0:33 Intro. [Recording date: July 12, 2013.] Russ: We're going to talk today about two articles you've written recently, and we may get into other things as well. But the two articles, one was on libertarianism; the other was on economics; and they've created a bit of a firestorm on the web. Let's start with libertarianism. You asked the rhetorical question: If libertarianism is so great, why hasn't it been tried before? Is that a fair assessment of your argument? And if so, can you elaborate? Guest: Well, it is a fair assessment, and it was inspired by a conversation I had at a party where most of the crowd was libertarian. Where I asked a libertarian economist who shall remain unnamed: Why are there are no countries of which you guys approve? Because all he or other libertarian thinkers can provide are examples of countries with particular policies they like. So they like Chile's Pinochet era Social Security privatization; and they like Swiss banking laws; but they can't point to an actual country which is largely libertarian in most but not all of its policies. It doesn't have to be exclusively libertarian. But there aren't even any predominantly libertarian countries. And so that was my rhetorical challenge to them. If you can't point to a single country out of nearly 200 sovereign states on this planet in 2013, that you approve of, then isn't your ideology fundamentally unworldly and utopian? And the responses were--the most plausible response, I think, was that we're pioneers of the future and perhaps in the year 3013 countries will be libertarian, but it's unfair to ask that question now. It would be like saying why are there no democracies during the dark ages? So I thought, well, at least you can make that case. But the least plausible response to my question why are there no countries, were those that said: Well, there was a libertarian country. Once upon a time in a golden age, it was the United States--between the Civil War and the Progressive era, when you had large industrial corporations, child labor, no unions, and so on. And I thought: that answer, even from a libertarian perspective, was not very smart, because the United States between the 1870s and let's say the 1900s was by no means a laissez faire society. We had high tariffs, the government was intervening was to help businesses crush strikers in the railroad and other industries. So the argument that the libertarian paradise lies in the distant future, at least you could make that argument. But you can't plausibly say that the libertarian paradise existed in the past, either in the United States or in another country. Russ: I want to come back to both of those points--the utopian point and the United States in that alleged golden era. But I first want to ask you about the example you got back from your cocktail party. I'm surprised that anyone would suggest that the Pinochet era, Chilean Social Security, has anything to do with libertarianism. It was a military dictatorship and the Social Security program was a public--it was forced savings. It's true you were free to invest the money in private activity, private investment. But it's not much of a libertarian social security system. Guest: Well you've put your finger on one of the contradictions of modern libertarian thought. Because they argue that what are in fact public programs that have some elements of choice are really market programs or libertarian programs. And you are quite right. It's completely incoherent, the contrast with their principles. So, for example, most libertarians--at least the politically influential ones in Washington--favor vouchers for schools. But a school voucher, if it's funded by the government, is just as much a government program as government money going directly to a single district school. Right? Russ: Totally agree with you. Guest: You're merely introducing the choice; merely introducing an element of choice does not make it a free market program. You are still taxing people. You are simply allowing the taxes are going to the consumer rather than to the producer. Russ: Yeah, I totally agree with that, in fact. That idea is associated with Milton Friedman. I think there are other people who claim authorship of the idea. Milton Friedman advocated that in Capitalism and Freedom-- Guest: If you go back to the 1920s there was something called 'Voucher Socialism.' So you can argue that a lot of these Friedmanite proposals--you are quite right, it comes from Milton Friedman. But it really has more to do with Voucher Socialism than it does with free markets. Russ: So, I agree with you in the sense that it's certainly still a government program. And I would argue that the political side of that program would be more worrisome than the economic side. I worry that if we had vouchers then there would be political pressure to increase the amount. And for government to get involved with the schools. So, yes, I am against government schooling generally, not replacing the current system with a voucher system. However, Milton Friedman, when he advocated that idea, I think saw it as an improvement. Now, Milton was not a utopian. In any sense. He advocated negative income tax, of which some would say, I think correctly, that the earned income tax credit is the descendent of that proposal; and whether he would like it now, how it's turned out, is a different question. But he certainly advocated a negative income tax as an improvement on the in-kind nature of food stamps and housing programs, health care, etc. But he was not a utopian. Guest: Well, I have a lot of time for Milton Friedman. I would see Milton Friedman actually as a neo-liberal of the right, rather than a truly market-fundamentalist libertarian. And, you know, progressives and centrists can support a lot of the same programs. For example, there are school vouchers in Sweden, which is an extremely social democratic country with about 50% of its Gross Domestic Product (GDP) going to government. But they have local school vouchers, and vouchers for other programs. In the United States the progressives are defending food stamps, which is a voucher program for particular restricted kinds of