie the strings that are in the way and the barriers and give permission, is a problem. But I know you know that already; and you are trying to avoid that. Michael Munger: Well, but it is--I think, at best, you are going to face these two kinds of permissions. So, in the city of Raleigh, North Carolina, there have been a number of attempts for--in North Carolina, where I live--there have been a number of attempts for food trucks to come in and offer lunch, dinner, by the side of roads, in legal parking spaces. And restaurants have succeeded in preventing that. Now, that means that you have to get the permission of the people that your innovation, that your thing, that presumably is being, is benefiting consumers--in fact, that's what the competitors are worried about, that you are going to provide something to consumers--that's the evidence for why they are opposing it. They've managed to prevent it. And they've used regulations to do that. Now, they come up with reasons like health. And some of them are probably legitimate. And if I were a restaurant owner, I probably would think that, 'This is great. We're protecting the public.' So, I'm not saying that people are necessarily acting badly. What we need to have is a system--and this is what permissionless innovation means--it's a presumption in favor of innovation. It's a rebuttable presumption. But, the presumption is in favor of: 'Here is the list of things that is prohibited. Everything else is permitted.' So, sometimes we'll have visitors from Germany come over and I'll turn right at a stop sign; and they'll say, 'Is that permitted?' And I'll say, 'Well, in the United States, it's actually permitted unless it's prohibited.' And, in Germany, it's basically the opposite. Here's a list of things you could do-- Russ Roberts: You mean at a red light. You said a stop sign. You mean right on red. Michael Munger: Yeah. At a red light. And there's no sign that's saying it's legal. Whereas, they're used to a system where, unless there's a sign that says you can turn right on red, you can't. And in the United States, it's the flip. If there's a sign that says you cannot turn right on red, then you can't. But the presumption is in favor of being able to do it. So, if you write that larger, the comparison is--and Adam Thierer at Mercatus is the one who often makes this argument--it's a presumption in favor of innovation. It's a presumption in favor of autonomy. Now, you may have some times when you can't do that. But, by and large you don't have to get permission. And it makes all the difference in the world. Russ Roberts: Yeah, it's what the default is; and that's a perfect example for the United States versus Germany. Although that particular example is not so important, in the case of actual innovation: it's a little, potentially a lot more-- Michael Munger: It's a prosaic example, but it actually is one where--I actually do get that reaction, where people are surprised. 'Where's the sign that says it's permitted?' 'No; actually there's only a sign that says it's prohibited.' Russ Roberts: Yeah. It's culturally, really interesting.

10:12 Russ Roberts: Your example, though, of food trucks is a case where the existing competitors, the restaurants, use the regulatory process to try to keep out competitors. And, as you point out, they might use health and safety, 'The sink's not big enough,' in the case of the food truck or whatever they are going to invoke. And as you said, sometimes maybe it's a legitimate argument. But there are situations where you literally have to get permission. So, we've talked about this on the program before: in many states--not all states; that may have been misleading to listeners in the past--in many states, a hospital that wants to open has to get, literally, permission--I think, if I have this correctly--from existing hospitals in the area, and has to prove that there's a need for that hospital-- Michael Munger: It's even called a Certificate of Need. You have to get your competitors to say, 'You know, we can't provide this service.' Russ Roberts: And, I'm here in--I can't help but think about it because I just heard about it this morning--we're here in, I'm here in Montgomery County, which is one of the more regulatory counties in America; and I want to put a porch up on the back of my house. And there's going--the person who is going to build the porch said to me this morning, well, he's not sure how it is in Montgomery County; he's not from here; he'll have to check. But, there's a certain distance I have to leave from the end of the porch to my back property line. And, if I don't meet that, I've got to try to get a variance--an exception, a waiver. And, there's one strategy I can use, evidently, where I just have to get permission from all the neighbors around me to use my property as I see fit. Yes, I know: there's an externality. It could be an eyesore. They could not like it. Michael Munger: What [?]. That's an interesting--it's not exactly the competitors-- Russ Roberts: It's like it-- Michael Munger: but others that might be affected by it. That's a good analogy. Russ Roberts: Yeah, so, the builder said, 'Well, you just have to walk around your neighbors' and get their permission.' And he said that in a very nonchalant way. Because, where this porch would be really isn't in the line of sight of too many of my neighbors in any annoying way. And I said, 'But, what if they don't like me?' And he kind of laughed at that. But, if one of them doesn't like me, they could keep me from having a porch. It's a bizarro veto. And that veto is a little more important when a hospital wants to open, I would say, than when I want to build my porch. But they are the same phenomenon. Michael Munger: There's a number of examples. Dozens, in fact, in a relatively new book by Dick Carpenter from the Institute for Justice; and it's called Bottlenecks. And he documents, Carpenter documents, the different licensing requirements and permission requirements in different states. And it's just amazing how often you have to get something like a Certificate of Need. And, of course, your analogy to the--the reason that I don't like you might be that you're my competitor. It might be, I just don't like you. You're going to discriminate. You're giving all these other people the discretion to say No. So, instead of--the presumption is you have to go out and persuade all of these people. And, if they don't like you, for no good reason, you can't put a porch on your house. Russ Roberts: Or even a good reason. You know, a neighbor doesn't like that I don't rake my leaves early enough in the year for the neighbor's taste. Michael Munger: Or too often. You use a leaf blower, 'I'm tired of that.' Russ Roberts: Exactly. So, there's--that's a legitimate reason to be annoyed, I think. I try to take a live-and-let-live attitude, for what it's worth. But, I can understand someone being annoyed. Whether they would then take it out on me by not giving me permission to build a porch--that's a different question. But it's an interesting question.

