0:36 Intro. [Recording date: September 8, 2011.] Book makes case for government regulation on libertarian terms. You challenge those of us who have a free-market bent to confront what you say are contradictions in our viewpoint or possible contradictions. It's also an indictment of anti-government arguments, generally. I want to start with that indictment and then turn to your defense of government intervention. You start the book by arguing that we are in a terrible mess-you call it paralysis--because of an anti-government mentality and ideology. What's the argument there? I think it accelerated when Ronald Reagan came onto the national stage; but the last several decades have seen a crescendo of anti-government rhetoric, that if we could just get government out of the way, everything would be fine; government is the source of the problem. Grover Norquist's famous quote: I don't want to eliminate government; I just want to shrink it to the point where I could haul it into my bathroom and drown it in the bathtub. I think there is a general skepticism of government, and so I think when there are circumstances in which government is really the only actor poised to take effective action against a problem, we are not able to move quickly. We are not able to move at all, oftentimes. I think it's true that certainly since the 1980s there's been a rise in philosophical defenses of free markets; and you can attribute that to cultural phenomena, the work of Milton Friedman, F. A. Hayek, and certainly in the last couple of years Hayek has been on the rise. But it doesn't seem to have mattered very much. That's the part I find troubling and mystifying about the argument, as you present. For example, you say in the book on p. 51: "For now, the most pressing issue is that although many extremely important tasks remain to be done, government has no money." And yet government spending is at an all-time high. Certainly at the Federal level, and often even at the state level, where you talk about problems in California due to Proposition 13. Yes, Prop. 13 limited property taxes, but it didn't stop government spending. So, where is the evidence that this rhetoric has any real impact on the size of government or the scope of it? Tax collections now are probably at the lowest point since 1950 as a share of GDP. It's true right now government expenditures are fairly high as a fraction of GDP, but that's almost entirely a consequence of the automatic expenditures that are triggered by a distressed labor market. We've got Medicare payments, Medicaid payments going out in much larger volumes than normal, unemployment insurance. The high expenditure levels now are not a consequence of a rising share of GDP going to government. They are really a temporary aberration that reflects the depth of the current downturn. Well, there are some automatic stabilizers, but that $820 billion of stimulus wasn't part of that. We are spending $3.6 or $3.7 trillion this year, some of that due to the recession. But certainly--let's go back to pre-recession, 2005-2006. Again to take the state level: spending in California was dramatically high; Federal government dramatically high. It was historically in the ballpark--it was toward the high end of peacetime spending as a proportion of GDP before the recession lowered that denominator. I'm going to argue, and I'll get your take on this, that government does too much. It hasn't shrunk, and that anti-government [?] hasn't had, in my mind and we can debate it, virtually zero impact on the real world. It's restrained some stuff, but I don't see that that free market impact has had much of an effect on the big picture. Instead, government has expanded to do a bunch of stuff it doesn't do very well. If you look internationally, I think we're really at the low end of the scale in terms of economic activity accounted for by government. That's true. The national health sector is very large in the United States. It's mostly private. In most countries it's public, so that's part of the difference. But if you look just at the growth in government spending, here it's been quite modest compared to international standards; and I think that's got to be a reflection in the end of the kind of anti-government we're talking about. The question is: Is that a good thing or a bad thing? I gather you think it's a good thing that government expenditures have grown more slowly here than they have elsewhere. People here are generally not happy with our government; we are quite suspicious of our government. I think the ranking of the United States on the Transparency International's scales of corruption in government--we rank 21st on that scale of corruption among nations. Where do you want to be? Every year there are lots of countries where people think they are doing a good job? Typically the kind of countries somebody would think about moving to if somebody's stuck a gun to their head and said you can't live here any more, you've got to choose another place--those countries would be at the top of almost anyone's list as a place to move to. The countries at the bottom of the Transparency International's list are countries you wouldn't want to move to, I wouldn't want to move to--Haiti, Afghanistan, Somalia. The countries that have weak, ineffective governments are not places anybody would want to move to. That's true. And as you point out in the book, there's a correlation issue. You don't know which way causation runs. Runs both ways. I think the international comparison is an interesting one. I certainly accept the point, and I think it's true that we have a different culture. The average American views government differently than in many other places, and that is part of the reason we have a smaller government. Historically, we had a different political system. It's interesting to think about why that is, too. I've often wondered why we are so different from the rest of the developed world on that particular dimension. My guess is that it's two things. One, the people who came here to start the United States were people who were running away from government; perception that government was a tyrannical force in their lives. Which it was. They wanted to get away from that. More important than that--I don't think that lasts 200 years--I think you see government acting when people bump up against each other and cause problems for each other. That's really the source of most demands for government intervention in almost every sphere. And here we had the Western frontier for most of our history. When people bumped up against each other and started getting in each other's way it was easy enough just to move west and escape the problem that way. We've run out of options to do that. Now we are going to have to come more face-to-face about the problem of what to do when your behavior hurts me or my behavior hurts you. We used to just run away from that; now we have to deal with it.