commodities. Now, my own thinking about vouchers is more practical. It's not a matter of libertarian ideology or progressive ideology. I think that vouchers tend to work where you have truly competitive markets, and also where the number of recipients of the vouchers is sufficiently small that it doesn't really warp the market very much. So, for example, if you give food stamps to people and let them buy, let's say something like cereal or preferably something more healthy like fruit, that's not going to drive up the price of fruit because you don't have vast sums of subsidy going from the government into the market. And at the same time, you do have a relatively competitive market in produce or in cereal, even if it's not perfectly competitive. Where I think vouchers and government subsidies in general are dangerous is when you are pouring government money--and whether it goes through the consumer or the producer--into what economists call 'imperfect markets' where you don't have lots of small firms competing. You have oligopolies or monopolies, which are able to set their own price. They have what's called 'market power.' And I think we've seen this since the 1960s in both health care, thanks to Medicare and Medicaid money, and higher education. Because beginning with the 1960s, for perfectly valid reasons--and I generally approve of federal aid to higher education and also of health care for the elderly and the poor--but when you put government subsidies into an oligopolistic or monopolistic market and you don't have some kind of price control system, that you cannot rely on competition to keep prices down.

9:34 Russ: Well, actually competition is going to push prices up when you subsidize large groups of people that way. So that's what we're seeing. Guest: Well that's right. And then you get this political feedback effect where the doctors or the universities with their tuition raise their prices. Producers raise their prices by the amount of the subsidy. They then tell their clients, you know, the doctors, patients, or the parents of the university students: Oh, isn't it terrible--prices are going up; write your Congressman and tell him or her that you have to increase the subsidy. Right? So you get this vicious feedback effect in which the producers can keep driving up their own prices. Russ: You don't need much market power to really make that argument. It's that if there were limited numbers of people on the earth, if the skills that were necessary to provide the services are limited--as they are with medical care or education--even though new people can enter the field, even though there's competition among the providers, a subsidy in a competitive market like that will push up the price and it will do exactly as you said: it will encourage the political lobbying to make the subsidy larger and continue the problem. I'd say we've done something quite similar in housing as well. Guest: Well, I think we're going to see this as a result of Obamacare. That the initial tendency will be to drive up prices because you have all of this new money flowing into the system. Now, if you accompany it with some kind of price regulation then you can deal with that problem. But if you don't, then the producers may simply jack up their prices. Russ: Absolutely.

11:15 Russ: Let's go back to your conversation about whether libertarianism has been tried or not in the United States and whether that's a realistic observation, and then the question of whether it's a utopian ideal. I think to some extent you've created something of a straw man. There are people like Milton Friedman--I think Milton, although he sometimes called himself a libertarian, would find himself more explicitly as a classical liberal--someone who wants smaller government--limited government, smaller government. He's not an anarchist. And certainly anarchists, anarcho-capitalists, people who are at the extreme of the libertarian position who make the case for zero government--it's an interesting position; I'd like to talk to you about why that might not be sustainable if it ever were tried. But it certainly has never been tried. But it seems to me that the more realistic--and certainly the view I hold--that I'd like to see some government but a dramatically smaller one, the fact that that hasn't been tried doesn't seem to be much of an argument against it, mainly because nations don't make decisions. Individuals do. Politicians vote in certain ways. If I said to you: No one tries chocolate ice cream; no one buys chocolate ice cream and therefore it must not be very good--that's a pretty reasonable claim. But the fact that no nation has adopted a classical liberal state, ever--and we could debate about England or the United States at certain time periods--why would that tell you anything about whether that's a good idea or not? Guest: Well, because what is the first principle of the state? Even in a classical liberal tradition. I mean, I consider myself in the Lockean liberal tradition--I consider myself a Lockean of the center left. And that's not a contradiction in terms. If you go back to John Locke and the Founders and classical natural rights theory of the 17th and 18th century, it's all about war and violence. That's what it is all about. A subject that the so-called modern libertarians tend not even to talk about or at least it's kind of an afterthought. But if you go back to the social contract libertarians, the whole idea is that a state of nature is a state of war. It's a state of anarchy. And you cannot protect your rights by yourself against the neighbors who want to kill you or enslave you. And so therefore humans--first tribes and then city-states--and it doesn't have to be a modern democratic nation-state, but the whole point of political entities is for people to pool their coercive powers against these external parasites, these human predators who try to kill or enslave you. And also the people within your own community, the potential tyrants who try to kill or enslave you. And ultimately it's pooled coercive power that is at the heart of true classical liberal theory. What I think--the people who call themselves classical