14:14 Russ Roberts: You give an example in the paper which is quite interesting to me of FedEx. Because, I think most people don't know much about that. FedEx, now we think of just a sort of delivery company. Of course, it does a lot of deliveries. But, in its first incarnation, it delivered letters overnight. And sometimes packages. But mostly crucial letters. Michael Munger: Yeah. Letters and documents. Russ Roberts: And, every once in a while someone would say to me, 'See. There's competition.' And I'd say, 'Well, actually, not really, because it's against the law to deliver mail.' And, I'd always wondered how FedEx was able to do what looked a lot like delivering mail. And you know, they really--I don't think they are allowed to use your post--this is just another aside; I apologize, Mike--but I don't think they are allowed to use your mailbox. Michael Munger: Nope. They are not. Russ Roberts: I think the mailbox itself--this offends me, I have to say. It's one of the most inane offenses of things that offend me. But, I think the mailbox belongs to the Federal Government, not to me. I like bought it and put it on my house. Michael Munger: Our embassy in Paris is, in legal terms, U.S. territory. And so, the inside of your mailbox is, in legal terms, Federal territory. Russ Roberts: Yeah. Michael Munger: If you trespass on Federal territory--FedEx--if your neighbor comes and puts some cookies in your mailbox, that's a Federal offense. They are trespassing. Russ Roberts: Or a party invitation. Michael Munger: Yep. Russ Roberts: We get around that. That email thing really solved that problem. But, in the old days--and you don't see this any more, for obvious reasons--but, I think the Post Office sued--was it--my game[?] is wrong; was it the Boy Scouts, because they were delivering some kind of packages and using mailboxes? I may be confusing a couple of stories there. But, the point is that the Post Office is very, very vigilant--a long time ago, very vigilant--about competitors. So, how did FedEx become a competitor? Michael Munger: Well, there was a sort of little-noticed, and I think no one expected, important loophole, where a courier service, like a bike courier service in New York--so, suppose I need to get a contract across town quickly; and the contract really is just a letter. It's folded up in an envelope. I can pay a courier service to do that very quickly. And, the Post Office law--the law that gives the Post Office a monopoly--said that that's going to be exempt. But it had to be extremely urgent. And, some people have--several people have written me since I published this little paper, and said they'd noticed that on FederalEx, and Fed Ex packages; they'd always wondered why it says that. But, on the FedEx envelope it always says 'Extremely Urgent'. Russ Roberts: Which sounds like it--which sounds like humor. Urgent. Isn't 'urgent' sufficient? I mean-- Michael Munger: Yeah. Yup. But that's literally quoting from the law. What they're doing is invoking that loophole in the law that gives the Post Office a monopoly. So, what Federal Express had to do, in effect, was ask--I said there's two sources. One is the government and the other is your competitors. In this case, they are one and the same. Federal Express had to ask the Post Office for permission. They, in effect, got permission because the Courts would grant that the Extremely Urgent loophole applied. And that's why Federal Express exists. Russ Roberts: Which is amazing.