8:52 Interesting argument. I think the 200-year-ago problem that you mention, that hypothesis that it was the founding fathers' intellectual heritage: of course, they put in place a set of constraints on government as a result of that feeling, and they did last a very long time. Those started to unravel in the first part of the 20th century, steadily unraveled. We've moved away very much from their vision of what the proper role for government is; and I think that is part of the reason we are more like Europe. You do want to add in state and local spending, of course, and when you do that we are a little closer to Europe than the federal numbers suggest. I also would challenge your argument about the bumping up against each other. That's what we teach our students. We teach our students that the demand for government comes from public goods and externalities. But that's what I see government doing. That's part of my claim that government's gotten too big and gotten away from its core competencies. A lot of what government does isn't to keep us from hurting each other. It's to hurt one of us at the expense of, to benefit, somebody else. And it's that cronyism that a lot of us who are anti-government, as you describe in the book--that's what motivates us. I'm with you on that, and the question is: What do you do about that? I think there are countries where that doesn't seem to be the perception. I'm sure there's some rent-seeking that goes on everywhere. I'm not that naive. But there are countries where I think the perception is that the government, civil servants, are there, they are competent, they are doing their best to provide high-quality public goods at a fair price for society. There's not this deep, deep skepticism that seems to exist of government here; and I think you just have to see that as the fruits of a very long-standing effort to build a good government, weed out corruption, structure institutions in a way that provides checks against abuses of government. Here we've not really embraced that task. We've sort of taken a negative view toward government. Smart people, ambitious people often don't want to serve in the government because it's not a post in life that's entitled to much respect in our society. That's different in many other countries. That's true. You have to ask yourself: Do you want to have a government? Yes and no. There's no society on earth that doesn't have one; if you didn't have one you'd be invaded and pay taxes to someone else's government, so that's not an issue. And if you are going to have a government, you want to have a good government; and that takes a lot of work. I definitely agree with that. The main thing that explains the kind of abuses that you and I find so troubling is that we've allowed our system to become so heavily dependent on campaign contributions that, sure, people are voting in a way that doesn't serve their constituents' interests. They've got to cater to the people who are funding their campaigns or they'll be unseated in the next round. I think if you really want to build a better government, that's job 1, to focus there. But I don't see anybody stepping up to meet that charge. I'm a skeptic on that. I think the ability of the government to hand out goodies is a Constitutional constraint. So, the current system is awash in money--we agree on that. The question is why. The answer is obvious--because of people trying to steer the system toward themselves or their ideology. Not always so pecuniary. But the question is what can you do about it that would be effective? If you have a government that's going to spend $3.7 trillion and you tell people they can't contribute to it, would there still be the influence that you and I don't like? And a lot of it is not monetary--it's subtler and stranger things. The role of the Fed, for example, in awarding large sums of money to large financial institutions through its policies and behavior--Ben Bernanke is not running for office; campaign contributions can't have anything to do with it. It's a subtler form of influence and lobbying that's disruptive. Well, we agree. I hope it ought to be a project we could each get behind. That project of building a more honest and effective government. We can agree on that. I think that's a huge part of what distinguishes where we think government can be effective. I think you are a little more optimistic than I am. I'd rather see government get better at what it does well rather than expand what it does.

