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0:00:00 Sean Carroll: Hello, everyone, and welcome to the Mindscape podcast. I’m your host, Sean Carroll. And today we’re talking about economics. Economics has always seemed like a funny field to me. On the one hand it can be extremely mathematical, precise, rigorous theorems are proven. On the other hand, it’s extraordinarily relevant to the messiness of everyday life. And there’s this ongoing tension between the pristine mathematics and the messiness of reality. Furthermore, in the United States, at least, right now, people are wondering about what kind of economics we should have. Of course, capitalism. I don’t think it’s possible to deny that capitalism has done good things. We have had enormous growth over the last several hundred years. On the other hand, it’s also impossible to deny that unchecked capitalism can be extremely deleterious; we need a social safety net, etcetera. Some people, even here in the US, are looking at controlled economies like they have in China with a little bit of envy. There’s a lot to be skeptical about in the economic performance of the US right now.

0:01:03 SC: On the one hand, the stock market and GDP is growing. On the other hand, we have more inequality than we’ve had in a long time. On the one hand, unemployment is low, but on the other hand, there’s a lack of really good jobs. It’s easy to get a job, but not one that really earns you a living wage. So some people are beginning to question the fundamental truths of received economics. Today I’m talking to Suresh Naidu, who is a Professor of Economics and International Affairs at Columbia University, as well as external professor at Santa Fe Institute. Suresh is not a bomb-thrower, he’s not trying to overthrow the system or anything, but he’s very interested in the relationship of economics to other big picture questions about how societies function. Does democracy promote growth? What was the economic influence of slavery? Can we have equitable economic growth? Is it possible to have booming economic growth while we still have equality and still take care of the people who are not doing well in our society?

0:02:04 SC: So we go into questions about capitalism, socialism, what’s been good, questions about the labor market and inflation, and monopsony, as well as monopoly. It’s a fascinating little intro to a whole bunch of big topics for people who are not experts in economics, including myself. Remember to check out our web page at preposterousuniverse.com/mindscape. One of the things you have to remember is that we have show notes for every episode, so you can find links to things. So for example, in today’s episode with Suresh, we’re talking about a textbook that he and many other collaborators have been working on, an openly available textbook in economics, you can find a link to that on the webpage. So with that, let’s go.

[music]

0:03:01 SC: Suresh Naidu, welcome to the Mindscape podcast.

0:03:02 Suresh Naidu: Thanks for having me.

0:03:04 SC: I’ve been on record as saying that I want to have more economics on the podcast to talk about lots of things.

0:03:08 SN: My apologies, yeah.

0:03:09 SC: That’s okay, there’s a lot there, but it’s a little bit intimidating. I’ve decided it’s intimidating because what I do for a living, dark matter, the origin of the universe, it doesn’t affect people’s daily lives, their daily bread, their jobs, etcetera. But economics is relentlessly practical in some way. So, so much economics is not the kind of high abstract theoretical stuff that I love so much, but really down-to-earth trade and markets and labor and things. What is the division of labor inside economics like that, is it an accurate representation on my part?

0:03:43 SN: So I would say that economics does have certain parts of it that are actually really are about describing big impersonal forces that wind up constraining or shaping what our everyday lives look like. And much in the same way that gravity or ecology or atmospheric pressure is a real thing in our lives and we don’t necessarily understand it all, but what physics and the rigorous study of these things do, is let you understand these forces that are just really important in your life. And then, and I think many physicists also think this, that one of the things you learn when you understand these forces is that you get some insight into what are the tools for manipulating them, what are the constraints on those tools, what are the orders of magnitude of scale that you can like humans can reasonably move, with what kinds of instruments. And so I would say at that level of abstraction it’s very similar. There’s a bunch of things in economics that are about describing patterns of global trade, macroeconomic forces that are really impersonal, big things that are kind of the aggregated decisions of billions of people showing up.

0:05:01 SN: But then, one of the benefits of understanding that is that you then understand how, “Okay, well, what is the minimum wage going to do?” or “What can central banks do with the interest rate?” “And what are the places that you have these touch points that you can push a lever to do something and maybe make things a little bit better.” And so I think it’s not so far away, I don’t think.

0:05:21 SC: Well, yeah, that’s what I’m thinking. Is there the economics equivalent… By the way, do you say ee-conomics or eck-conomics?

0:05:27 SN: Eck-onomics. It depends on what country.

[chuckle]

0:05:29 SC: Just checking that I wasn’t doing a faux pas there. Is there the equivalent of string theorists or mathematical physicists who never look at data whatsoever, never apply their stuff to the real world? Are there purely big brain economists who just work out general principles or does basically everyone dip their fingers into the muddy waters of reality?

0:05:50 SN: I mean, you must know the answer to that. Yeah, so, as you know, as you probably know, the whole 20th century of economics was dominated by basically brilliant mathematical theorists.

0:06:00 SC: Yeah.

0:06:00 SN: Everyone from Kenneth Arrow, who was a founder of SFI, the Santa Fe Institute, and people like Paul Samuelson, and just people whose entire lens on the world was building these incredibly elegant theories that would capture some very deep fundamental truths about the way markets worked or the way political institutions could work, or just the tools for understanding what it meant to have supply and demand equal to each other. And I would say overwhelmingly for the 20th century, economics was in this world, well, what it meant to do good economics was you built mathematical models. But what it meant if you weren’t a really good mathematical theorist is that then you went off and did empirical work and looked at the world.

0:06:00 SC: Ah, yes. [laughter]

0:06:54 SN: But I do think… Yeah.

0:06:56 SC: So not only is there that distinction in economics, but it’s the same status hierarchy.

0:07:02 SN: Yeah, there’s a, Axel Leijonhufvud, I can never pronounce his name, but he had an article about life Among the econs, where he takes an anthropological lens to the economists and say they have their fetishes that are called models. And you have the highest caste group who are like the manipulators and creators of these models. And so that was really economics, I think, in the 20th century. And then I think what has been a slow, but I think positive development is that social scientific data became our microscope and just made it that… Starting in the ’60s and things, even with the rise of labor market data, like the current population survey, like the individual files of the census and the computational power to process them, it became now a world where you really had to not… It wasn’t enough to just have a cute idea about how this theoretical force might work. You actually had to sort of provide some evidence that it mattered. And it also wasn’t enough to just sort of say, “Well, supply equal demand.”

[chuckle]

0:08:15 SN: And that that would obviously answer all of these questions because it became something that we actually had to look at. “Well, how important are these supply and demand forces relative to the background noise that’s just going on in society and all of these other things? Maybe we’re mathematically right, but quantitatively small.”

0:08:34 SC: Right, right.

0:08:35 SN: And that becomes something that we start to look at. So there’s both a measurement angle of the rise of government surveys, there’s a way in which the operations of government themselves generate so much data, running a UI system, social security. In European countries administering corporatist wage setting between unions and firms. It just like, as those processes became more routinized and bureaucratic they generated a huge volume of data that was then also kind of a great social science microscope.

0:09:14 SC: So it’s the big data era, basically?

0:09:16 SN: It’s a big data era. I would say it’s a little bit… In the style of economics that I come out of, we were always using the biggest data sets that you could get your hands on. And yes, some things have changed with big data, but in some ways, like a lot of the principles that we had with small data, it’s just a computational problem, it’s not a conceptual problem. Yeah, and I want to say an important part of that is kind of a, I think also since the late ’90s has been a real attention to what we’d say is causality and causal identification.

0:09:52 SC: Oh, okay, yeah.

0:09:53 SN: So that it wasn’t enough to… So basically there was a lot of shoddy work around correlations and saying, “Oh, see this correlation shows that this theory is correct,” but never, not nearly as much of the kind of paying attention to looking at the parts of the world that look like they’re generating natural experiments or that there’s… Where something has just shifted all of a sudden and then that’s a particularly clean test of a theory. And so basically the rise of this causal revolution in economics really sort of… Also changed how we use data, so that we really became attentive, that you couldn’t just mine a data set and look for whatever correlations that you wanted. You had to really commit to a design that was like, “Okay, here is a control group. Here’s a treatment group. Let’s look at the difference and make sure that those things are comparable on every other dimension.”

0:10:47 SC: I’m sure this is a very unfair question, but is there one big lesson that has been learned since we have been paying attention to these big data sets and causality and things like that, or is it many little lessons?

0:11:00 SN: I’d say there’s a couple of big lessons, but what you’ll think of as big depends on what you kind of care about in the world. One thing that’s kind of been… A lot of papers got written on and kind of answered the question, which is like, “What’s the rate of return to a year of schooling?”

0:11:15 SC: Oh, okay.

0:11:17 SN: And basically, 15 years of trying to estimate that using all sorts of clever things about lotteries and distance to universities, and trying to get this kind of experimental variation generates… We roughly get a ball park number of between 9% and 12% so that…

0:11:37 SC: 9% and 12% in what? Just salary…

0:11:41 SN: In terms of additional earning. Additional earnings, yeah.