liberals now are not actually in that Hobbesian-Lockean, 17th century natural rights tradition, which is obsessed with created bounded territorial units with military power and police power to prevent anarchic violence. Russ: Well I don't know-- Guest: [?] Really come more out of a 19th century kind of Proudhonian anarchist tradition, which assumes that the natural state of human beings is sociability and cooperation. And one can have an interesting anthropological argument as to which of either of these corresponds to the world as it is. But I think this is--and it's an answer to your question by the way. The answer to your question is, at least according to the Lockean tradition: if you are surrounded by militaristic, socialistic welfare states, and then you create a libertarian paradise--particularly if it's on a desirable piece of territory--your country is not going to be sovereign for very long, if it cannot mobilize the military resources and the population support to defend it from the aggressive non-libertarian neighbors. And I think that's a real flaw. Russ: Well, I agree with that. I think that's the flaw of anarchy. But I don't see it as a flaw of classical liberalism. Certainly classical liberals, up through the modern era, which would include Robert Nozick in his Anarchy, State, and Utopia, certainly made a case for the police state, or a role for the state in provision of police. Certainly I think most classical liberals see a role for national defense--very modest of course but certainly the ability to defend the nation from attack. I think it's the rest of it where the interesting stuff lies. Guest: Well, okay, but just bear in mind that the people who are thought of as big government liberals including Theodore Roosevelt and Franklin Roosevelt, they simply think that survival in the modern world requires a more extensive government, even for the basic liberal state. So, being liberal, a classical liberal like John Stuart Mill in the late 19th century, and think that well, without violating your classical liberal principles, you'd want as much private property, as many individual rights as possible, in industrial conditions where giant industrial organizations can poison whole landscapes. You may simply have to have bigger, more state regulation. It's not that you love the state--it's something you reluctantly conclude. And likewise, all of the industrial societies by 1950 had adopted some kind of social insurance schemes or welfare state that was more or less compulsory. And it wasn't because they loved the state for the sake of the state. They weren't fascist or totalitarians. It was because the alternatives--you know, foreign-based family support systems and local charity, simply had ceased to function, when you had a wage-earning majority living in giant industrial cities. So I think that to dismiss the dominant tradition of the 20th century as not being in the classical liberal tradition as though it's, you know, some sort of alternate or statist tradition--I think you can justify a lot of the modern welfare state as well as a lot of the modern warfare state on classical liberal grounds; that is in today's industrial conditions this is the minimum that you need. The minimum government that you need is vastly bigger than it would have been in the 17th or 18th century. Now that holds out the possibility that maybe in 200 years, if conditions change, you could have a smaller welfare state and a smaller military. Right? Russ: Well, but you are suggesting that the reason that we have a large welfare state, a large corporate welfare state, a large public social welfare state, a large regulatory state-- Guest: Well, I'm not defending crony capitalism. But let's look at the social welfare state. Russ: It sounds like you are. But go ahead. Guest: Well, no no. The modern British welfare state really was a product of World War II, of the Beveridge Report. And the basic idea was: We have to guarantee all of these soldiers fighting Hitler that when they come back we are not simply going to abandon them to destitution and unemployment. And so therefore you had the right to national health insurance, the right to a job, public housing, all of this. It was the reward for fighting in a World War. And the link in the United States is not as direct but it's still there. If you think about the GI Bill. So I do think there's a link between provisions of some kind of economic security to your citizens and the need to have those citizens mobilized in these colossal wars like the World Wars. Now, as I say--now most liberals and most conservatives ignore that link. Let me say that right out. Most progressives think that the social welfare state of the kind we have might have existed just for its own merits, in their view, without these World Wars, without the link between the citizen-soldier and the domestic economic benefits. And a lot of conservatives think: Well, we can draft everybody to go fight in foreign lands. But on the other hand, when they come back, they are on their own, right? But I'm just saying as a political historian that the link between military service and minimal economic security--this has been crucial. And you also find this same link historically between voting rights and military service. That is, every expansion of voting rights in the United States has tended to be justified, in practice, successfully, by the rights of soldiers, whether it was the expansion of voting rights for all white males during the War of 1812, and then of course the abolition of slavery, and initial voting rights, with the Civil War, and so on. Russ: Well, it's an interesting point. I think it's a bit of a stretch, as you somewhat might agree, in the United States. The GI Bill, yes, that was done as a way to cushion soldiers' return to civilian life. Many of them did not take advantage of it. Many of them found jobs. It wasn't horrible. They got health care, they didn't starve to death. They found a job and a roof to put over their head. And in fact the post-WWII economy was rather successful despite a very small increase in government activity. Very, very different, yes, from the British case.