14:11 Let's talk about some of the big issues in the book, other than this issue of ideology and mentality. The title of the book is The Darwin Economy, and you have some provocative things to say about Charles Darwin. Why is Darwin relevant? Talk about what you see as the insight Darwin had into competition that's relevant for economics? I start with a prediction that I won't live to see whether it comes true or not: I predict that if we were to poll professional economists a century from now about who is the intellectual founder of the discipline, I say we'd get a majority responding by naming Charles Darwin, not Adam Smith. Smith, of course, would be the name out of 99% of economists if you asked the same question today. My claim behind that prediction is that in time, not next year, we'll recognize that Darwin's vision of the competitive process was just a lot more accurate and descriptive than Smith's was. I say Smith's--I really mean Smith's modern disciples. Neoclassical economists. I think Smith was amazed that when you turn selfish people loose and let them seek their own interests, you often get good results for society as a whole from that process. I don't think anybody had quite captured the logic of that narrative anywhere near as clearly as Smith had before he wrote. So, it's a hugely important contribution. Smith, however, didn't say you always got good results. He was quite circumspect about the claim. He seemed amazed that you often did. His reservations about markets, though, mapped very closely onto the kinds of reservations you still see from pundits on the left. Markets would be great, I think he would have argued, if they were truly competitive. However, there were, he wrote, actors with lots of market power; whenever they got together their conversations would inevitably turn to conspiracies, to fraud, to bilk their workers or customers; so you needed to have governments to rein them in again. Exploitation of people with their market power. He was particularly interested in reining in their ability to use the government, which is where I think the left and I part company. That's a fair point. I'll certainly grant you that he wasn't exactly on the same page as today's left. But he understood that they were as self-interested and grasping as any. The question is: What's the best way to protect people from that? I think you need to add that it was not Smith's vision of mankind that they were selfish and grasping. Absolutely not. You've read the Theory of Moral Sentiments; so have I. Not too many economists go back and read that these days. He knew full well that the economy would grind to a halt if people didn't have some moral fiber out there in the market place. And they care about altruism and charity and helping others and being respected by their neighbors and all kinds of things besides just money. You go back and read Smith--it's amazing his insights all across the spectrum have held up. Where I think he missed, or at any rate his modern disciples have missed a key feature of competition was--he saw clearly in a way that I don't think others do yet, that competition favors individual actors. That's what it does. Correct. Sometimes in the process it helps the larger group, but there are lots and lots of instances in which competition acts against the interests of the larger group. Familiar example from the Darwinian domain is the kinds of traits that have evolved to help individual animals do battle with one another for resources that are important. Think about polygynous mating species, the vertebrates; for the most part the males take more than one mate if they can. Obviously the qualifier is important; if some get more than one mate, you've got others left with none; and that's the ultimate loser position in the Darwinian scheme. You don't pass your stuff along into the next generation. So, of course the males fight with each other. If who wins the fights gets the mates, then mutations will be favored that help you win fights. So, male body mass starts to grow. Not without limit, but well beyond the point that would be optimal for males as a group. The bull elephant seal weighs 6000 pounds. They fight with one another four or five hours on the beach; they leave one another bloodied and exhausted. One finally can't continue; the victor claims the harem with 100 cows and the mutation that made him a little bit bigger and therefore in the winner's slot in that fight ends up in the pups of all those cows. So you get this runaway arms race that makes males too big from the perspective of males as a group. They'd be much better off if they could push a button and be one third their current body mass. But that's not an option. There are other traits that mimic the invisible hand story. So the gazelle is fast; it got to be fast because it was chased down by cheetahs for the whole of its evolutionary history; if you weren't fast you got eaten. A mutation that makes an individual gazelle faster is good for that gazelle, but it's also good for the gazelles as a group as it spreads through their population. So, sure, you get lots of results in the marketplace, too. There's a cost-saving innovation, somebody introduces it and does really well; then others begin to copy it and it spreads throughout the marketplace and the competition then drives the price down to the new lower cost made possible by the innovation; and the consumer benefits from that once the dust settles. Ultimately. You get Smith's story in broad stretches of market activity. I think anybody who doesn't understand the beauty of that narrative and the power of it to explain why there has been so much material progress in the last 200 years just is missing a huge component of human history. That's a hugely important story. As a sidenote, I think it's about 2/3 of what economics has to contribute to humankind and it's striking to me how little we convey that mystery and power to our students. Students just get out of our courses; they don't know that markets have that unbelievably powerful capacity to get things like that done.