0:11:42 SC: Okay, salary. Rate of salary, yeah.

0:11:46 SN: Another one, though, that’s…

0:11:47 SC: Sorry, and that was a difficult thing because, of course, education is correlated with a whole bunch of other things.

0:11:52 SN: Yeah, your decision to go to school is correlated with your ability, all of this other stuff.

0:11:57 SC: And your parents.

0:11:57 SN: Yeah, and your parents, and your parents’ income, and all this stuff. And so finding places where you could actually say, “No, sending this person to school generated their… Increased their earnings by 12%. I think that’s a result.” And we kind of have that…

0:12:08 SC: And is that elementary school, high school, college, grad school, any of those?

0:12:11 SN: So places that we have the… It’s a reasonably stable, I think 12% is in the high school to college range.

0:12:20 SC: Okay.

0:12:20 SN: That’s sort of where… At least my familiarity with that evidence kind of lives. But it’s held up as one the, as a victory in labor economics, is that we sort of know that there’s a positive rate of return to schooling.

0:12:32 SC: Stay in school, kids.

0:12:33 SN: Stay in school, yeah. The other… Although not at any price. So there is…

0:12:38 SC: Sure, sure, sure.

0:12:40 SN: It’s only 12%. The other thing, which I’m happy to go into because I know a lot about it, is like this endless debates on the minimum wage and how… Basically this… This, almost as long as there’s been a minimum wage, economists have argued about whether or not on net cost jobs and I wouldn’t say that it’s like 100% settled now, but I think it’s like 80% to 95% settled now.

0:13:15 SC: Which is super good in social sciences.

0:13:15 SN: Which is super good, and who knows, it might get overturned. We might get a whole new wave of studies that just flip this around, let’s see, particularly as the minimum wages starts… At some point, it’s going to… If you just keep ratcheting up the minimum wage, I think at some point you start to see [0:13:29] ____ effects. But I think one of the other successes of this causal identification turn has been really getting clean estimates of the lack of… Okay, let’s suppose the minimum wage does kill jobs; if it does, it’s a very small number.

0:13:52 SC: The result is that the minimum wage, roughly speaking, doesn’t kill jobs.

0:13:55 SN: Doesn’t kill very many jobs.

0:13:56 SC: Does not cause unemployment.

0:13:58 SN: Yeah. And so, if it… Yeah, so you can imagine that a 10% increase in the minimum wage will cost no more than 0.1% of jobs.

0:14:08 SC: Okay.

0:14:09 SN: That is the kind of estimates we’re after, and that is something that’s incredibly, cuts to the core of so many people’s priors about what markets are like, ’cause if supply is equal to the demand and then you impose a minimum wage, then that has to reduce employment. It’s just what the graph says.

0:14:30 SC: Well, I mean, just to put that in other words, saying the same thing, if employees cost more money, you’re going to have less of ’em.

0:14:38 SN: Yeah, it’s like… And Gary Becker, I think, literally said this, it’s like gravity, goes the wrong way. And… But I think one of the useful things about this transformation of economics into a much more empirical, much more, what we call identification-based discipline has been that we are able to take things that were just kind of somewhat ideological articles of faith about how markets must work and…

0:15:06 SC: Just test some the data.

0:15:06 SN: Test them and find that… Yeah, it often, in lots of markets, supply does equal demand. And in some markets, it’s more complicated.

0:15:18 SC: Well, so supply and demand, I get the impression from not only reading your stuff, but other people, that economists know the following, that in Econ 101, we teach you that markets are the best in supply and demand, control everything. And then in Econ 102 and every subsequent course, all we talk about is how the market fails and how we have to fix it.

0:15:36 SN: Yeah, and then, there’s also Econ 3, which is like how the government’s attempts to fix them, also…

0:15:42 SC: Also fails.

0:15:43 SN: Then fail.

[chuckle]

0:15:45 SN: And then there’s Econ 4, which is how you actually, in order to fix the government failures you might actually need a specific set of market failures to like… Anyway, so we can keep going, but I think that’s roughly right at first pass. Yeah.

0:16:00 SC: So, if our intuition about why the minimum wage should cause unemployment is wrong, what’s right? How should we think about the minimum wage?

0:16:08 SN: So, I think this comes to the other thing that I want to talk about, which is just what do labor markets actually look like. And they look like a world in which, particularly at the bottom end, in which employers are not taking the market wage as given, where they have some leeway to choose wages, because they have to manage, because workers don’t have perfect turnover across a job, let me put that in a different way. So, when I cut my wage by 10% as an employer, what fraction of my workers disappears in the next, say, one to three years? And standard economic theory would say 100%. Everyone has to leave instantaneously and it would…

0:16:52 SC: Get a better job elsewhere.

0:16:53 SN: Get a better job elsewhere. But what you see in the data, when you actually get those kinds of experiments is roughly like 30%, which is not zero, so it’s like the market forces are there, but it’s also not… And it’s also not like everyone, immediately. It’s like 30% over a year, it takes a while. And so, what that means is that employers have some discretion because they can be like, “Okay, I can pick a wage that’s maybe a little bit lower than I’d be willing… I might be willing to pay because I’ll save on payroll, I might have to endure a little bit of higher turnover but it’s worth it to me in exchange for what I can save on payroll.”

0:17:30 SN: And so then, if employers are then kind of trading off this wages and turnover, which is very intuitive if you look at any HR textbook, it’s kind of what they tell you to… It’s like if you’re worried about turnover you should think about the wage you’re setting, then that means that one of the things that when it happens, when the minimum wage goes up, is that you kind of get… You’re forced to raise a higher wage, and so, you get lower turnover as a result, and then that offsets any additional cost of labor that you might have faced with it… Faced from the additional minimum wage. So, you can think of it this way like… And there’s a paper that finds this.

0:18:07 SC: So sorry, that was backwards from what we were just talking about, ’cause you were just saying if you lower the wages, people should leave, but they don’t and now you’re saying if you raise the wages, the employers won’t cut costs.

0:18:18 SN: So, you’re starting from a place where employers have set the wage, such that they’re enduring a given level of turnover and they’re paying a low wage. And so, then imagine the minimum wage comes in, and forces them to pay a higher wage. And so, then they’re like, “Well, now they have to take that higher wage, but as kind of a byproduct, they get lower turnover.”

0:18:34 SC: Okay, yeah.

0:18:35 SN: And so that’s why you don’t see necessarily so many jobs getting destroyed is because there’s this offsetting force of the lower turnover.

0:18:42 SC: And they were willing to pay that much, all along, is point of this theory.

0:18:44 SN: Well, no. It’s costing them profits.

0:18:47 SC: It’s costing them profits?

0:18:48 SN: And they’re passing along some of it to consumers, for sure.

0:18:50 SC: Okay.

0:18:51 SN: So, both of those things happen, but I think…

0:18:52 SC: There still is supply and demand.

0:18:54 SN: There still is, yeah, but one of the things you don’t see is this immediate cost in jobs.

0:18:57 SC: Yeah, okay.

0:18:57 SN: Because of this offset in decreased turnover. And so what you actually see when you can see recruits and quits kinda separately is that you’ll see that when you… There’s a paper that looked at this in the US that found that new hiring falls, but separations fall the exact same amount. And so that’s why it’s kind of a net loss. You hire fewer new workers, but your existing workers don’t quit nearly as much and so you don’t shrink in overall employment.

0:19:31 SC: In both cases, in the fact that the workers don’t leave immediately, if their wages are lowered and the fact that the employers don’t hire far fewer people if minimum wage comes in, there’s sort of a stickiness or a friction in sort of physics terms, right? There’s an ideal system where things work a certain way, but the world is far from ideal. Is that fair?

0:19:50 SN: Yeah. Let’s talk about that. I feel like that is often how we’re taught economics, which is that the perfectly competitive frictionless world is analogous to the ideal gas. It’s like this is the thing that, without any other information, you should think that it looks like this and then you’ll bolt things onto this apparatus in order to make it look more like reality. And so I’m of mixed minds about that. I’m like, yeah, that’s a pretty powerful way to work. Partly because that perfect competition thing comes with a bunch of mathematical things that make it really tractable and they get like…

0:20:26 SC: You’ve improved things. Yeah.

0:20:26 SN: And you can communicate it very easily to other economists. Everyone knows what it looks like. It is very powerful, but for certain things, it’s also terribly misleading. And such that… And particularly around, I guess this is just my hobby horse, is that particularly around things around the labor market, but I would also say the land market and the credit market, these markets where there’s lots of these… It gets complicated, that the perfect competition assumption does more violence to the reality than might be acceptable. And we don’t yet have a benchmark for… That’s a substitute for that frictionless world. We’re still kinda hovering around it. But I feel like there’s a… If you looked at theoretical models now that are even trying to be quantitatively made more accurate… Resemble the real world, they have to adopt as baseline measures departures from that frictionless world. So let me give you a concrete example.