21:12 Russ: Let's take an example, say, such as education, where, as you point out, say it's part of the safety net that we've decided--someone has decided--that education is provided publicly and funded publicly, K-12, and subsidized dramatically in the post-high school years. That has not been a very effective system, it seems to me. And so while you can argue that it is there because it just seems natural, it's partly there as every one of these programs is, for political reasons that are not about some ideal taking care of people, but there are specific special interests that benefit. In my case--I'm one of them--I'm an academic, most of my career, and I've been a tremendous beneficiary, not my not-so-happy result, from these subsidies. And I don't think they've served people very well. They've served me well. Guest: I think there are two questions. Let me push back, first of all, as to they haven't been successful. Look at the United States. A lot of the stuff about the failure of America's K-12 system is pure propaganda. The data came out recently showing that whites, blacks, and Latinos have steadily improved their academic performance over the last couple of generations. Now you can say they might have been better under a different system. But what would that system be? Let's look at international comparisons. The United States--sometimes there's these alarms in the press about the United States instead of being number 1 or 2 is like number 15 or number 12--it's still near the top--on math and science or things like that. Well, there are sociological reasons for this which it's very unpopular to discuss in public, because you don't want to reinforce stereotypes; and I certainly don't intend to do this. But if you look at non-Hispanic whites in international comparisons--there is something called the PISA scores. Non-Hispanic whites in the United States are at the top. They are up there with the kids of Shanghai, China. And by the way, the Chinese scores are only for Shanghai; it's not the whole country, which would drag it down. So, what are the two groups that drag down the scores in the United States? It's two groups which for obvious historical reasons would do so. One is African Americans, who were victimized and disenfranchised until only a generation or so ago--two generations ago--and have yet to catch up, despite great progress. And the other group is fairly recent immigrants from rural portions of Latin America. And again, there's no big surprise there. If you look at Germany, the working class and working poor are Turkish immigrants and their children, who are at the bottom of the economic spectrum there, do less [more?--Econlib Ed.] poorly than the native Germans and drag down the overall German scores. So I want to push back on the idea that the United States does not have a successful educational system. It does. Russ: High literacy rate. There are things it does fairly well. Guest: I think it costs too much. You can make that case, certainly. And you can also make the case that even if it has worked in the past, maybe you need to rethink the model using new technology and the Internet and so on. And I think that's certainly the case. Russ: It's happening. Guest: Yeah. So, if in 1840 the county commissioners had distance learning and computers and the Internet and all of these other technologies, would they have voted to have a one-room schoolhouse with one 19-year old woman teaching all classes, you know, from 1st grade through 12th grade? I don't think so. So certainly you can reinvent. And I think we are going to see this in the next generation. But again getting back to the libertarians, I think a lot of the actual policy proposals which are put forth in the name of libertarianism, some of them are quite sensible. Right? Russ: You can list them if you want. You can pick a couple. If they come to mind. Guest: Well, for example, for-profit universities. I don't see why people should be against that on principle. Progressives tend to be, because their electoral, in some degree financial, constituencies tend to be teachers' unions. Right? I consider myself a progressive, but, you know, I don't represent the teachers' unions, so I don't see why people shouldn't think about alternate models. And the same is true of K-12. You don't necessarily have to have 30 students to a room with one teacher who has an Ed (Education) Degree instead of some particular subject. You could experiment with part of the day at a physical location and part of the day online. And so on. So I think there's enormous room for experimentation there. But the thing is, as we discussed earlier, libertarians say they are against the government. But then they line up behind proposals which are actually government policies that are simply more flexible. This simply has some kind of partial market element to them. So, actually I think the libertarian proposals tend to deserve more respect than the libertarian theory. Russ: Well, I guess again it depends on the flavor that you are talking about. I certainly agree with you that so-called market solutions that have government running the market whether it's for schools or health care or other things are not particularly libertarian or classically liberal.