17:54 Russ Roberts: In passing, I want to remark on a comment you made in passing in your essay where you talked about this famous story that--I often wonder if it's apocryphal, and I've quoted it before on the program, but I think it's important to quote it again. When Fred Smith, the founder of FedEx, was in management school at Yale--or he may have been an undergrad, but he was taking a class. And, I was always told that his econ professor--maybe it was his business professor--gave him a C for the paper that proposed that FedEx exist. He came up with the idea of FedEx and used it in a paper in college or grad school. Michael Munger: It was--as I read it, and it was, you know, it was a business plan for a business, and it was supposed to be hypothetical: you were just supposed to say, 'Here's a business plan,' and the professor said, 'This is a great idea, but it has to be possible.' And so he got a C. The fact that it was clearly just impossible--there's no way that you could do this--meant that--that's experts. Experts by their nature are really bad at innovation, because what experts understand--and when I say, 'we,' I would include myself. Economists generally at predicting innovations. We're not very good at being entrepreneurs because we tend to think in terms of the existing infrastructure. Whereas entrepreneurs say, 'Let's try to do something else.' Now, to be fair, most of the time, the experts are right; and the ideas that seem stupid really are. But, some ideas that seem stupid to the experts turn out to be really great. And so, when Fred Smith basically asked an expert at Yale about this business plan--it was a great idea, but it could never actually work--and not long later, Fred Smith was a millionaire. Russ Roberts: Yeah, I just have to defend this--I think I may have done before. Even though it comes naturally to me to make fun of my fellow economists and professors, and to mock them mercilesslessly on this program; and when you said, you know, they don't--economists aren't very good at predictions--because they are, tend to be-- Michael Munger: at predicting innovation-- Russ Roberts: at predicting innovation. I would--the reason I would have given is because obviously they fact that they've chosen to be in an industry that's remarkably uncompetitive. And has tenure in it, and all kinds of other things. It clearly selects for people who are rather risk averse, rather than risk loving. Michael Munger: And you consider that to be a defense? Huh, hah! Russ Roberts: No, a different defense. For the--no, you are right. It's not. But I had a different defense for the Yale manager professor gamist. See, it's conceivable to you and me, I think--certainly [?] but even to me and you, that the paper that Fred Smith turned in could have actually been a very infeasible version of FedEx. Michael Munger: Yeah. Russ Roberts: So, I don't--you know, I'd like to see that paper. Michael Munger: Well, but the people had exactly the same reactions to Uber and to Airbnb. You still think that about Airbnb. Russ Roberts: Yeah. It doesn't exist, actually. Michael Munger: It can't work. Russ Roberts: It doesn't exist, obviously. Right. If someone had come to me--if I had been friends with the founders of Airbnb--and of course we had one of them on, as, on EconTalk a while back--but if I had been, if they had been my personal friends, they'd have said my new idea, I've got this new idea; would you like to invest in it? I would have laughed at 'me. Because I would have said, 'I'm not going to waste my money.' No one's going to stay in a stranger's house with no guarantee of safety and that the place in good condition. It's a horrible idea. You're going to go out of business. You are never going to make a penny. So, yeah. Well, I'm an academic. So, I'm a bad person to ask. Michael Munger: By definition, we're--it would be surprising if we knew, because we are in a very conservative, not political business but we're, you know, in a conservative political business. Because the very idea of innovation is hard for us to imagine. But I think it's important that we recognize that. And that's why permissionless innovation is so important. Because, there are other people who try stuff out. It's a search process. Most of them fail. But, if they have to get permission, economists think at the margin, if every time you want to try an experiment you have to get permission, at the margin it's going to reduce the number of those experiments. Which means that the search for innovations will proceed much more slowly and less efficiently. Russ Roberts: And, you could argue that some of the problems that the developing world has--poor parts of the world have--is that everything requires permission. Use of land, use of property, use of starting a business. That, the amount of red tape that you have to get through is so high that it obviously has a real impact. Michael Munger: Right. And that's another form of the argument for what would be the Top Five in Political Economy, would be one of my mentors, Douglass North. His claim would be transactions costs. Russ Roberts: Yup. Michael Munger: And transactions costs are a big factor in determining the level of permissionless innovation. Russ Roberts: And, of course, yeah. For sure.

23:00 Russ Roberts: I was going to make the observation, which I don't think you talk about in the paper, that the amount of permission you have to get varies a lot. Certainly by country. So, I just alluded to in terms of poor countries, that struggle with bureaucracy, sometimes certainly within a country, within the United States, because of our system our states, counties, cities. It depends on where you are, for how much permissionless innovation is allowed. So, I can't build a porch willy-nilly and then ask for permission after the fact. I need a permit, or I will get in trouble. But, of course, that's not true; or the amount of any of this varies a lot, regionally, in the United States. Certainly, certain cities make it much more difficult. Did you think about that at all? Michael Munger: Well, it--that's an important consideration. The fact that the amount of permission differs quite a bit may--and I've heard this explanation, um, that one of the things that Silicon Valley and Boston, Massachusetts differ on, is the use of non-compete agreements. And non-compete agreements were quite common in Massachusetts, which meant that--and this story may be apocryphal. It may be a difference that may not, may cause as much of the difference. But, suppose that we're looking at Boston and Silicon Valley in 1980. And Boston is a lot of colleges and researchers. But Massachusetts law allows--and which, that means it encourages non-compete agreements. So, if I'm working for an innovator, I quit and go to work for somebody else, I cannot use any of my knowledge for at least a year. And by that time it's enough out to out of date that I'm probably not going to move around. California doesn't allow, or at least restricts the use of non-compete agreements. That means that I can go somewhere else without the state or my employer's permission. And, that fact is probably capitalized in salaries--maybe people want higher salaries to work in Boston. But, it meant that the degree of permissionless innovation in Boston held them back. And that's why we think of Silicon Valley and not Boston as being the place where much of the innovations in the Internet and the sharing economy have taken place. Now, that's a--it's a Just So Story. It looks at one small difference. But, there probably is something to it, in the sense that having a non-compete agreement where I couldn't go something else and do the same thing for a year or two meant that it was hard for people to move around. It was harder to hire talent. And it's a kind of transactions cost or restriction on how quickly people could adapt.