22:13 But that's only part of the story for you. I think you can't stop there, and that's why Darwin eventually will have a much more prominent place in economists' thinking. There's lots of stuff in the marketplace where what counts is not how well you do, not the absolute quality of your performance, but the relative quality of it, and competition does spawn, as in the case of big antlers in the bull elk, large body mass in elephant seals, many analogs to those arms races that we see in the market. Look at the financial service industry. They are hiring the smartest people we produce in the university system. Their task is to figure out when a price will move faster than the other people who are trying to solve that same problem. They've invested tens of millions of dollars in supercomputers; they've crunched the numbers up, down, left, and right, and the one who gets there fastest with an accurate price prediction makes a bundle of money. But that's not social product. That's just money somebody else won't make. And those same people, all those best and brightest, 45% of Princeton's graduating class takes a job in the financial services industry, the last year we have data from before the crash. Those are really smart people who could be doing something that you and I would benefit from; you and I are not benefiting when they help the market in derivative securities. Or help come up with an algorithm to help predict when the price is going to move ten seconds before the second fastest algorithm does it. But Goldman Sachs's Chairman, Lloyd Blankfein, assures me they are doing the Lord's work! And I bet you are not reassured by that. It's funny, because I used to be. I used to take that story you just told me and I'd say: I disagree with you. It's true that these are small movements in prices that people make money off of, but that's good because these prices send signals and it's important that the right prices be sent, and the allocation of capital is crucial for productivity. I agree completely. The problem is that we just spent a few trillion dollars on our housing stock, which suggests that there's something deeply wrong with the allocation within our financial system. It could just be a mistake. No, it's not a mistake at all. Influence of money in the political system--the banking industry got deregulated; that was in large part I think because of ties politicians had to people in the banking industry. The banking industry got an incredibly high rate of return on the donations made to the Congressmen and Senators who acquiesced in the deregulation of the banking industry. But once you started making credit available on the terms they were, then I think the Darwinian account gives you a very tidy narrative of how events unfolded. How? The theoretical apparatus that Alan Greenspan brought to bear, to think about that same collection of activities, left him high and dry. He was flabbergasted. He testified that he was shocked that people behaved the way they did and been so irresponsible. He wouldn't have been shocked at all if he'd followed the literature about how individual and group interest just don't coincide. I have to give a different interpretation of Greenspan's testimony. I paid close attention to that, because it was a rare moment when someone said he was flabbergasted, confused, or wrong. He said at the end of that testimony: I have to reexamine my beliefs. And he is portrayed, as you portrayed him, universally as a free-market ideologue who refused to regulate when these excesses occurred. The problem with that interpretation is he wasn't that much of a free-market ideologue when it came to bail out banks. He was a cheerleader. So, I don't view him as much of a free marketer. He used free market rhetoric often, to justify, say, not regulating the derivatives market. He said: Oh, no, those markets, have to leave them alone. And yet when large creditors found they weren't going to collect their money, he bailed out those creditors. He supported the Mexican bailout, which was a bailout of American banks and others. He supported the Long Term Capital Management--it wasn't a bailout by the government but the orchestration of a rescue of people who had lent money to Long Term Capital Management foolishly. He socialized the losses. You are right about each of those points. The deregulation people point to--there was some deregulation, but government's hand was still involved in that market. And where we agree is the political influence of those institutions. Of course, there's a different story, which I don't agree with: they were crucial, we had no choice, we were standing on the edge of a precipice if we had let Mexico fail or Long Term Capital Management; there would have been this horrible ripple effect. So, those people--no one stands up in front of Congress--here's what they never testify. They never say: Well, yes, I supported all those policies because I was getting a good deal from the people who kept me in power. That you never hear. They always say: I had to do it, save the country, had to protect the credit markets from spiking. But to me it's a pretty nasty story.