27:04 Russ: I want to go back to one last thing on this issue of this transition to a larger government. You mentioned that after the Great Depression, somewhere in the New Deal perhaps, we had to go to government provision of social welfare services because charities weren't doing the job. Actually, charities were quite active during the Depression of 1895. They were quite active in the Great Depression. They disappeared when government got much larger. You are correct, as you point out in your article, or in one of your articles, that there's always been public provision of welfare at the state and local level, though. So it's never been a so-called libertarian provision of aid to the poor. There's been a lot more private aid to the poor pre-Great Depression. I think it's important to point out that the death of serious private charities fighting hunger and poverty for large groups of people ended with the New Deal and the rise of Federal spending. Guest: You are absolutely right. There is no doubt that government social insurance crowded out a lot of charitable activity. And also that Federal social insurance crowded out a lot of state and county and local. Russ: That's correct. Guest: Now, the question is: Is this a bad thing or not? Russ: That is the question. Guest: I asked this once of an 84 year old friend of the family, unfortunately no longer with us, who had grown up on a farm in Missouri. And I was discussing Robert Putnam's study about the decline of civic activity and so on. So I asked him, because he lived all the way back until--was born around WWI--you know: Did he miss all of these organizations like the Elks and the Moose Lodge and all these fraternal civic organizations? And he said exactly what you said. He said, well they all disappeared because of Social Security. Russ: That's right. Guest: He said, because the only reason 90% of us joined them was because they had health insurance. You know, sometimes the Moose Lodge would have a deal with a doctor, who would see all the members of the Immortal Order of Moose. Or the Elks or whatever. So, they provided health insurance, they provided burial insurance, which was very important for people who did not have the cash to provide for funerals. And also they had old age homes. Old folks' homes. If you were poor then the fraternal order of Elks would have an old folks' home. So I said, do you miss that world of diverse civic society? And he said, Hell no. So. You know there may be people who have some nostalgia for that, but I think this actually liberates civil society. You may disagree with me, but it seems to me--I'll give you an example. During the Communist rule in Poland and in Eastern Europe, jazz clubs were often used as covers for democratic political activism. Okay? So the membership of these jazz clubs collapsed once you had democracy in these countries. Is that a good thing or a bad thing? Well, I think if you love jazz, then really, if the jazz club, even if it's smaller, now it's simply jazz lovers. And likewise, the Masons and the Shriners are much smaller than they were in the past. But if most of the people who join the local Shriner Lodge are really interested in Freemasonry, in other words they are not simply interested in economic benefits, which are now provided by the state, it seems to me that's an improvement for the Shriners. They don't have all of these people who were there just to get burial insurance. Russ: Well, I think the question is if you want to assess what a more libertarian charity system, a more private, voluntary charity system, would look like, I'm not sure you want to look at 1927. It probably would be worse in 1927 than it would be today. We're a much wealthier nation; we have much better ways of communicating and interacting and sharing ideas. And raising money, for that matter. So, when I think about what private provision of some government services would look like, I think about the Harlem Children's Zone, which Paul Tough talked about on a podcast here a few months ago, where basically an entrepreneur, Jeffrey Canada, thought the government safety net had done such a miserable job with inner city African-Americans and other poor people that he decided to provide it privately in a different way. And does it better. It's a lot of work. He doesn't raise as much money or as easily as Head Start or other government programs, government schools, which use tax revenue. But it's more effective. It's more humane. It's more transformative both for the people who live through it and the people who fund it. So, I think the crucial question is--it's unanswerable, so we can argue about it until the cows come home--the crucial question is: Is it imaginable that privately collectively provided social services might do better? I think they might. I agree you can't prove it. Guest: Well, yeah. I guess the question is: Are there enough benevolent billionaires? Because it is mostly the rich who provide the money for charity. Individuals do some. Ordinary middle class. But it's mostly the rich. The only time we had any experience of this really was in the United States and maybe in some