0:21:29 SN: If you want a world in which there’s any kind of role for monetary policy, for example, from the central bank, you need a world in which prices are sort of sticky. And so to get, just like as a first pass, these are what are called New Keynesian kind of models, is that you need models where it’s… Where not all firms can adjust all their prices instantaneously. And so there’s a couple of tricks for getting that one is like a monopolistic competition and like a staggered price setting. And that’s one modeling trick that is kind of becomes almost another benchmark in all of the models that need to talk about monetary policy, because it’s really hard to get a role for monetary policy in a model that doesn’t have that kind of friction. There’s one sort of many canonical model that talks about that. Let me give you another example on the internet.

0:22:23 SC: But sorry, but the idea is that… Your underlying claim is that the very idea of a frictionless model being the good starting point is, it’s so far away from reality that it’s just not even a good starting point.

0:22:36 SN: It’s not even a good starting point or I wonder about it like… Yeah.

0:22:40 SC: I blame Galileo for all this, by the way, in physics.

0:22:41 SN: Oh, yeah? Like how, what?

0:22:43 SC: Well, Galileo overturned Aristotelian physics. Two objects he says will actually fall at the same rate and you can do an experiment and drop a rock and a feather, and they don’t fall at the same rate. And I think that Galileo gets credit for being the first one to say, “But they would if it weren’t for air resistance,” right? And he set that the paradigm of physics that let’s ignore as much as we can ignore and then put everything back in later.

0:23:07 SN: That’s very interesting. I hadn’t heard it dated back to Galileo.

0:23:12 SC: I’m sure there’s a bit of selection effect of giving credit to famous people. But you know, that he was synthesizing things that other people did. But I think that that paradigm of imagining a world without friction, without dissipation and so forth, and then you can build on that to get the real world, I think Galileo gets as much credit for it as anyone.

0:23:30 SN: Got it, interesting. That’s very interesting.

[chuckle]

0:23:33 SC: But there’s no reason why it has to work where things are strongly coupled and non-linear like they are in economics.

0:23:37 SN: Yeah. And it’s also… It kind of feels like it should depend on the problem that you’re trying to solve. For some problems, air resistance is the thing that you actually care about.

0:23:46 SC: Exactly. That’s right. Yes, there’s a whole other limit where you’re moving through molasses, not air, in which you can’t start by assuming it’s frictionless.

0:23:55 SN: That’s at least how I think about it. And I also want to point out there’s lots of ways in which this frictionless world is not just a theoretical construct. It gets embedded into how do we construct various measures of national income. And in government statistics construction, there’s a surprising amount of folk theorizing that goes into even core economic measurement, that you’re always like, “Is that… Should we really believe that?” And so I just wanted to flag that it’s not purely theoretical things, it matters for how we actually measure the world.

0:24:30 SC: Well, and closely related to this minimum wage question is the monopsony question.

0:24:33 SN: Monopsony question, which is I just gave you the short version of that.

0:24:36 SC: Exactly, well, we can use the technical term here ’cause it’s a useful one. I’m sure that everyone’s heard of monopoly, where there’s one company that has all the products. What’s monopsony?

0:24:45 SN: First, let me clarify, so that monopoly power, I guess, is just considered… It’s just that you have some ability to set the price so that you don’t have to take the market price as given. You can instead have some control over what price you set. You’re not… If you change the price a little bit, you don’t lose all of your customers immediately. It’s again, like that 30% sort of thing. You’ll lose some, but not everyone. And so that’s kind of the flip… The monopsony is basically the flip side of that for the labor market, where you think about wages.

0:25:17 SN: Instead of a firm having to take the market wage it’s given it instead has some discretion to set the wage. So let me give you some, and so that’s this like, and one of the things when they do have this discretion, they can manage it and say, “Yeah, you know, I’m going to pay a little bit of a lower wage and accept the additional turnover,” and that same thing I explained a little bit earlier, but let me just give some very concrete sort of real world [0:25:45] ____, so for example, you can go online, you can find these leaked slides from Walmart’s HR program, I’m talking about Sam’s Club and how they set pay, and so it turns out one of the things that’s very interesting in that is that they talk about how if you actually, if a Sam’s Club needs to set a wage that’s really different from the national wage policy, they need to apply to Bentonville, Arkansas for a special exemption.

0:26:09 SC: Okay.

0:26:10 SN: So that suggests that they do…

0:26:10 SC: That’s the headquarters.

0:26:13 SN: The headquarters, yes.

0:26:14 SC: Yeah.

0:26:14 SN: And so that suggests that it’s not the case that every Walmart has to exactly pay the wage…

0:26:22 SC: The local wage.

0:26:24 SN: In that labor market, that’s in fact the national wage policy. Another paper by a co-author of mine and his co-authors, [0:26:29] ____ and Leonard, was looking at this national retailer that basically had a policy that gave you a raise that depended very discontinuously on your previous wage. So if you had, if you were making like one penny over some threshold you were, got a very different raise than if you were making one penny below.

0:26:50 SC: Wow, okay. [chuckle]

0:26:51 SN: And so what you can do is look to see what happens to quits among those, like do workers differentially leave just around that based on the change in the raise that they got. Turns out not that many left when they didn’t get the same raise relative to those that did, suggesting again that there’s again there’s not just a huge responsiveness to the wage in the labor market, but I think what’s also evidence about, this is also evidence for is that the very fact you could have this like weirdo wage raise policy where you had all these discontinuities in it is not just the kind of thing that you think that comes out of a smooth market taking system…

0:27:28 SC: No.

0:27:29 SN: Where you would just have to naturally, it would look like airline prices where you’d have lots of round numbers and the things would be like a much smoother distribution. But the fact that when you look at a wage policy and you see all this bunching and kinking and all of this stuff suggests that there’s a real room for human decision-making.

0:27:47 SC: And isn’t there are also an information problem? I mean, we have the social more that we don’t ask each other what we’re getting as a salary, right?

0:27:55 SN: Yeah.

0:27:55 SC: And that certainly helps the people setting salaries.

0:27:57 SN: It does, it does, and there’s some very interesting studies on this. By the way, I should flag there’s been the great campaign by co-worker.org that’s meant to make these like, kind of online spreadsheets where workplaces can share their salaries and that’s become like an important kind of labor organizing tool.

0:28:16 SC: I’ve actually seen that for science journalists with what magazine set rates are.

0:28:20 SN: Oh, yeah, oh, that’s great, yeah.

0:28:23 SC: They’re not publicly available, but they’re shared. [0:28:25] ____, yeah.

0:28:25 SN: They’re shared, yes. Yeah, so that’s kinda, that’s exactly like creating information about what wages are. There’s also, there’s kind of a great study done by these professors at UC Berkeley, so if you’re at Berkeley, wages are public for all public employees. And so what they did is they actually randomized showing some workers a link to the pay of their co-workers and others not and looked to see the job search and quit behavior of those that got the ability to compare their wages to their peers, and they find that those that are making below what their peers are making are more likely to leave.

0:29:06 SC: Leave a lot more, okay, good. Information is power. [chuckle]

0:29:09 SN: Yeah, so I just think that that’s like kind of some immediate evidence that the labor market doesn’t look like the market for chairs.

0:29:16 SC: No, okay, it’s not frictionless, right, okay.

0:29:18 SN: And there’s not like this law of one price. And another piece of evidence that sort of come out from this big era of big data is this availability of matched worker firm data, that where you can see the same worker being employed by different firms over time and you can see how much of their wage changes depending on what firm that they’re at versus who they are. So you can imagine if the labor market was totally frictionless, the wage would just depend on you, not which firm you were at, because all firms should be in the same labor market.

0:29:47 SC: Right, you have an intrinsic worth and they pay it.

0:29:50 SN: And they pay it, yeah, exactly, it’s like your human capital captures this, it’s priced and every company has to pay the same price for that. So but what you in fact see is that there’s considerable movement of individual workers’ wages, so something between 15% and 20% of the wage variation that we see is explained by the firm that you’re at, not just who you are, and so that suggests that given this reasonably important role for firms that again there’s like this kinda room for all these frictions ’cause that’s a deviation. So I guess I don’t know if that, I don’t know if there’s an analog in physics for the kind of person that’s really obsessed with the frictions [chuckle] versus the kind of person that’s really…

0:30:28 SC: That’s a good question.

0:30:29 SN: Into the ideal, into the frictionless model.

0:30:31 SC: Right, right. I mean, you have to be… Some people you have to do that. But so this leads into the real world question of low wage jobs, there’s been a lot less of rebounding in the low wage sector than the high-wage sector since the financial crisis, if I understand correctly, and some people have blamed automation, other people have blamed globalization, and this sort of labor market stickiness is a different explanation.

0:30:57 SN: Yes, yes, so I want to be clear, a bunch of those other, a bunch of the explanations do have, I’m not going to deny the trade with China has had a huge effect on American jobs and that’s like a big, that is a big factor. Automation I think it’s a little bit premature, I don’t know that we have really amazing evidence that automation has really leveled American employment.