27:43 But look at the dynamic that was underway in the housing bubble. That's where I think the Darwinian perspective shines relative to the Smith's-modern-disciples' view of that market. How old was I when I bought my first house? I was in my late 20s. I remember at the time I had to come up with 25% of the purchase price before I could buy that house. I remember my first house, too; same deal. Saving, doing without, but we did it. And buying a smaller house than you'd prefer. That's right. We skimped. But we did it. We were never in any danger of not being able to meet our mortgage payments, fortunately I was steadily employed throughout that time. But if we hadn't been able to pay our mortgage, it wouldn't have been a calamity for the bank because the bank would have taken possession, sold it for more than I owed on it; nobody would have been panicking or running for the exits as a result of any of that. And the reason for that was that the regulations required strict vetting of the mortgage applications; they required large down-payments. There was stability in that system. Once you lifted those restraints, you can make more money in a rising market by lending more money out. It's just the standard leverage argument. And so banks saw they could bundle these securities and sell them; they could move a lot more credit if they would relax the standards. So, you think about the homeowner who is trying to decide what to do--and here's where I think the Darwinian insight comes in full bore--they are letting people borrow more to buy houses; that means people like me, earn the same income I do, can pay more for a house than before they started relaxing those credit terms. How does that affect me? You could say, and it has been said: I should borrow prudently and not be affected by it. But that's where I think the social dimension of our existence is so crucial, and it's the one that the invisible hand account doesn't take fully into the picture. So, I'm a parent; I have two small kids when I bought my first house. My main concern was that they go to a good school. And what's true in every city, everywhere in the world, is that the good schools are in the more expensive neighborhoods. You may be an exception you can find somewhere to that, but as a general rule that's the way the world works. Some variance, but on average that's true. True in France, where the average expenditure per pupil is the same, no matter what the real estate prices are across different areas; and the kids are on the same page and the same curriculum all year long. Still, the schools in the good neighborhoods are better, if only because the kids who go to them are advantaged. Better learning environment. Every parent wants that. If you are in the middle of the income distribution, say, you are as a parent at least have the goal of sending your kid to an average quality school. We'd think ill of you if you didn't have at least that ambition; probably you'd want to do better than average. But if you want to just meet the standard, you've got to buy a house that is in the middle of the price distribution for your area. Others like you are spending more because the banks are letting them spend more. So what's your choice? You can either borrow more than would be comfortable for you to borrow and match that spending and hold your spot in the 50th percentile, or you can say: No, I'm going to be prudent. In that case it's your kids who will go to the schools that have reading and math scores in the 20th percentile and have metal detectors out front. We're not going to look down on a parent who says: I'm going to borrow; I'm going to go to a better school district; we'll worry later what to do if we don't have enough savings for retirement, if we are not able to meet the mortgage we'll get a second job and make ends meet somehow. That's the way the housing bubble unfolded. It wasn't just people with visions of sugar plums dancing in front of them, vaulted ceilings and granite countertops. It was people trying to keep up with what others were spending so they wouldn't fall behind in terms of where their kids went to school. That was part of it. Account offered by the Two Income Trap book that was out about 7-8 years ago: where does the second salary go? Elizabeth Warren and Amelia Tyagi--how parents could make ends meet on one salary back in the 1950s and 1960s; now parents are in over their heads on two salaries. They pointed out that the extra salary went into a bidding war for better school districts. That's part of it. I think what's missing from that story is why banks were willing to lower those down payment claims from 20% to 10% down to 3%. And that initially started with government in the 1990s to encourage home ownership and liberating Fannie and Freddie from the requirements that they only went to safe people with 20% down. Those were factors that mattered too. Absolutely. So that went to a flood of financing that wouldn't have occurred in a Smithian world. Now, it's true that as the prices started to rise, the private sector, without Fannie and Freddie's help, contribution with the subprime part of it. But it wasn't just the subprime. No, that's my point. In the expensive housing market. No, I think the right makes the mistake in blaming the subprime problem on Fannie and Freddie. The subprime problem was overwhelmingly the investment banks' funding it. Although Fannie and Freddie bought a rather significant portion of their paper. But you could always say somebody else could have bought it. It was so attractive at the time that their purchasing 20% and 30% and sometimes more of the mortgage-backed securities is irrelevant because other investment banks would have bid for that. But I don't know.