European countries after the decline of feudalism when you had state religious welfare, tax-funded things and the rise of the modern welfare state. You know, from the late 19th, early 20th centuries. And at least at that time, the great industrialists and bankers did not see fit to provide charity in anything matching even a minimal welfare state for people now. Which is one of the reasons why these countries created a welfare state. If, you know, the British and the German and the American industrialists had had this whole alternate funded model, then I don't think there would have been much pressure for a modern welfare state. And you can say, well now you have Bill Gates and Warren Buffett, and they are different. My experience in my job--you know, obviously the non-profit community brings me to dealing with very wealthy people. Russ: You're going after them. Guest: Yeah. It's a kind of quasi-academic sector. Is that the majority of very wealthy donors are not very interested in poor people. Or even in the middle class. In helping them out in their own country. The big 'gets' if you are asking for charitable donations involve either the poorest and most destitute people in the world--say, the poor in Africa, a traditional objective of charity from the West; the environment; and also, artistic and cultural and educational institutions, like universities and symphony orchestras, which largely benefit the rich and the upper middle class. And their own children. I don't know. I'm open to the suggestion. But my fear would be that if you got rid of the welfare state it wouldn't be replaced by money from the rich, because they would be spending all the money on zoos and on, you know, symphony orchestras. Russ: I think the counter-argument there is that even in a world where government provision of funding of public schools exists, there are still a lot of wealthy folk and not so wealthy folk who donate to a private scholarship system to get people out of those schools--even when there is a zero-price alternative. So, that to me suggests there is some potential. Guest: But this brings us to a different question. Which is: They do so because it's very easy to say the problem with the working poor and low-wage workers in the United States is because they lack education, and therefore we'll help them go to college and they'll make more money. But the vast majority of jobs in the United States today, and the majority that are being created, require no higher education beyond high school. And maybe a couple of weeks of on-the-job training. That's according to the Bureau of Labor Statistics, which every couple of years publishes an updated list of the jobs with the greatest overall, and it's jobs like nursing aides, janitors, security guards. These all greatly outnumber all of the scientists, engineers, lawyers, professors put together. I do think there's kind of a taboo in the United States--I can't speak for other countries--where the rich are told, well, you can help the poor and low-wage workers by helping them go to college, even though most of the jobs don't require college degrees. But we are not going to ask you to pay your workers more. Right? Whenever there is a suggestion for a higher minimum wage or just higher pay or that more of the profits be shared with workers, Democrats for the most part as well as Republicans, this is not on the table for discussion. The problem is a janitor with a Ph.D. is not going to be paid any more than other janitors. Because most actual occupations, the labor market structure is what determines compensation. It's not credentials. Russ: No, that's true. Which is a good thing, I think.

37:01 Russ: I think the question is whether the world would be a better place if K-12 education, say, was provided in a more thoughtful and more effective way. Guest: But follow that to your conclusion. Since a lot of people, particularly academics, complain that they are doing remedial instruction for undergraduates who really have not mastered what they needed in high school, so if we had better K-12 maybe fewer people would need to go to college. Russ: That would be a good thing. I like that. That would be great. I think too many people probably do go to college. It's subsidized dramatically. The consequence is that subsidization has not been fully paid yet; we have an impending student debt problem, because exactly along the lines you talked about before, we have subsidized it, pushed up the tuition as a result-- Guest: Right. Russ: It's a labor-intensive activity. Whether it should be or not remains to be seen. There are some technological things coming that will maybe reduce the labor involvement. But right now it's generally done in a labor-intensive way, and as a result it's enriched, again, people like me, and you, because you are a substitute for me. Guest: Well, a think tank is a university without students. Russ: Correct. Guest: And we benefit from the fact that our productivity growth is extremely slow in the non-profit intellectual sector, so we can't yet be replaced by software programs. It may happen at some point. Russ: That's right. It very well might.