0:31:21 SC: Andrew Yang is very worried about it, we know that, right?

0:31:23 SN: Yes, well, yeah, that’s a… But I feel like it’s kind of, I feel like it’s his fantasy that American capitalism goes through every couple of generations, is like in the ’60s it’s like, “The robots are coming!” And…

0:31:36 SC: Well, it seems to me like a perpetual belief that jobs will disappear because of automation, but it always seems to be true that other jobs pop up, but maybe that doesn’t last forever.

0:31:46 SN: And who knows, I don’t know if that’s like an iron law or that just might be a law insofar as there’s things that humans have a comparative advantage in relative to machines. But I do want to suggest that there’s a way in which the, we also want to flag that we’re currently at record low unemployment, like kind of insanely low unemployment, hot, hot labor market. And yet we’re seeing that it’s really difficult to pick up increases in wages in this period of…

0:32:19 SC: Which again goes against our intuition from Econ 101.

0:32:22 SN: Yes, exactly. And that it goes… It also points against some of the automation and trade stories, because it’s like if those stories were the main thing going on, then you’d expect it’s also… You see it show up on unemployment as well as wages.

0:32:34 SC: Yeah.

0:32:35 SN: While, if it’s… Oh, but if you have really low unemployment, but you’re seeing low wage growth, it brings you to like kind of what’s a different category of explanation. So I don’t want to say that monopsony is like the only or main thing going on here, I don’t know. I do think it is interesting that one of the… A lot of the forces that have countervailed monopsony have just been in slow decline. So like union… So a lot of the things that took the wage-setting power out of the hands of firms have just over 57 years have just declined. And so…

0:33:14 SC: Because of changes in government policy or just…

0:33:17 SN: I would say some of it is changes in government policy, some of it is these other technology and trade things. So you could imagine a big chunk of the effect of trade is via hammering union manufacturing jobs, and part of them were relocating the right to work to the states, and that got hastened by globalization. And once you have more and more manufacturing…

0:33:41 SC: For those who don’t know, right to work is basically like right to not be in the union.

0:33:45 SN: Right to not be in the union. And so just between… And both relentless government hostility to unions, particularly since the 1970s. So you can think of those two things happening together. And so that this erosion of this institution that pushed back against, that sort of curbed monopsony, but also made us think that it wasn’t a big problem, which is an interesting history of thought, kind of thing, that in the 1940s and ’50s labor economists, who are not like the high priests of mathematical theory, but these are the people that were working, you know, they were professors at Harvard and Princeton and Berkeley and they were also employed in the National War Labor Board to like involved in wage setting, involved in union/firm negotiations, and they very much had the idea that the labor market when it was not regulated looked like monopsony, and that firms had a considerable…

0:34:42 SC: So it’s an old idea.

0:34:43 SN: It’s an old idea.

0:34:43 SC: And not exactly the newest…

0:34:44 SN: Yeah, I didn’t invent it, by no means. And it was not invented in the last 20 years, it’s like Joan Robinson, who is in my mind the greatest economist of the 20th century. I just want to say that so that more people look up who she is, and she’s had a very interesting life.

0:34:58 SC: When was she working?

0:35:00 SN: So in the 1930s and ’40s, in the ’50s and ’60s. So she was one of Keynes’ compatriots in Cambridge, and one of the people in that circle of British economics in mid-century. And so she comes up with it. She’s also one of these economists that partly because of who she is and stuff, that’s like always arguing with the Marxists, and so takes their ideas very seriously, but it’s like arguing with them…

0:35:25 SC: Constructive argument, not just trying to discourage, yeah.

0:35:28 SN: Constructive argument, you can kind of see monopsony as like kind of a sort of, somewhat of a genesis of that coming out of some of those conversations. And when labor economists heard about this theoretical thing, they were like, “Yeah, that’s totally right.”

0:35:47 SC: Makes sense.

0:35:47 SN: And so there’s a great quote I love from this paper by Clark Kerr, who was a labor economist in 1950, which is like, “Yes, yes, yes, this theory of like what,” he called it “natural competition,” but monopsonistic competition. “It might be relevant for like laissez faire labor markets, but the labor markets of the future are going to be administered and unionized and so this kind of monopsony thing isn’t really a relevant object of study because we’re headed to a world where everyone’s going to be in the union.” So he wrote that in 1950.

0:36:16 SC: So he thought that the workers would prevent monopsony, basically?

0:36:20 SN: Yes. So he might have got the effect of unionization on monopsony right, but he got the timeframe of unionization totally wrong.

0:36:26 SC: Yeah.

0:36:28 SN: So I think that that’s an interesting history of thought, partly but also because those old, they were called institutionalist labor economists, really got the idea that there is a considerable amount of discretion that firms have in wage setting, that it wasn’t just like this frictionless supply and demand, they had this idea that there was a band of wages, that wages could be set around in this band, and that there was considerable leeway within that band. So that was like a way of adding frictions.

0:36:58 SC: Hysteresis or something like that?

0:37:00 SN: Yeah. Yeah, yeah. So I think… Yeah, not sure how I got back to this. But I think this point that the labor market is a particularly a place where these frictions are important and so if you really care about studying low wages and labor market outcomes, you kind of need to depart from the frictionless model to get it right.

0:37:25 SC: Yeah. And is my vague feeling correct that organized labor has just been declining in power for decades?

0:37:30 SN: Yes. Yeah, absolutely. It takes a particular sharp downturn in the early ’80s, some of that’s the ’81 recession, some of that is just generic employer, like employer hostility. It’s something that’s actually a paper I’m working on is just trying to document this change in norms that just seems like, you have all of a sudden this tip in norms among employers, where before they were kind of playing softball with unions, they’d be like, “Okay, well, you can go on strike, we won’t fire you.” Even though they had all kinds of legal powers to fight unions with more vigor, they didn’t use them just because of the norms against them, and then that just flips in the ’70s. They all of a sudden become like, “Alright, truce is off, we’re now going to fire workers during strikes and replace them with permanent replacements.”

0:38:08 SC: And the Reagan administration certainly helped that along.

0:38:08 SN: And the Reagan administration is kind of like a green light to jumpstart that. So I think that’s all part of the sauce of what’s going on, I don’t know that, anything… I mean, there’s also structural ways in which American and British and Australian unions are organized that makes it hard to imagine how they could come back in the form that they existed, because they’re organized on an enterprise basis, rather than on a whole labor market basis. In Europe, unions are sector-wide and they got everyone’s in them or everyone’s at least covered by them. And in the US, it’s been this firm by firm kind of organizing model, and that’s just a really uphill battle for unions. I don’t know that unions are going to come back in the form that they looked like. I do think something like them needs to come back to sort of… If something that curbs the use of monopsony power by firms needs to…

0:39:37 SC: Well, I was going to ask, is that your prescription, is there a best way to fight against this monopsony power?

0:39:42 SN: Yeah, I do think that some sort of way of workers getting a substantial voice in how wages are set collectively. And what’s important about… It’s difficult for the government to do it. The government can impose a minimum wage, but one of the things that the government can’t know is exactly A, what’s the mix of wages and benefits that workers want; B, how much of that mix of whatever workers want are consistent with the firm’s business model and them making profits. It’s one reason why kind of unions are kind of a better solution than government regulation in lots of places because they can customize the terms of a collective bargaining agreement to the particular needs of that workplace and those workers.

0:40:33 SC: So it’s still the free market, it’s just that there’s some organization on one side?

0:40:37 SN: Yeah, so you can think of it as… I don’t know, I feel like most people that would say it’s the free market would say, well, if you have to negotiate collectively, then it’s not free. But you kind of want it to be collective because you need that kind of balance of bargaining power on both sides. It has to be all of the workers at once.

0:40:52 SC: Maybe there’s another term for… It’s not the government doing it.

0:40:56 SN: It’s not the government doing it, it’s decentralized. I would say it’s decentralized, then it’s bottom-up, but it’s not free market, I guess it’s…

0:41:04 SC: Well, okay, good. This raises a whole bunch of deeper things. We’ve successfully covered what I wanted to be the second half of the interview in the first half, so that’s good, that’s fine.

0:41:14 SN: We can go back to the first half.

0:41:16 SC: No, that’s how we roll here at Mindscape. We just follow the flow of the river. I mean, the free market capitalism. How do you feel about these things? How should we feel about these things? Let’s be big picture and ask, certainly, there’s been enormous successes, there’s been dramatic failures. I feel that there are people who are very, very pro-free market who love to bring up spectacular failures of central planning and there is exactly the opposite. There are people who are very anti-free market who love to bring up the spectacular failures of capitalism, and there’s fewer people sort of talking to people who are very… Who are close to them, but slightly different across one divide. Do you have a big opinion about this stuff or does the economics profession have big opinions about this stuff?