34:23 I want to take your point about the bidding up of housing prices and the school issue, because you use an example in the book which is a very clean example of how a Smithian like myself looks at the world; and then you make the case that I am missing something. I want to take that and let's talk about it. The example you use is whether firms offer the right amount of safety in the tradeoff between safety and compensation. So talk about that example, and then you can tie it back into the housing. Because that's the way you tell it in the book. Here's where I think both the left and the right in the way they spin nowadays miss the essential forces that are going on in these decisions. So, the left will say: We need to regulate safety because powerful employers would otherwise force their workers to work under unconscionably dangerous conditions. That's an argument that I think clearly fails what I call the no-cash-on-the-table test. Safety is a cost-benefit question. A lot of people object to that way of thinking about it, but there's no way to think intelligently about safety investments if you don't weigh costs and benefits. If you talk to somebody who says we shouldn't be talking about safety decisions in cost-benefit terms, here are two questions I would suggest you ask. Did you get your brakes checked on your way to work this morning? Most people would say: No. But a tiny handful will say: Yes, I did. Second question: Do you plan to get them checked again tomorrow? No rational person would say yes to both of those questions. You check your brakes once a year or whatever the standard is you adopt because it's just too expensive to check them every day or twice a day. You weigh costs, you weigh benefits; you make accommodations just because safety isn't the only thing you care about. You get risks down to a prudent level and then you spend the money you save by not focusing all your effort on getting them down further, but on other things you value more. And that's wise. No one disputes that. That's absolutely proper. The only accommodation a person could make to that kind of problem. Now, one of the reasons I think people have trouble with have trouble with this issue on the left--I think there's other reasons; you talk about in the book this idea that people aren't maybe aware of the risk. That's always a possibility. In some cases; a general problem that we face. But I think the issue people struggle with is they want to know whether their car is safe. And the economist's perspective is: It's not a 0-1. It's not safe or unsafe. No job is safe or unsafe. There are degrees to safety and the more safe you want it to be, the more expensive it is. So, once you say that, there's a tradeoff. So people would say: I want a safe job; no job should be unsafe. But of course the only safe job is the one you don't go to. Many don't understand that point and they want to regulate safety because they think if you don't regulate it the employer is going to take advantage of the workers. Because of greed; they want to make more money. This story is a very powerful rejoinder to that claim by people on the left. So, what would Smith say to that? Well, look: Safety devices in the workplace cost money. If you value one at, let's say $100 a week, the guard on the saw blade that will keep you from getting your hand from being cut off when you are working in this factory, you'd pay $100 a week to have the protection it offers you. It's worth that much to you. The cost of putting one on there, let's say, is $50 a week. Now the pundit on the left wants to say we have to require that it be installed because otherwise the powerful firm would just refuse to install it because he has power. What that claim completely belies is the obvious objection that the employer won't want to have that saw without a blade guard because he could pay you $100 less a week without it. You'd be willing to move to a job that paid you $75 dollars a week less rather than stay in your current job but refuse to put a saw blade guard on there. So, there are forces in the marketplace that will push the employer to install a safety device on a machine where the benefit exceeds the cost of it just because you would have an incentive to move otherwise. If there's no place you could move to, he'd still do it because he could cut your salary and you'd agree rather than continue working with the conditions that didn't suit you. That's where I think the left's view of this problem utterly fails the no-cash-on-the-table objection. If the employers were doing what the left says they are doing, there would be cash on the table. Another employer could come in and cherry-pick the best workers at a dangerous factory just by installing safety devices that were worth more to their workers than their cost. The other part of that story of course is that a safety device that is too expensive won't be installed. That's right. They will install the ones that are wise to install and fail to install the ones we wouldn't want to install. And that story points you to the level of safety that will emerge in an employer-managed workplace that would be exactly the same as the level of safety you'd see if individuals were self-employed. They would confront the same cost-benefit question whether to put a saw-blade guard on the machine they are working on; and they would compare the costs and benefits the same as would happen under market competition.