25:48 Russ Roberts: I guess my thought on that--which goes against my normal biases. But, it's an interesting thing just to chew on--and I invite listeners to do so, as I'm doing now--to chew on the fact, well, who does that help, a non-compete agreement? Usually we'd say: Well, it helps the worker, because I'm free then to go work for another company right away. But, of course, if that made it hard for companies to make investments in workers, that's not good for a worker. And it certainly discourages companies from locating there. So, it could have cut the other way. Michael Munger: Well, for workers, I think that's right. It's not clear whether it's good for workers. In fact, I'd probably get paid quite a bit more in Boston. And I get better trained. They are more willing to invest. Russ Roberts: Right. But, maybe it means that I'll lose some of my--companies aren't able to find, new companies aren't able to find employees there because they can't steal them away from existing companies. Just an example of how it's very difficult in a complex world to figure out what the effects are. But it reminds me of the recent EconTalk episode with Philip Auerswald where we talk about cities as places where apparently productivity seems to be higher. And we talked about whether that's because it just attracts more talented people, or is there just some synergy that's going on? Michael Munger: Right. Russ Roberts: And as point about non-competes is saying, well, actually, there is a synergy. When you allow--I was going to say something that was wrong, that was because when you allow firms to interact and workers to move around, it creates more life. But of course you can do that on your own in Boston, by not requiring non-competes. So, then the question would be: Is there some external benefit, positive externality, that a firm would not take account of? So, it would put in a non-compete out of its own self-interest, perhaps? Not taking account[?] of the fact that there are other costs for the region as a whole and that, as every firm does that, Boston becomes less effective? Michael Munger: And, it means that the general equilibrium effects are the place where you have to look. It might be that workers don't mind non-competes. Companies want non-competes. But, in some larger sense over a period of 10 or 20 years, the firms that succeed make a lot more money. But, it means that you are also, a lot of companies are going to go out of business. Because they invest in some workers who then leave. And I'm stuck. So, you get more churn, but more innovation and more--so, permissionless innovation, the problem with it is, it really does cause a lot of harm to the companies that lose. And that churning means that you are constantly turning over where you work. It's a difficult thing to ask workers to do. Workers might well prefer more stability. What the general equilibrium effect--that's the claim that is being made here--overall you get more innovation and more benefit to consumers.

28:53 Russ Roberts: So, before we taped, started recording this, you mentioned Grace Hopper. And, I didn't know who Grace Hopper was. And I didn't know about Hopper's Law. But I want to give that, tell us about that. And then I want to talk a little bit about permissionless innovation within a workplace or within a family. And then we'll come back to some of these economy-wide effects. So, talk about Grace Hopper. Michael Munger: Well, computer scientists, when they think of permissionless innovation, will often refer to Hopper's Law. And I've seen that before. But I'd also seen the reference to Admiral Grace Hopper, who was Rear Admiral in the Navy but also a computer scientist. And she had said, in the context of the Navy and doing computer work that it's easier to ask forgiveness than it is to ask permission. So, go ahead and do it; and then, if it screws up, you can ask for forgiveness later. But, if you ask for permission in advance you'll never find out and probably you'll alert other people to your plans. It may fail. So, in the context of computer innovation and the tech industry, Hopper's Law is defense of permissionless innovation. I think it's interesting to recognize that what that means is--they go a step further. They would invoke Hopper's Law as a justification for saying that you want experimentation with new technologies, new business models, things like that should be permitted by default so that you don't even have to ask for permission or forgiveness after the fact. But if you go bankrupt, you go bankrupt. That's extra forgiveness that you have to ask for, if you have to ask for the forgiveness of your investors. Russ Roberts: It's just such a provocative--simple and provocative--I mean, I was thinking about, my mind wandered while you were talking; I apologize. But, you stimulated a story I remember where the employee of a hotel was loading the bags of a customer into the taxi, heading out having checked out on the way to the airport. And, the cab pulled out; and the employee looked down and realized that he'd left one of the suitcases behind. And, he immediately--this was either, I think it was the Ritz, Ritz-Carlton, I think--he immediately jumped in a cab--walked off the property, jumped in a cab, and said, 'Follow that cab.' Or, maybe it was too late. Maybe he'd taken a bit of time, but said, 'Go to the airport.' Now, that's a case where that employee didn't ask for permission--because there's transactions costs for asking for permission; there's time that elapses. Instead of going to the supervisor and saying, 'I messed up. Can I go to the airport?' just immediately the culture of that company was such that that was what they did. Think about, for a minute, how companies encourage innovation within their ranks rather than--excuse me: They encourage innovation and expect you to innovation without permission and ask for forgiveness if it doesn't work. Michael Munger: Yeah. And so, that story that you just told was invoked in the past year or so in the context of United Airlines. So, United Airlines, as the listeners will recall, had oversold a flight. They had to get 4 members of a crew to a different city, and so first they asked-- Russ Roberts: This