0:42:02 SN: Yeah, no way, the economics profession does not… I think it’s almost like a condition of membership is not allowed to have an opinion about capitalism.

0:42:10 SC: No, I thought you loved capitalism.

0:42:12 SN: Well, yeah, generally, it’s like pro, but it’s the kind of thing that like, “Oh, we’re trying to be scientific, we’re just going to say… “

0:42:21 SC: It’s like cosmologists being asked about the existence of God.

0:42:23 SN: Yes. Okay, a couple of things. One is, no one should deny that the success of capitalism in raising material standards of living has been kind of amazing in a world of historical break and Cosma Shalizi, another SFI professor, has a great line which is like the singularity already happened. And it was the industrial revolution. And we basically… Let these eldritch forces loose and one of those is kind of letting people buy and sell stuff out of arm’s length transactions, and that kind of very… Being a really great way to coordinate people’s wants over very long distances.

0:43:15 SC: People can look online, there’s this charming short video with you in it, where you’re complaining about the lack of WiFi on the train in London, and they you go, well, but then again, 800 years ago, they were dying of dysentery and eating gruel, so I shouldn’t be complaining.

0:43:27 SN: Exactly, exactly. So that’s part of this textbook project, which we should talk about. That’s what irritates me to no end is when anti-capitalists sort of somehow pretend that it was better before capitalists. So I have no sympathy for that argument. An argument I do have some sympathy for is that that’s not the right counterfactual. The counterfactual we should always be thinking about is how this is performing relative to what some other thing that we could have. Looking to the past doesn’t generate the right counterfactual; what you want to think about is another possible future. And do there exist other economic organizations, ways of organizing the economy that, given the technologies that we have, that might actually be a better fit and might result in more human flourishing, less inequality, more environmental sustainability, all these good things that we want. Could we do better? And I feel like we don’t do ourselves a lot of favors by pretending that the thing that we’ve got is the best that it could possibly be.

0:44:33 SN: And a friend of mine, Glen Weyl, says it’s like an engineer looking at the telegraph and thinking, “This got to be the best way to communicate, guys.”

0:44:38 SC: We perfected it, yeah.

0:44:38 SN: Yeah, we’ve got it. And we should as social scientists, as citizens be thinking about doing things better. And some of that’s just policy fixes within the orbit of capitalism and we can talk about lots of those, and that’s things like healthcare and antitrust and minimum wages. And some of them might involve things that kind of strike more to the core of what makes capitalism distinctive, which you can think of as making private property a little bit more of an elastic concept. You can imagine in an economy where the biggest resources are ideas that putting those in the shackles of private ownership and in patents and in monopoly rights, it’s kind of not necessarily doing ourselves the best, giving ourselves the best chance of success.

0:45:38 SC: Well, and these days when you can patent or copyright genes or algorithms and things like that, it seems bizarre to me. It seems… Maybe that’s exactly what you’re saying. It’s not a comfortable fit, where we [0:45:48] ____ to these concepts that were brought up in the context of…

0:45:51 SN: Agricultural manufacturing.

0:45:53 SC: Farms and cows.

0:45:54 SN: Yeah, yeah, or even like…

0:45:55 SC: Or mills.

0:45:56 SN: Trading widgets. And that when you have these goods that are like as symbols, almost like future of resources, they’re a high fixed cost, zero marginal cost kinds of goods that shackling them with the institutions of capitalism, maybe it’s not a great fit. And then other people that are pro-capitalist will say, yes, that’s what’s been said at every technological change is that capitalism is no longer a good fit, and what you’ll always see is that it winds up sort of still doing a better job than any other system, so.

0:46:32 SC: Because private property and property rights are like the central tenet.

0:46:36 SN: They’re definitely like a big part of it.

0:46:40 SC: I do think… Let’s just be a little pro-capitalist for a second.

0:46:44 SN: Yup.

0:46:44 SC: I think of it as a search strategy, right? In some way, capitalism is a way to find a certain kind of equilibrium that has good properties. People are innovative. They try to do better, they have incentives pointing in the right direction. What is your pro-capitalist sales pitch for someone who’s never heard of it?

0:47:02 SN: I think that’s right. I think it’s like the idea that the way that you get prestige and status and material resources in capitalism is by making things that other people want to buy.

0:47:14 SC: Yeah.

0:47:14 SN: And that’s a real break from how human history did it before, which is like you killed lots of people or like, or you conquered lots of territory or something. And so a real institutional break is making the basis of social reward providing useful things to anonymous strangers.

0:47:34 SC: So it’s more of a win-win, right?

0:47:34 SN: It’s more of a win-win, and so that’s…

0:47:35 SC: You benefit yourself by doing things that benefit other people.

0:47:37 SN: And that’s kinda… I mean, if you put it abstractly like that, it’s like what a great thing.

0:47:41 SC: Sure. [chuckle]

0:47:42 SN: I think the limitations of that is that there’s other things that you can do that are really profitable under capitalism that don’t involve making useful things for other people.

0:47:54 SC: Well, I wanted to sort of talk about the term “rent-seeking” because it’s used as sort of an epithet, but I think probably most people in the street were like, “Well, yeah, people own property and they rent it, what’s wrong with that?”

0:48:05 SN: Yeah. [chuckle] So we should back up and define concepts. So rent technically in economics is just defined as like a payment for something above and beyond its next best… It’s payment that I would guess, and there’s a next best alternative. So I’m making rents as a professor if I’d be willing to do this job for one-tenth the salary. And so then, everything above that one-tenth of my current salary is rents.

0:48:32 SC: Okay, that sounds like a bizarre…

0:48:34 SN: Right.

0:48:34 SC: Construal of the word rent.

0:48:36 SN: Yes, but it’s not completely alien to the traditional use of payments for land, because the idea was that an opportunity cost of land is zero. It just sits there, and so that’s why landlords are like often the worst people in history. It’s like, “Why are they like that?” [chuckle]

0:48:54 SC: We’ve all met them, yes, we’ve all met them.

0:48:55 SN: Yeah, it’s just like you’re… And why they’ve often been called like social parasites is that you’re just… There’s… Like a pure landlord in pure form is just sitting there collecting rent, while the land that they own purely by virtue of a property right doesn’t actually… They’re not actually doing anything to produce that value. And you can imagine in the real world, they’re developing and doing stuff, but that’s not the pure landlord function, that’s a developer function.

0:49:22 SC: That’s what I’m going to say. Like I mean, to just be fair if there’s any landlords. In fact my friend, Karen, if you’re listening out there. Of course, real world people are often much better than just sitting in their home collecting the rents.

0:49:35 SN: But I think conceptually, you can split apart the like…

0:49:36 SC: Yeah, it’s a different role.

0:49:39 SN: The development and maintenance of a house with ownership rights of the land on top of that house.

0:49:43 SC: Yeah, that’s right.

0:49:47 SN: And so that’s why it’s like the opportunity cost of land, pure land, was zero and so all of the payments going to land were considered rent.

0:49:54 SC: And somehow… But it’s become a way of conceptualizing a certain kind of bad behavior under capitalism or a certain way, it doesn’t work? I don’t know what to say.

0:50:03 SN: Well, sometimes it’s used that way. I think in CORE, in this textbook project, what we try to say is that there’s productive… An entrepreneur starting a new business, seeing that there’s some service that could be offered that’s not being offered and starting a business to do that, they’re rent-seeking. But that’s because there’s a rent there that’s like a gap between what the things that are… That that person’s time and the cost of those materials and all of that, and what they could be getting by producing this good and selling it, so they’re getting a rent by supplying this market thing.

0:50:38 SC: Okay, it doesn’t sound like it’s such a bad thing in that sense.

0:50:40 SN: And so I think there’s productive rent-seeking in that like a lot of innovation and a lot of entrepreneurship is in fact chasing rents too as a part of making the market work. And that’s part of how markets work is that people inside the market are chasing rents all over the place and trying to meet people’s needs and lower costs and things like that. And so there’s a very… We shouldn’t prejudice the term rent-seeking as necessarily a bad thing. Although I think, when it is used in a prejudiced way, it’s often referred to kind of like artificially raising barriers to entry, like engaging in the kind of activities at a zero sum so that you’re like trying to raise your share of a pie at the expense of someone else’s rather than trying to grow a pie.

0:51:26 SN: But I think that’s how it’s used in a pejorative way, but I think conceptually, we can sort of say it’s just like trying to get something, trying to get a flow of income that’s higher than your opportunity cost. And just to put a pin in it, that opportunity cost is a pretty metaphysical idea, so it’s very… [chuckle] So it’s… We say rents very casually, but actually operationalizing what’s a rent and what isn’t is a…

0:51:56 SC: I mean, this is an issue, I think it’s an issue in physics as well, where we use words like energy and dimension and time in a different way than people use them on the street. In economics, we also use words and struggle over their definition. There’s a very related word I wanted to get to, that I know you and other people were feisty about on Twitter recently, namely neoliberalism. And of course, it starts with the word liberalism but then it’s neo, and I think that maybe it goes back to Reagan and Thatcher-era things, but some people use it to mean Bill Clinton and Tony Blair, and some people just use it to mean everything good or everything bad.