40:57 But you argue there is more to the story. That's the story the left doesn't understand. What I think the right doesn't acknowledge is that it's not just absolute value of safety versus absolute value of wage income. If you think about the worker's decision--should I take a riskier job--well, I can get more money if I do. Why would I want more money? Well, I want more money because maybe the extra absolute quality of the goods I buy will give me additional utility. That's the standard Adam Smith story. What's really important that's left out of that story is you value the extra income not just for the extra absolute consumption, but also for the extra relative consumption. So think about a worker who takes a riskier job, earns $100 a week more in salary; that's $100 dollars a week he can take and bid for a house in a better school district. He's got now some leverage; he can move his kids up in the hierarchy. That's since that's a decision that any other worker is free to take, too, the equilibrium in that game is one in which all workers sell more safety than they would as individuals. And the extra money goes into a bidding war for the houses in the better school districts. And when the dust settles, the only thing they've managed to achieve by that is to bid up the prices in the better school districts. And they've got less safety than they would have chosen on a desert island in isolation. So the fact that they might want to endorse safety regulation--they know things would want to be better if we were all working under better conditions. So we are all going to regulate. That's the only way we are going to get there. It's like Tom Schelling's example of the hockey players, who when they have the right to skate bare-headed and yet they would always vote unanimously in a secret ballot for a rule requiring helmets. And his explanation was always exactly parallel. When you are free to take your helmet off you get a competitive edge by doing that. The other side's got a match because they don't want to lose a competitive edge. The equilibrium is everybody skating without a helmet. Everybody facing more risk. The only way you solve that problem is to have a rule. You can't just post a sign in a locker room saying: Caution, skating without a helmet could injure you. They know that. It's the fact that that competitive edge trumps that worry about safety. I think there are two ways to get to the helmet law. And by the way, it's a rule, not a law. It's voluntarily imposed by the league. You are free to formally do. I can see that point. But I think the deeper point is there is a second way to get to that, which is culture. Elinor Ostrom's work in the Tragedy of the Commons, shows that different ways and norms evolve to solve these problems. And in her case, the tragedy of the commons. To take an example, when I was a kid, if you wore a helmet riding a bike you'd be laughed at. This would be 1963, say. I was 9 years old. If my parents, and as I've mentioned on the show before, if we rode around on our cross-country trips--I lay down in the back window in the flat part behind the back seat; and we used to fight, my sister and I as kids, before my brother was born, we used to fight over who would get the window seat. And that didn't mean who was sitting next to the window. It meant laying down on the back shelf. My parents thought nothing of that. Today if you did that, you'd be viewed as a candidate for having your kids taken away from you by Family Services. Because you are abusive. Which was better? Which was better? The old days or now when if your kid is not strapped in they will give you a ticket? Well, I don't need the ticket. My claim is there are two ways to get to a world where kids are safer. And there are two ways to get to world where hockey players are safer. Two ways to get to a way where everyone wears a bike helmet. Every 9-year-old today, almost every one of them, wears a bike helmet. And it's not because there is a law. It's because the cultural norm has evolved that says that if you don't do that, you are a bad parent. Having said that, there are other ways to solve these problems.

46:04 I completely agree, and sometimes doing it informally in that way is better. Not always. I know. So, I am going to try to create the claim it's almost always, and I'll use your safety example, the worker housing story. Let's say I agree with you. And I certainly do agree with you, by the way, that some of my demand for higher income is not going to work out the way I think it will. I'll even concede another point which you make in the book which you don't make in our conversation: Sometimes you make more money, you take the harder job, you take the less safe job; and it lets you buy the bigger screen TV or the bigger house, and it's not just this fact that we're a 0-sum game for the good schools or a limited number of spots. It's the fact that money doesn't always make you happy. So, I agree with that point. And Adam Smith, in The Theory of Moral Sentiments, preached that point. He didn't want the government to solve it. He wanted to encourage people to think more carefully about how happy they'd be if they traded away their leisure or their serenity for a harder job. Well, he also proposed taxes on various luxury items. He did. Because he thought if people consumed less of them it wouldn't be a big sacrifice. That's correct. You could use the revenue for useful things. That's correct. So, let's concede that point; we agree on that. Where we disagree, by the way, on that piece of the story is I think it's absurd and a horrible form of public policy that if you want to a good school you have to buy a house in the neighborhood of that good school. I'd get rid of the public school