is a law-- Michael Munger: and then they demanded. Well, they have to do it. But then, the rule said that they would ask for volunteers up to a certain amount. And I don't remember the amount, but it wasn't that much. It was like $600 or $700. Nobody volunteered. And so they chose a--I'm making air quotes--"volunteer," who happened to be a man who claimed to be a doctor; he had to see patients the next day. For whatever reason, they chose this volunteer. They dragged him off; they beat him up. Russ Roberts: Physically. They physically dragged him off. Michael Munger: Yes. And, they didn't have any discretion. The defense that the United employees used was, 'We could not have more money. We had to get these other people on. We just chose people.' Now, United Airlines then changed the rules in just the way that you have suggested, allowing people to innovate without permission. Now, they can go up to $1500 or $2000; again, I don't remember the amount. But it's some multiple--it's about 3 times as much. So, they have far more discretion now. And that means that, though you have to trust the people who are in that situation. So, the example that you give is: This guy should not have made the mistake of not loading the suitcase. Given that he did, he had to fix it. And, it meant he left work without permission. He was AWOL [Absent Without Leave]. It was as if he had quit. But he was doing something that they should sanction given the larger importance of what was going on. So, to what extent do you have rules that entrust your employees with the discretion that they need to do what the manager would do if he were there to make the decision on the spot? Because, the head of the company at United would never have said, 'You know what would be great public relations? If we beat the heck out of this guy and then drag him off, knowing that all these cellphones are going to have videos of this poor man being beaten and dragged off.' It was a terrible idea. The amount of advertising--it's going to take them a decade to win back the customers that they lost by this one stupid act. Which was a consequence of not allowing permissionless innovation. Russ Roberts: Yeah. I mean, it's just a great example of the importance of local knowledge. Right? So, when you see a situation where you need to do something, once you have to ask permission, it's going to take a while. You might make a mistake from above because you might not have all the information. You want the person on the ground with the most information to make the decision--if, in fact, you trust that person. And so-- Michael Munger: But that's a thing in the military. There's a--the local commander--what you say is, 'The unit commander is responsible for all the unit does or fails to do.' So, you ask the commander on the ground. And, if they did it, it's his fault. If they didn't do it, it's her fault. But, if you don't trust them, you relieve them of command. You don't try to micromanage them. Because, you don't know enough. And, it's a terrible tradeoff, because suppose the person does the wrong thing? You have to have enough training where you think that person there with the local knowledge is going to be able to do it. That's exactly the same thing that entrepreneurs are trying to figure out, is: Rather than ask permission of an expert who has some sort of abstract consideration, or ask the permission of a competitor, who--they have plenty of local knowledge but they don't want you to build the porch on your house because they don't like you--then, that's not allowing people to use the resources, to put them to their best value.

35:52 Russ Roberts: And, of course, the other way that firms try to deal with this: They have a Rule Book. Like you said: the United case, they have a manual; they are just following the strictures of the manual. But, of course, a manual can never be complete. That can never take into account all examples. And so, you really want to have a situation--you want to have a corporate culture where your natural inclination is to--excuse me; I want to say it differently. You want a corporate culture where you want to hire people you trust with the skills to make decisions in real time, so that you don't have to always rely on the manual. Always rely on permission. And that way you'll get a better result. And there will be mistakes! Of course, there will be mistakes. Michael Munger: Yeah. Russ Roberts: But, the benefits outweigh the mistakes. I think that's a perfect example of the economic way of thinking. Because, sometimes people would say, 'Well, but [?] will mess up.' Yeah, of course they will. But the Rule Book messes up, too, all the time. They both mess up. And so does the bureaucrat. Michael Munger: There's a particular kind of mess-up, and your--another relatively frequent guest on EconTalk that I'm a big fan of, Nassim Taleb, has talked about: What sort of mess-up should we be concerned about? And, instead of being concerned about the everyday sort of mess-ups--that one we should allow people to do--the question is: What if things go really, really wrong? You want a system that's not fragile with respect to really, really bad mess-ups. You want redundancy, and you want people to have enough discretion to see that and prevent it. So, what Taleb says--and it's a very interesting perspective--is: Try to think in terms of system. What if something really, really goes wrong? What are we going to do then? And that, in a way is what happened at United. Suppose that there's a catastrophe. Do you have to keep following the stupid rules even though you know it's going to be a disaster? You can tell, in this case: Don't beat the guy up and drag him off. Russ Roberts: And I love it when I'm confronted by an employee who is going by the book. Right? And I sometimes, even though I'm very frustrated, say, 'I'm late for a flight,' or I've got some issue on an airplane, I say to the person, 'I know you are just doing your job. But it's a really bad decision you are making.' And, 'I know you have to make it, so I guess I'm just [?].' You know, [?]. And of course, I don't know the full story, either. I'm only thinking about me really in that situation. So, it's, it's a complicated thing.