0:52:31 SN: So, I find there’s a very clear statement of it is in a 1950 article in Milton Friedman, where he actually just literally explains what the doctrine of neoliberalism is, and it’s not libertarianism, importantly, it is not just…

0:52:44 SC: So libertarianism would be the more pure free market.

0:52:46 SN: More pure free market, no need for a state, even. We don’t even need police, for example.

0:52:50 SC: Or the night watchman, or…

0:52:51 SN: Well, so, I think the night watchman state might be on the outer edges of neoliberalism and… But then in Milton Friedman’s article, he really does talk about the functions of government should be to not distort the market. But that also means that it needs to provide antitrust and might need to do some sort of basic income provision. And so that’s why…

0:53:17 SC: So, like a UBI, like universal basic income type of thing.

0:53:20 SN: Yeah, so I don’t think he uses the term, but I think he’s not unopposed to the idea that the government’s doing some non-distortionary redistribution.

0:53:28 SC: Milton Friedman, radical leftist.

0:53:30 SN: Well, [chuckle] yeah, but I think it’s very important, and this is where it started with Econ 103 and Econ 104 is that the broad view of neoliberalism is like the open markets is just free money and it’s just always going to be, it’s both good for prosperity, it’s fair on its own rights. Like what you get in the market is pretty close to what you might deserve. And we might need to fix it, like with these very particular tools, like we might need to in some places make it a little bit more competitive or we might need to undo the worst excesses of it by redistributing to the poor. But the idea that you would broadly have to have the government intervene in a variety of places inside the economy was like, they were like, no. So in particular, regulations and things like that were seen as not particularly necessary because the market would fix it.

0:54:35 SC: I guess. Yeah, I’m still little unclear in this one.

0:54:39 SN: Yeah, so let’s talk through it.

0:54:41 SC: I don’t think the word should even be used, ’cause people mean different things by it, but…

0:54:43 SN: But… Okay, so let me give you… I think a very clear, I think, which is just this broad confidence in markets as the baseline mechanism for organizing the production of…

[overlapping conversation]

0:54:55 SC: But I guess I want to get at if the government passes a rule that is sort of safety standards for factories. Does that distort the market?

0:55:02 SN: Yes.

0:55:03 SC: So explain why.

0:55:05 SN: Imagine… Let’s take a ridiculous example…

0:55:07 SC: Sorry, ’cause I’m trying to contrast that with literal central planning that says, here is the cost of this good.

0:55:17 SN: ‘Cause we can come up with ridiculous regulations, and so there are some regulations that… So a good example is zoning restrictions in California.

0:55:29 SC: Mm-hmm, oh, my goodness.

0:55:31 SN: Where endless numbers of people have pointed out how these restrictions on where and what you can build are causing all these other problems, and so there’s a very neoliberal take to them, take on that, which is like, get rid of them. And then there’s a less confident and less articulate thing, which is that, well, some of them might be there for a reason, and we can’t just necessarily presume that they’re all bad because they are restrictions on market. That there are some restrictions on markets that are in fact good, even though they are distorting and even though they are deviations from some sort of a more efficient benchmark, because of either the kinds of communities that they support, because of the political coalitions they allow, because of something else, potentially non-economic. And that’s an argument that we can have is the neo…

0:56:29 SC: So maybe I’m beginning to get it in the sense that something like a safety regulation, a rezoning restriction counts as a distortion of the market because it’s saying, here’s something you can’t do in the market, right?

0:56:40 SN: Here’s some voluntary, mutually improving transaction that we, the government will say that you cannot do.

0:56:46 SN: Right, ’cause I could build a really, really deadly factory and people might want to work in it and the government’s saying, “You can’t do that.

0:56:52 SN: Yeah.

0:56:52 SC: Okay. Got it.

0:56:53 SN: Yeah, and my favorite, just to come back to… It’s like my favorite example of a bit of the Constitution that rules out. Some of this is actually the 13th Amendment, which says that I’m literally not allowed to indenture myself. I can not sell…

0:57:08 SC: Even though you would willingly enter in that transaction.

0:57:09 SN: Even though I might be willing and, that was very conscious of the time because there was Mexican peons in the New Mexico territory that were in debt bondage, and that was one of the things that was coming up was like, are they covered under the 13th Amendment, ’cause they’d voluntarily…

0:57:27 SC: So you have issues with neoliberalism.

0:57:29 SN: Yeah, I guess so. I think it’s also one of these things, it’s way past its sell-by date. And it was also just like, when I just think of the origins of so many of the social problems that we’ve got now, I just feel… Like it just feels like the history is borne out that a lot of those can be laid at the feet of policy reforms that were conducted in the name of neoliberalism in the ’70s, ’80s and ’90s, and even up and through the Bush and Obama administrations. So that’s why that ideological label is, some people see it as so elastic, but some people say it’s like, no. There was a real tendency and a real commonality that went through all of those administrations. And this is the name that we give to it.

0:58:15 SC: And one of the things, this is just physics prejudice showing through, but one of the things that fascinates me is the relationship of various economic doctrines, capitalism and nihilism, neoliberalism, for example, to time, right? And one of the big counterarguments against neoliberalism or capitalism, maybe, is that it has led to disasters of climate change because of [0:58:39] ____ kind of things, and we need to move beyond this sort of just adjust to what the market wants, if we’re going to serve future generations. But then there’s a big philosophy question like, on the one hand, how much do we owe to future generations? And on the other hand, previously guest Astra Taylor, brings up this question of, why do we pay so much attention to the wishes of previous generations when people have their wills that are distributed in certain ways or inheritances in certain ways?

0:59:08 SN: And dead trust funds.

0:59:09 SC: Is there a way that… Has this been properly theorized, the relationship of economics to future and past generations?

0:59:18 SN: So there has been a lot of theory about… So, here’s an intuition from economics that probably other people haven’t thought of is that one of the things that you also get is that future generations are also going to be richer than us, just because of technological change and…

0:59:33 SC: One hopes, yes, right.

0:59:34 SN: Yeah. So for any given level of climate change, there’s some ways in which like future generations…

0:59:41 SC: They’re better equipped.

0:59:42 SN: Might be actually better off, might have more tools to deal with it, or in any case might be richer. And so I’m not going to… I don’t necessarily think this, but there’s some arguments for saying that if you are going to do these trade-offs across generations, you might want to also take account of the kind of income inequality across generations, because we are poorer than our future, than future generations are going to be. So maybe we’ve earned a little right to…

1:00:13 SC: Unless we destroy the planet…

1:00:14 SN: Unless we destroy the planet. So, it’s good that you said that, ’cause it puts a finger on a real deficiency of the way economists think about things, which is that we’re always thinking in terms of smooth optimization problems. And so there’s like, “Oh, there’s always some margin on which you could shift a little bit more here versus there,” but if you’re dealing with these systems that have these big [1:00:33] ____ and cliffs and things like that, then that kind of thinking at the margin, that economists are kind of trained to do, doesn’t work super well.

1:00:42 SC: It’s less appropriate.

1:00:43 SN: It’s less appropriate. Yeah, and so that’s, I think, a pretty deep, I think, criticism of economics is that this really focus on thinking about what you can do at the margin, where you have these kind of… You can always move a little bit from choice A to choice B, and so you just have to pick in between them, fails when you’re just like, “Nope,” it’s like a big gap in pass. And so, you need some other decision calculus to…

1:01:07 SC: Well, yeah, that’s the opposite of I guess, Tyler Cowen was a previous guest on the podcast, and he has this point of view that the best thing to do, the morally best action is just to maximize economic growth. Because compound interest, it catches up, and also we should not discount future generations at all. They are people just like us. I made him slightly disgruntled by calling him the temporal version of Peter Singer, ’cause Peter Singer says we should count people far away just as much as these kind of future people, but I think it makes sense to me to discount future generations ’cause so much uncertainty about what things will be like. How can we possibly think that we’re accurately judging what the future generations are going to have or not have?

1:01:50 SN: Yeah. So, I think the uncertainty makes it complicated, but then you get into these insane kind of calculations that effective altruism people do of the risk of AI. So, basically, once you start discounting for enough in the future.

1:02:03 SC: They’re insane, but we have to do them.

1:02:05 SN: I’m sorry?

1:02:06 SC: They’re insane, but we also have to do them in some sense.

1:02:09 SN: So we do have to do them. But I think the idea that you can… It feels like you’re doing a lot of division by small numbers, and so you can make small quantities blow up by dividing by like a really, really small number.

1:02:20 SC: You’re multiplying really big numbers by really small numbers, you can get any number you want.