38:95 Russ: Let's move on to your discussion of economics. A 10-point manifesto against what you call Econ 101. I agreed with one of the 10, maybe one and a half, which is pretty good. I agreed with your first point, which is that economics is not a science and that there's way too much advocacy without certainty on the part of economists. So we agree there. But what else do you think is dangerous or unhelpful about economics? Guest: Well, let me make clear: A lot of people didn't read our piece. We had a disclaimer in there. We were not criticizing Econ 101 textbooks, whether by Paul Krugman or Greg Mankiw or anybody else. We just used Econ 101 for what politicians [?] about the economy. Russ: Say that again? You faded out there. Guest: We were using 'Econ 101' as shorthand, for what people with a fairly limited economic education think that economics says. Right? It was sort of common knowledge. Maybe the phrase 'Econ 101' is misleading. But we were just both frustrated, Robert Atkinson and I, because again and again someone will stand up in Congress, or maybe write an op-ed saying, like: Economics shows, all economists agree, x, y, and z. And usually it's an extremely simplified vision of all activities can be done by for-profit firms in competitive markets. I mean, there is a kind of right-of-center bias to this. And so we just went through a number of things from imperfect competition and oligopolistic industries where the efficient organizations, efficiency may actually favor monopolies and oligopolies for engineering purposes, and in some cases to trade, which is the best example of this. Because in fact the theory of international trade, all the way back to David Ricardo, who has all kinds of qualifications for his theory of comparative advantage is never reducible to the simple thesis that in free trade all sides win. No sophisticated economist, including defenders of free trade in general like Jagdish Bhagwati-- Russ: Including me. Guest: Yah. Well, you always say there's some circumstances. For example Ricardo said-- Russ: Well, not 'some circumstances.' There are, at any point in time, trade has people who benefit and people who struggle. Whether there's losers or not--my former colleague, Don Boudreaux likes to point out that some people who are harmed by trade of a particular kind might still be better off than they would be if there were total protectionism. But you could argue that's a fine point. Guest: Fair point. But these qualifications tend to get lost in public debate. So we were arguing for a more nuanced public debate. That was the point of our piece. Russ: Well, it's certainly true that when things like NAFTA (North Atlantic Free Trade Act) came up, or whatever recent trade issues come up, the defenders of the bill, the legislation, NAFTA, say: Trade will create x number of jobs and we'll all be better off. That's stupid. You can't count how many jobs; it probably won't create jobs; it might change the number of jobs; and certainly some people will be worse off because of NAFTA than otherwise. The critics of NAFTA said, count the number of jobs that would be lost, using a goofy model of relationship between trade and employment that required a certain set of heroic assumptions about data and complexity. And they'd tell how many jobs would be lost, as if that were a reasonable scientific attempt. Guest: Yeah, we're not defending the other side, either. You see the same thing in the debate about this immigration reform bill. So, the Congressional Budget Office (CBO) does a study where it says that there is a very small gain to the economy as a whole over 10 years--and it is small, it's in the billions in a multi-trillion economy--small but real. On the other hand, there are real losses, in terms of lowered wages, at the very bottom of the labor market for native and naturalized workers without high school diplomas who would compete with low-wage immigrants in some areas. Okay, that's a nuanced report. There are positives, there are negatives; you can decide whether the positives outweigh the negatives. And the CBO thinks that it does. This gets translated into public debate and suddenly we're being told that the CBO says the United States will grow rich through immigration. And nobody will suffer. Russ: Yeah. Well, part of this is an aggregation problem, right? It's the idea that the United States will benefit from--and my side, the free market side, makes this kind of claim all the time. What they really mean, if you press them, is that most people will be better off. Ultimately it's a certain form of utilitarianism that I find--my Austrian side, my Hayekian side, finds very unattractive. I don't care, when you ask me, and I think you are agreeing here, I don't care if you tell me that the net gain to all Americans is positive that that means that therefore it's a good idea. That doesn't follow, to me, at all. You have to look at, you'd have to make an assessment. Because it's not going to make everybody better off. It's a lie. Guest: Right. So, the left has its own mess. But I think this particular version of Econ 101, it tends to take arguments which are actually complex and nuanced and then it turns them into this kind of bumper sticker slogan, which is that the more free market solution or the more deregulatory solution is just a win-win for everybody; there are no costs, there are no benefits. Now I guarantee you that if we are dominated by a generation of real collectivists--I don't think the Progressives are very collectivist nowadays--the Wall Street Democrats certainly are not--that I would be arguing against their myths. Right? If they began arguing that you can have infinite levels of taxation and it has no effect on crowding out of private capital and so on. It's just at the moment, your side, or at least the center right, more pro-market side, has pretty much dominated the elite public discourse. Really since the 1980s. Not public policy necessarily. Russ: No. Certainly not. Guest: But the way we talk about markets and about business and so on.