38:07 Russ Roberts: Before we go on to something else, I want to talk about family dynamics. Your father--I'm a father--children often are confronted with asking for permission versus forgiveness. And, I've noticed that teenagers are really being on the forgiveness. We run a tight ship in the Roberts' family. Maybe too tight. Because there's tradeoffs there, as well. But my kids, as they got older, learned that often they would not get permission. So, often, they would do it and seek forgiveness. And, of course, I would notice that. And, of course, there's a great dynamic there. Do you have any thoughts on that in the Munger family or in general? You can talk about your spouse, too, if you want. Michael Munger: Yeah. Well, I often--right. I've learned that I need to ask for permission--because forgiveness will not be forthcoming. But, yeah, she's come up with a structure of incentives to solve that problem for me. I even wonder if teenagers don't really wonder, don't really think that much about it. Or, maybe they internalize it, so I remember in "Calvin and Hobbes," the cartoon from quite a while ago, when Calvin was going to jump off the roof and use a sheet as a parachute, the tiger, Hobbes, said to him: 'Don't you think you should ask your mom if it's smart to do this?' And, Calvin responded, 'Oh, no. I don't have to ask questions I already know the answer to.' So, I think that's how my teenagers--they knew what the answer was going to be. And maybe they wouldn't get caught. And if they did, they could always ask. Because that's one of the things--is that enforcement is costly. And the probability of getting caught is much less than 1. Russ Roberts: Yep. For sure. Michael Munger: So that's another thing on the side of asking for forgiveness, is that you may not get caught in the first place. Russ Roberts: Correct. And if it works out well, then you can wave it around. And if it doesn't, you hope they don't notice. Right? Michael Munger: Yes. Russ Roberts: I'm debating on whether to tell a personal story here, and I'm not going to. It's about a relative of mine; and the honesty that was portrayed after a bad event when forgiveness was asked for. But, I'm going to leave it alone. I want to turn--but [?].

40:33 Russ Roberts: I'm going to turn to Friedrich Schiller, who I think has never been mentioned on EconTalk before. And, he's a German poet, late 1700s to early 1800s. And, if you had said, 'Do you know anything about Friedrich Schiller?' I think I could have said one thing, and one thing only: which is that he wrote the words to the Ode to Joy, which is Beethoven's Ninth Symphony. Which are in German; I don't even know what they are. So, my Schillerian knowledge was slim. But you have a fantastic reference to Schiller in this piece. Michael Munger: Which was sent to me, and I guess to us, by[?]--a University of Illinois, to Fred Giertz; so, thanks to him for this. Because I did not know of it. Russ Roberts: Well, I knew it in the original, we knew it in the original German, of course. We didn't know it in English--and Fred--the English, yeah. Michael Munger: That is not forgivable. You didn't ask for permission and no one's going to forgive it. He's talking about the English Dance--and I actually spent 3 or 4 hours trying to figure out what the heck English Dance that was. And if listeners know enough about what is the Englische Tanze that Schiller is talking about, I would be interested to know, because there is a lot of English spoke dances. But, Schiller's description of it is so great. So, let me read it. "I know," and he is talking about society, so this is--the metaphor here is intentional, I know of no better image for the ideal of a beautiful society than a well executed English dance, composed of many complicated figures and turns. A spectator located on the balcony observes an infinite variety of criss-crossing motions which keep decisively but arbitrarily changing directions without ever colliding with each other. Everything has been arranged in such a manner that each dancer has already vacated his position by the time the other arrives. Everything fits so skillfully, yet so spontaneously, that everyone seems to be following his own lead, without ever getting in anyone's way. Such a dance is the perfect symbol of one's own individually asserted freedom as well as of one's respect for the freedom of the other. So, the idea of a dance is one that you, actually, have talked about a couple of times--once in your book on Adam Smith and then once in a podcast of where you talked about, with Jim Otteson and Vernon Smith, where you talked about Adam Smith, of thinking, of harmony. And then, you riff on the idea of a dance. So I think you kind of independently talked about this. What I think is interesting about the metaphor of the dance is, each of us is in a way in it for our own purposes; it's expressive; but the rules, the context of the dance also allow us not to interfere with other people's expression of what they want to do in the dance. And some dances are boring. But some dances encourage--and apparently that's what Schiller thought about this one--some dances encourage a kind of spontaneous beauty because of the order that emerges from the interaction of all these different people's freedom, that articulate, that fit together without interfering with one another. So, it's really a remarkable passage. Russ Roberts: Yeah; it made me think about the metaphor in more detail. It's such a beautiful metaphor for our interactions with others. But, the idea that I'm vacating a space--I always think of it as, 'I don't want to step on your toes,' either of the person I'm dancing with or the other dancers. Right? I don't want to bump into people. But Schiller's formulation is also--sometimes you need to get out of the way of other people. And, of course, that is part of what you are doing when you are dancing at high speed with a partner, or alone, and on a crowded dance floor. And of course it's a totally different experience on a crowded dance floor than a non-crowded one. It's much more beautiful on a crowded dance floor. Michael Munger: Yep. Well, that's what you said in the other podcast, so let me quote you, if I may. So, you talk about harmony as the metaphor that [Adam] Smith uses, but, quoting you "But to me it's a dance of how you partner with an enormous number of people," so that you're partnering, but with an enormous number of people, not directly but because of the rules, "knowing how fast to dance, how not to bump into other people, how not to override, how not to misstep." So, part of it is the rules; but part of is the convention of not bumping into other people while at the same time allowing them to express themselves. And that is how I end the essay--is by comparing that to Twitter. So, I don't know if you want to move to Twitter or if there's something else that you have on dance.