system; I'd get rid of the mortgage deduction. That would reduce some of this. Certainly getting rid of the school system's attachment to neighborhood would solve some of that problem. I think that would be a better way to solve it. I would applaud each of those efforts, but I would caution you not to be too optimistic about severing the link between where you live and how good the school your kid goes to. Why? I just think there is a very powerful demand on the part of the people who position to secede from the school system. Just be able to go to school close by and convenient. Good point. But I'm not sure that would change--if that's the only thing going on, if we had a private school system and the government is out of schooling, it's true there would be a correlation between housing prices and quality of school, perhaps, but for a bunch of reasons, but it wouldn't be the one we are talking about--that the only way to go to a good school is to live near it. But let's put that to the side. Here's the more interesting issue for me. I'm going to concede your point. I'm going to concede that, given the constraints of the public school system, it is certainly true that we have created--a tragedy of the commons, an externality, what you call an inefficiency--that in my trying to decide the tradeoff between safety and compensation, I'm forced, through my own self-interest to pursue a mix that is not the ideal, because the extra income doesn't necessarily buy me what I think it's going to buy me. So, let's say that's true. Here's my two challenges to you. The first one is: What's the magnitude? That's a crucial question. When you talk about the relative importance of this Darwinian versus the Smithian competition, relative versus absolute improvements. So, if it's a small magnitude, it's not so important. If it's a big magnitude, it's important. First thing I point out is that if you look at the secular trend, meaning the trend over time, there's a long steady fall in mortality and injuries. The workplace has gotten safer and safer in the United States long before the government got involved, Occupational Safety and Health Act (OSHA) 1970. So the Smithian forces are still pretty powerful. I don't deny that for a moment, by the way. Safety is a normal good; we are way richer than we used to be; and one of the things you want more of when you get richer is safety. And you and I work in jobs that are way safer than required by OSHA regulations. And if you look at that secular trend over time, part of the reason fewer people die on the job is we take safer jobs. Fewer people work in the mines, factories, more at desk jobs. But even within the dangerous jobs it is safer. And that trend started before regulation. I think the fundamental issue, and I think what really distinguishes--so we could debate how big these factors are. The biggest problem I have is that even if I concede your point, which is significant, where is the evidence that government is going to pick the right level of safety? So, you don't want to let the invisible hand pick it. Okay. I understand the argument. The invisible hand doesn't pick the perfect mix. Why would I think government could do it better? And how would it possibly do that, given the possibly-set "right level" of safety you are worried about? There could be all sorts of interesting design issues in the question of how to regulate safety. If you think there's even a theoretical case that the market level might be suboptimal. I'll grant you all the objections you'd be inclined to make about how ill-equipped OSHA might be on a case-by-case basis. And how it might listen to the more powerful interests. Yes; you would need to evaluate whether the proposed solution was going to be better than doing nothing. I think that's always got to be the test for any government intervention. I have a constant challenge to persuade students that they are not done when they have merely succeeded in demonstrating that the current equilibrium might not be socially optimal. That doesn't mean that any old intervention is going to make matters better. You've got to begin with the assumption that government is imperfect, too, and whatever intervention they mount might be worse than doing nothing. That's a valid point. Injury taxes--the fact that we have a workman's compensation program that's experience-rated. There are sort of more flexible, price-based ways to stimulate the provision of additional safety that do not prescribe in command-and-control form and possibly run up against a lot of waste of that familiar sort. That's all properly on the table for discussion. I'm just trying to achieve a much more modest objective, which is to say we need to have that discussion. I think so many on the right say: Government has no right to even consider intervening in workplace decisions. It's very powerful rhetoric that the right has. Why should the government step between me and my employer? We are free individuals. Why can't we sign a contract where I agree to accept the work and whatever risks go with it freely of my own accord? And the employer agrees and I agree? Who else is affected by that? That's a pretty powerful argument when you hear it, but what it leaves out is when I make that choice, I get a leg up on others in my ability to bid for the house and the better school district. So, others are involved in that choice. No doubt. Therefore, it's proper to think about whether there is anything that can and should be done. That's my objective here. I don't want to say this intervention necessarily makes matters better. It doesn't. I think the left needs to be far more attentive to design issues and regulation and less presumptuous that intervening will make matters better no matter what.