1:02:24 SN: You get any number you want. So you’re in that space with a lot of these future discounting calculations is it feels like, again, the tools of trying to think about the trade-offs aren’t really well-suited to that because the scales are just like up in the air, so we just have no idea what the magnitudes are. So, thinking quantitatively about trade-offs at 10 generations from now, I’m not sure is super productive.

1:02:49 SC: Yeah, so I take your point that there’s sort of an attitude that says that future generations will on the one hand be better equipped, on the other hand know more about what’s the situation is. So maybe they should handle it.

1:03:00 SN: But I also think it’s mood for climate change. Like we’re not exactly… We’re here.

1:03:02 SC: We’re already feeling it.

1:03:06 SN: My life is materially worse because of climate change, it’s like…

1:03:09 SC: I live in California, so.

1:03:10 SN: Yeah, so I feel like all this like, oh, how much do we wait, the generations of the future, it’s done. That was a 15 years ago conversation.

1:03:18 SC: Okay, fair enough. But I like the, still, the analogy of inequality of the present to the future, because… So, let’s go back to the present. And there’s inequality now, and this has been a long-standing thing among economists. They measure progress by GDP or something like that, and less by how the worse off people are doing, is there more… Am I crazy in thinking there seems to be more attention now paid to issues of inequality?

1:03:48 SN: Yeah, absolutely, absolutely. A Nobel Laureate, in my first year of grad school, 2004, at Berkeley, I went. It’s like, I’m interested in studying inequality. And he was very smart, he said, he’s like, “Nobody really cares about studying equality, except the French, the French really like studying inequality.” And he was absolutely right about one of those things. But I think obviously that’s changed, I think Occupy Wall Street played some role. I think Bernie Sanders. I think the actual just continuing increase of inequality has done its own work. So, sorry, go ahead.

1:04:31 SC: Let’s not let that go by too quickly. It is fairly agreed upon that in the last some number of years, maybe you should tell me rather then me guessing, inequality has been increasing.

1:04:40 SN: Yeah, no, I think nobody can deny that inequality has increased over the last 40 years.

1:04:45 SC: Yeah, In the US, in the UK, in almost everywhere, although the magnitude of the increase is much muted in the continental countries. People will argue about exactly how much and there are calculations you can do that can get you a range that is… Looks like… Oh, it wasn’t so bad, or it was enormous…

1:05:14 SC: But it’s gone up more in the more neoliberal countries.

1:05:16 SN: Yes, it has gone up more in the more anglo countries, almost for sure. It’s also gone up a lot, though, in developing countries, so countries that have grown a lot, like India.

1:05:22 SC: No, but I said neoliberal countries.

1:05:23 SN: Yeah, yeah, yeah, so I think, that’s that. And so one of the interesting I think recent areas of research is the stuff pursued by Piketty and Saez and Zucman that’s come out of that whole French research program, which is the idea of distributional national accounts, which is that instead of just keeping track of the aggregate GDP of a country, let’s keep track of it by percentile. And so then you get an easy statistic, which is look at median GDP instead of like mean. And median will just get you pretty much the sense in which the 50th percentile is doing, and that’s not a bad proxy for also capturing how evenly distributed the growth is.

1:06:05 SC: And it’s a nice kind of marketing ploy, ’cause no one can argue with collecting more data or paying attention to more data, right? It’s not normative.

1:06:12 SN: Well, people can argue, just like it comes in with the national accounts, you can… A lot of folk theory goes into the construction of the measures, and so you have to argue a lot, on both sides… Lots of people are arguing about what are the folk theories that are going into constructing these statistics and so that’s where there’s an active argument on Twitter and things like that, and so.

1:06:41 SC: Choosing what to pay attention to is a big choice, it’s not innocent.

1:06:44 SN: Yeah, yeah, exactly. And what assumptions you make about allocating dollars and things gets into the weeds and it matters.

1:06:51 SC: Okay, but anyway, inequality is increasing.

1:06:52 SN: Yeah.

1:06:55 SC: Probably we should do something about that. I guess people’s opinions will differ on how much it’s a problem.

1:07:00 SN: People who… I think there are lots of people who think like, no, we shouldn’t do anything but to… [1:07:01] ____ Well, we should just pick poverty. Lots of people think that.

1:07:04 SC: What do you think?

1:07:06 SN: I think you don’t get a flourishing society with insane amounts of inequality.

1:07:15 SC: So let’s just, again, lay it out there, there’s certainly, I think that my youthful self would have been guilty of saying, “Look, if everyone is better off, it doesn’t matter that some people are way better off, it’s still better, right?” So is there an intrinsic value to equality?

1:07:29 SN: I just think there’s lots of things in… There’s lots of dimensions of things that are important, that are in fact zero sum, and so when you have this kind of… Even just something very basic, like relative status in society, is basically kind of a thing, that you… Because relative, it’s got to be zero sum. And so when you have enormous income inequality and it’s roughly correlated with this, it means that some people are very low status, and that’s just not great for a good, healthy democratic society. And so, that itself is a reason… Once you have some things that are zero sum, that are correlated with, that come along with income inequality, that’s a good reason to reduce the income inequality, and so those zero sum things can include relative status, they can include political power, they can include cultural representation in society, there’s a bunch of things that are not just expanding the pie, but where the distribution of the pie really means that some people are made worse off.

1:08:24 SC: And is the solution to this as simple as changing the tax code, wealth taxes or inheritance taxes or just a more progressive tax system?

1:08:31 SN: I hope so. Because the only other thing is we either do it through policy… Here’s the bet is that the only way in which we’ve seen inequality of this type fall in the past is with social catastrophes.

1:08:44 SN: Yeah, okay.

1:08:45 SN: And it’s either an internal revolution or it’s external war or… Walter Scheidel has a book, The Great Leveler, that makes this point, but here’s the bet, which is that we are progressed enough as a society, as a civilization, we have enough tools of government and enough tools of reason in the society that we can actually use policy to reduce inequality without having to go through a war.

1:09:13 SC: Right, so that’s hope slash aspiration.

1:09:15 SN: So that’s… Yeah… That’s one of the reasons for thinking about the goals as like a wealth tax and these things is like, “Look, guys, we don’t have to worry about millions of dead people, if we can actually get these relatively mild policy things into play.” And you can imagine similar with climate change, it’s like one way or another, the climate is going to fix us.

1:09:42 SC: A human brain just isn’t meant to think to reason on these time scales. If someone is very wealthy right now and has never seen a revolution in their lifetime, the prospect just doesn’t seem real to them, right?

[laughter]

1:10:01 SN: And so, maybe it’s for their own good that we’ll take it from them, but I think that’s the thing, it’s like, yeah, they will fight it. And hopefully, the idea is that if doing it through the democratic process is a way to get it peacefully to do it, like while maintaining democratic institutions. And so…

1:10:20 SC: We’ve certainly see the eyes grow wide among the cohort of wealthy Democratic donors at the prospect that Elizabeth Warren could get nominated and start taxing their wealth…

1:10:34 SN: And I mean, good, it’s good, I think it’s a…

1:10:39 SC: Someone said on Twitter if the rest of us had as much class solidarity as the billionaires do, we… [1:10:45] ____.

1:10:45 SN: They call each other on the phone and tell each other the…

1:10:46 SC: Exactly.

[chuckle]

1:10:48 SN: Yeah. One of the things about the wealth inequality thing that I think Piketty and others have made apparent, which is actually something I learned at the Santa Fe Institute a long time ago, which is this idea of Gibran’s law for wealth, that basically because assets have these stochastic multiplicative returns so they just kind of grow at a random rate, that that can get you an extremely skewed [1:11:19] ____ distribution of wealth.

1:11:23 SC: And so these parallels are just very natural outcomes of network processes building on each other?

1:11:29 SN: Yeah, it’s cumulative processes, but yeah.

1:11:32 SC: And that explains why a good old revolution is the best way to…

1:11:35 SN: Yeah, that is the other way you get it, or you can think that what you do is you damp down the growth parameter, and you’re never going to get rid of it, but you can slow it, by taxing wealth, you’re kind of curbing that growth that’s happening every year and sort of letting… It’ll still get out into a parallel, but just the thinness of the tail will be less. It’s…

1:12:00 SC: So the sales pitch to the wealthy donors is you’d rather have a wealth tax than the guillotine?

1:12:04 SN: Yeah. [chuckle] I think they know that at some level.

1:12:07 SC: Probably know that, but…

1:12:08 SN: I think at another level they’re like, this isn’t the society they themselves grew up in. And I think they feel some… Some of them at least might feel some guilt for that.

1:12:18 SC: At a more practical level, do you have a favorite strategy? Maybe wealth taxes serve some purpose but there’s other things to do also?

1:12:25 SN: Like I said earlier, I think something like the labor movement has to come back both for political reasons, because it was a way for so many regular people to have their voices aggregated, to be expressed politically, it trained so many working class people to run for office; it was just like this broad-based kind of institution that when, in the ’50s had 35% of the American workforce in it that just did a lot to compress the income distribution, and I think when I think of what I’m committed to is trying to figure out how to use social science and things to help resuscitate something that looks like a labor movement.