45:26 Russ Roberts: Can we--I want to talk about dance for a minute, and we'll come to Twitter at the end. Because I want to add something that I've been thinking a lot about, and it's not directly related to all of this, but it's somewhat related. So, okay. So, in the standard economic models, I'm a utility-maximizer. I'm trying to get the most out of whatever it is--the products I'm using, the job I do, the salary I can earn. I might take account of non-monetary factors, of course. But, I'm maximizing. And, I think I got this from Vernon--you're kind to quote me in that episode with Vernon and Jim Otteson--but Vernon Smith, I think, taught me this: That, in a Smithian world of The Theory of Moral Sentiments I'm concerned with propriety. I'm concerned with doing the right thing and playing by the rules. So, when I'm out on the dance floor--and again, think of this as a metaphor for how I interact with people more generally at work and in my daily life and with my neighbors or with my friends or my family--when I'm out there on the dance floor, yeah, okay, I want to look good. I want to be seen as a good dancer. I might even have an urge to be seen as the best dancer. I might want that thrill and that honor and that excitement. But, in general, it can't be my strategy. Because, if that's my strategy, I'm going to step--do some really--end up stepping on people. And so, my real goal in the dance is to conform to the rules of the dance. If it's a Salsa, it's a Salsa. If it's a Cha-cha, it's a Cha-cha. If it's a Charleston, it's a Charleston. And heaven forbid, if it's Disco night, it's Disco night, doing the bump. But, I'm playing by the rules. And the rules are about making room for other people. It's about self-expression, but also making room for other people. And I think that tension between what I want to do and the societal norm--it's not a rule, it's not legislation, it's not a statute--but the concept of making room for other people and not always putting myself first is a very different way of looking at human behavior. I see it very much as a Theory-of-Moral-Sentiments/Smithian way, rather than the max-U, maximizing utility way that we tend to model how people behave. Michael Munger: Well, there are kinds of dance where it's by yourself. So, if it's a theatrical dance, there's particular lighting; you're expressing something. That's different from the kind of social dance that you're talking about and that Schiller talks about. Duke University every year has a faculty prom, and I've been offered thousands of dollars to sneak a video camera in to the faculty prom and video the faculty dancing. Because, we often bump into each other. But I think what we value in that setting is something I would call 'grace.' And grace is not just graceful motion, but gracefully, you know, not bumping into other people without seeming ostentatiously to say, 'Oh, no, you go ahead.' It's just that it all happens in a way that no one really notices, because it works so smoothly. So, what I think the way to think of social dancing, gracefulness is a way of accomplishing what you want without stepping on others, without bumping into other people. And, I'm not very good at it. I often do bump into people. But I really, really like to dance. I wish I had that grace. Russ Roberts: I think the right metaphor here, counter-metaphor, is gymnastics competition. So, a gymnastics competition, a person goes out on the floor, does this incredibly graceful, acrobatic, athletic routine, and we all applaud. And we give people a score. Michael Munger: Yeah, but that's an animal kind of grace, a feline kind of grace. So, you're exactly right; and that's the distinction. It's not a social grace, but a feline or animal kind of grace where you think, 'Look at the athleticism of that person.' Russ Roberts: And what the dance does, that Schiller's talking about and we're talking about--in a minute we'll extend it to the social setting a little more fully--but what the dance does is, you're still going to try to be graceful in an animal or feline or elegant, aesthetic way; but you have to do it within a certain context. And, the person who "takes over the dance floor" and by their aggressiveness pushes people aside and forces people off the floor because they are reckless is a loser, not a winner. Michael Munger: That's one of the points in Saturday Night Live--forgive me: Saturday Night Fever. Russ Roberts: You scared me, there, for a minute. Michael Munger: Saturday Night Fever. John Travolta and the other people he hung out with, their objective was to dance in a way that was so ostentatious and over the top that other people would just stand aside and watch. Russ Roberts: And applaud. Yeah. Michael Munger: And, there was a kind of implicit competition: 'I'm better than you.' It's not the social dance that in economics that we think of in a way of--the permissionless innovation part of the dance, the harmony that you talked about is that I, the seller, am trying to dance with the buyer, in a way to make sure that you get what you want, you get what you need from this transaction so we can continue this social process. Not, that--'Although many entrepreneurs would do more of the John Travolta, I'm the only one that makes this product. I'm going to succeed.' So, dance is such a complicated metaphor for the different kinds of representation of economics that I was glad that you and Otteson and [Vernon] Smith had talked about it.