1:13:07 SC: Are you personally in favor of a basic income?

1:13:10 SN: I think not really. Actually, it’s an interesting idea to play with. I wouldn’t be opposed if we got it, but I do think there’s a way in which we’ll, A, see a lot of the gains undone by monopoly pricing, and secondly that there’s a real sense in which work and the fact of having to go and interact productively with people that are not like you is just like a real great glue for…

1:13:39 SC: Don’t you think… I mean, I’m completely open to this possibility. My mind is very open about UBI and I’m glad that certain local jurisdictions are experimenting with it, ’cause you can collect the data, right? But I think almost everyone will still work even if they had a basic income, right?

1:13:52 SC: Yeah, that might be… In which case… I think that’s fine, then it just becomes like a, it’s not a transformation of society in any way; it’s just like a little extra cash.

1:14:04 SC: You raise the floor for the people who don’t.

1:14:07 SN: But if you’re not raising the floor enough to get some people to opt out then you’re not raising the floor that much.

1:14:15 SC: Yeah, maybe, I’m literally thinking of people on Skid Row in Los Angeles who could afford a studio apartment if there were UBI.

1:14:23 SN: Yeah, I think there’s a lot of that. My optimist side would also think that a lot of the other pathologies and pain that comes with being poor would be less if you were just less poor, and so…

1:14:39 SC: Giving people money…

1:14:41 SN: Not a bad idea, and…

1:14:42 SC: But it is expensive, I get it.

1:14:44 SN: Yeah, it’s not that… You could do a UBI, maybe not this year, but in 10 years, American society could easily afford a reasonable UBI. In fact, there’s a very easy way to do it right now, which is just take the Earned Income Tax Credit that we already do, and then just like, so my friend [1:15:04] ____ proposes; make it so that you don’t get zero if you’re not working, you’re just getting some positive amount, but then if you work more, you get even more via the ITC. Then that disincentives, like then people get a basic income but there are still some additional incentives to work, and that might actually be both the kind of the best of both worlds.

1:15:24 SC: Yeah, okay. It’s time to wrap up, but I want to give you an opportunity to promote at least two different things: One is the idea of economics for inclusive prosperity. Did I get that right?

1:15:36 SN: Yep. The idea of that was me and Dani Rodrik and Gabriel Zucman were at a conference with intellectual historians and sociologists, it was at CASBS at Stanford, and it was about neoliberalism and all of these other social scientists were like, “Economics is responsible for neoliberalism.” And we were like, “What are you talking about?” And basically, so, we started this initiative to just collect policy ideas and get a group of economists that were doing progressive policy, that were doing work in progressive policy circles, but it just wasn’t getting heard in either policy makers or even other social sciences. And so we were like, “Let’s put up this flag that suggests there is in fact at least a community of economists that are non-neoliberal,” and…

1:16:26 SC: Well, good branding goes a long way, just letting people know.

1:16:28 SN: Yeah. And see what comes up. And so that was kind of our… And we’ve gotten some really… I mean, some of the policy memos are really fantastic that people… And it’s also giving people like economists that have really great ideas that…

1:16:42 SC: Sorry, what does it mean, inclusive prosperity?

1:16:46 SN: It’s a generic nice thing. It’s like who could be against inclusive prosperity?

1:16:51 SC: Exactly, yeah.

1:16:51 SN: But the idea that like economic growth, it’s not enough to just consider the level of economic growth, you also want to consider its distribution, and you don’t just want to consider economic growth narrowly as GDP, you want to consider the broad measures of human flourishing…

1:17:05 SN: That ideal we talked about.

1:17:10 SN: But yeah, and the price of entry is one of these 5 to 10-page policy memos that builds on your research or something you’ve worked on and talks about an idea for either a policy maker to run with or just a view on a way to make the world better. And so these policy briefs that have come back have been really fantastic and really interesting. So, I just encourage everyone to go check it out at econfip.org.

1:17:39 SC: Alright, we will link to it in the show notes. That sounds great.

1:17:40 SN: Okay, and what was the other thing you wanted me to…

1:17:42 SC: Well, sorry, before we go onto the other thing, it does remind me… I wanted to just ask a little bit about the duty that you have as a social scientist or an economist in particular. There was just a conference in Santa Fe, I don’t know if you were there.

1:17:55 SN: No, I missed it. Yeah.

1:17:56 SC: It seemed to be, from the live tweeting, there seemed to be a lot of ragging on economists, on the basis of abandoning their social responsibilities. You know, Geoffrey West said like, “Why aren’t economists leading the battle against climate change?” And so I’ve always thought that it’s perfectly okay to be a scientist, even a social scientist, who just tries to describe what happens in the world. But it’s also okay as a field, there might be an obligation to intervene constructively in some ways.

1:18:32 SN: Okay, so what’s the social obligation of economists?

1:18:35 SC: Well, I don’t know, so I’m asking you if you think that there is one. Do you think that if you have…

1:18:40 SN: Do no harm.

[chuckle]

1:18:41 SC: Well, yeah. Do no harm would be would be a good one. I guess the argument I buy is that there are experts who have a certain kind of special expertise and if it’s clear that that particular kind of expertise could be deployed to make the world a better place, that at least some fraction of people who have that expertise should do that. Very milque-toasty statement, but…

1:19:03 SN: Yeah, so I think that’s true and I think that does happen, I think you’ll find that economists are much more involved in policy-making than almost any other social science. And some of them are, I think, working on climate change… Like my colleagues here work on climate change all the time. I don’t know that we have more of a responsibility than physicists.

[laughter]

1:19:39 SC: Yeah, no, actually, neither do I. I think the philosophy that I just outlined, and I don’t necessarily hold very strongly, I’m just trying to figure it out myself but… I think that for the most part, academics, intellectuals, scholars should try to say true things about the world. But that’s right next to doing good things in the world, and I admit that there’s a connection there.

1:20:05 SN: I would be happy if we just restricted ourselves to saying true things about the world. So, it’s partly that the field has been so… Is, has been, it’s ideologically riven in a way the most fields are not. Partly, it’s ideologically riven because there’s actual conservatives in economics in a way that there aren’t in lots of other fields.

[chuckle]

1:20:24 SC: Right.

1:20:25 SN: And so, there are actually political disagreements and they’re often… So I have a paper on this how you can actually predict using the language of an academic article, you can do a pretty good job predicting someone’s campaign contributions.

1:20:38 SC: Interesting. Okay. Yeah.

1:20:38 SN: And in economics, because…

1:20:40 SC: Well, because it really reveals some of their values in some sense, right?

1:20:42 SN: And yeah, so you’re going to have people with diverging values inside the same discipline, and I don’t know that the discipline should say, “No, everybody should be doing… “… If you have these divergent values and real disagreements over things.

1:20:57 SC: Well, but the valence goes either way. If someone legitimately believes that there’s something that would make the world a better place, the question is then, whatever that thing is that they think would make the world a better place, is there some obligation to do it? I don’t think that there’s a individual-level obligation, but maybe there is a discipline-wide obligation.

1:21:15 SN: Yeah, so I think if the discipline agreed on what those things were, it would be a decent… But I don’t know that we agree.

1:21:21 SC: That’s probably it. And the other thing was, you mentioned a textbook.

1:21:24 SN: Oh yeah, so I’m part of this big open, me and Sam Bowles and others, and many other people in the circle of Santa Fe, the Santa Fe Institute, have been for a long time involved in a textbook project called CORE. It’s core-econ.org, and it’s basically a big online open source textbook that’s not just a usual way of teaching. It’s aimed to be an introduction to economics textbook, but it really presents introductory economics in a way that’s really different from every other textbook. And every other textbook is kind of the same to each other and what we’re really trying to do is trying to say that economics is not just supply and demand. It’s not just the frictionless model. And so how we try to teach it, and Simon DeDeo, another SFI person, drew the analogy that CORE is to traditional economics what the Feynman lectures were to the physics teaching of the day, which was like…

1:22:19 SC: Might as well throw that in.

1:22:21 SN: To grab sort of the things that are happening on the research frontier and make them intelligible and useful to people that are encountering it for the first time. The idea that if you’re never going to take another economics class, should you think the world looks like the frictionless model, or should you get this library of gadgets for thinking about the world?

1:22:38 SC: Okay. Alright, that’s good. Is it out?

1:22:40 SN: It’s out. It’s online. And you can just go and look at it, you can order it from Oxford University Press. It’s a…

1:22:46 SC: Like a real book. An actual paper book. Not just… Okay, very good.

1:22:47 SN: Yep. Yep. A real book. It’s also online. Will always be online and for free, but if you also want it, it’s a…

1:22:53 SC: I’m a big believer in real books as well. Alright. Suresh Naidu, thank you so much for being on the podcast.

1:22:55 SN: Thank you so much for having me. Great.

[music]