51:28 Russ Roberts: Well, I'm thinking about it maybe a little bit differently. I'm thinking, I've got a parcel of land in a downtown area of the city and we're trying to figure out who gets it. And, in a centrally planned economy, there's petitions and different people might apply for the opportunity to rent that space and make their case as to why the city needs this, akin to the hospital case we were talking about earlier. But, in a free market--and by a free market, of course, I don't mean anarchy; there could be some zoning laws; there are going to be sidewalks and public property mixed in here. But, in general, in terms of who gets the land and who gets to use it, I would mean free market to mean the person who is willing to pay the most. Or the person the seller is willing to sell it to. And they could choose someone, who isn't the best or isn't the highest paying--whatever it is. And, we let that happen in most American cities up to a point. There's restrictions of all kinds, like my porch. But, what's remarkable to me is, that's a dance of--if the price is too high, sometimes the person who is in that spot will make way for the other retailer, the other use of that land: Get out of the way, peacefully. They are not going to break their windows at night to threaten them to leave if they want the space-- Michael Munger: In fact, [?] community don't notice it. It happens so smoothly that you barely notice it. Russ Roberts: Correct. And we as the consumers never notice. 'Oh,' we say, 'there's a new restaurant on the corner. That's interesting.' Or, 'It's a dry cleaner.' Whatever it is. And then you realize: 'Oh, that's a good place for me. It's closer than my other dry cleaner. I'm going to use that.' Or they do a better job, 'I heard from a friend.' And, to me, that dance of how space and workers get allocated is really a beautiful way of thinking about an emergent, uncontrolled non-top down, bottom up system. Michael Munger: So, a group of people dancing in the English Dance regulate, negotiate in effect, their movements as they go in these complicated patterns around the floor. And, the rules of the dance allow them to do this in a way where, you know, they don't--at the beginning, they don't think 'I'm going to go here. I'm going to go there; I'm going to go there.' Each moment they are reacting to the people that are around them. And that's a very Austrian Economics way of thinking about this. What the market system does, what the price system does, is reconcile all of the conflicting plans that people have. So, I have a plan for what I want to try to accomplish; you have a plan for what you're going to try to accomplish. But, the rules of a free market allow us to reconcile--I change my plans in response to new information about the opportunity cost of resources, about prices, about profits that signal whether this is a useful thing for me to open--should I have a restaurant here or not. And, all of those plans are reconciled by the rules, but it works so smoothly that you don't even notice it. So, I had not thought of the example of urban planning. Urban planning happens all the time. The question is, does it happen with somebody calling out commands, or does it happen something like the English Dance? So, well done. Russ Roberts: I'm going to add one more, and then we'll talk about Twitter and take it home. But, I was thinking about my mom, who at 50 decided she wanted to become a nurse, and had never been to college--50 years old, very scary--but, enrolled in nursing school, and ended up having a wonderful 20-something, maybe even--I think 20-something-year career as a nurse; and of course being that she is my mom, she was an extraordinary nurse--you know, of course. And I actually think she was. And that turned out to be a good thing for the world, I think. But it's a different model from becoming a nurse where you have to apply, and you have to ask: Do we have too many nurses already? And, in a market system, there's always room for one more. You think about this dance floor: it's a dance floor where there's plenty of room. It can be very crowded, but in fact, there's plenty of room. And, if you're there first, if you are one of the early arrivals on the dance floor, you can do some more spectacular things. Some, you know, triple flips and swings and pass your partner around your back and all that. But, if it's crowded, usually there's room for a little bit more. And, it might drive the wages down as more and more people enter a field and profession. But no one says, 'Nope. Sorry. We don't give you permission. You can't be a doctor. You can't try to open that food truck. You can't, etc.' So, the more that--it just, a labor market has some of that dance metaphor in it, and captures your point about permissionless versus having to get permission. Michael Munger: Yep. We all have these different plans and purposes. They are bound to conflict. But, we have rules by which we negotiate and reconcile those. Some rules are better than others. And, when it works, it's really quite beautiful because it may be difficult--if you are looking up above, as Schiller happened to be, you are looking down, you think, 'Gosh, the intricate patterns here.' But none of those patterns are intentional in the sense that any individual means them. It's just a result of following these rules. And some rules work well, and some don't. Russ Roberts: And, when a new product comes along, somebody has a temporary monopoly on some idea or process, it works pretty well, that new product, it might. If it attracts customers, it's going to attract competitors. And they come onto that dance floor. And they're trying to get at the same--I'm going to extend the metaphor one more time, here. They might use the same raw materials as the existing competitor. So, there's usually room there, too. There's going to be multiple people providing those raw materials, so that they can get access to the customers, also. And they might try to jazz it up a little bit. They might try to make it a little fancier. They might try to add features. Their version of the dance might be a little more exotic. But, there's still going to be rules about how you treat your competitors, in terms of--you can't break their windows. And the last thing--I've got to add this just because it's such a nice mix of these metaphors--the jazz band, where the members of the band get solo. But they also have to play together. And the whole, the motif of jazz is another way of thinking about emergent order: that, occasionally, you get to play by yourself, and really shine. Really show off. And really try to impress the other person. Sometimes two musicians will back and forth, riffing and trying to show who has got the better command of the improvisational skill. But ultimately you come back together and you have to figure out a way for your melody, your harmony, etc., to merge with everyone else's. And--just a beautiful thing. Totally spontaneous. Michael Munger: Sure. And that is nice. Because, if we're all playing music and we're just reading it, that's kind of a plan. And that can be nice. A lot of music works that way. Jazz allows refinements, flourishes, extensions, and individual innovation, but in the context that we are all trying to accomplish.