45:28 Russ: Can I just stop you? When you mention, invoked 'Wall Street Democrats,' what was your point? You said that they weren't what? Guest: I don't think you can call them collectivist or leftist or social democratic in any way. Russ: Well, only for their industry. Which is the nature of cronies. Guest: Yeah, the other thing--right, right. Russ: The nature of cronies is to say: We need free markets except for my industry, which is special. So the financial sector has managed to convince the ruling class and to some extent the economics profession that they deserve to be special. Which I find to be repugnant. And every industry makes this claim. Guest: Well, explain this to me: Why is it that--see, I consider myself pro-business. I'm pro-market, where you can really have competitive markets. Why is it that the attempts of what I view as natural monopolies and natural public utilities--and I would include not just water and sewage but a lot of basic transactional banking for example--this is a tax. When these are in private hands, these are predatory monopolies, these are oligopolies; they are exacting a tax from every entrepreneur, every business, and their customers. It's actually bad for markets. And the best thing for a market would either be they would be regulated like public utilities or nationalized in some cases. But what I consider to be the real productive businesses in the United States have been persuaded that banks--and remember that Alexander Hamilton, first Treasury Secretary, called banking a public utility. They've been persuaded that bankers are somehow risk-taking entrepreneurs just like they are. Just like Bill Gates and Steve Jobs and so on. And therefore if the government wants to regulate what arguably is a utility like banking, then this is an attack on free enterprise. Do you see the point I'm making? Russ: Well, not exactly. I see part of it. Guest: Let me give you another example. Russ: Yeah, go ahead. Guest: Suppose that ConEd and some of these natural monopolies that are public utilities--let's say the local sewage commission--were privatized. And then the local sewage company now that it's under private ownership uses its monopoly power to jack up its prices and then, if it goes bankrupt it demands to be bailed out by the government. Okay? I mean, that would be a parallel. Particularly because a lot of the banking stuff is sewage. Russ: Cute. Toxic. Guest: Why would the so-called free market people rush to the defense of this predatory private monopoly when the government tries to regulate them? It seems to me the logical thing to do would be to say, we'd rather have a private regulated utility than these parasites who were hurting the actual productive businesses. Russ: I guess it depends on whether you think banking is a natural monopoly. I don't see that it is. I see lots of competition potentially among bankers, among provision of services of the various kinds we could imagine. We could imagine the security of your money, we could imagine the ability to make transactions at a distance, providing liquidity through credit, etc. So, I don't see why that has to be the case. Where I agree with you, and I said this--I have to hold my nose when I say it but I certainly agree--I would much rather have government regulate and run the banking system than pretending it's a free market system and just bailing it out so that all the up-side belongs to the financial sector and the taxpayer pays for the down-side. That's the worst of all possible worlds. Guest: Where we agree--I think where we could have real agreement across partisan, philosophical lines, is against crony capitalism, where it's the worst of both government and for-profit. And that if you could go to a lot of these crony capitalist sectors--and I think banking is one-- Russ: Housing is another. Guest: Higher education. Russ: Health care. We've only described about 50% of the economy. Guest: Exactly. And then you say, okay, look, either we are going to move this in a more market direction where appropriate, or we are just going to make it more government. But we are going to get rid of these socialize-the-losses and keep-the-profits model, of crony capitalism. I think that could be a program for one or both parties. Russ: Yeah. I'm surprised it hasn't been. Guest: But if you are right and it's 50% of the economy and it's 80% of the campaign finance contributions, then why are you surprised? Russ: Yeah, no, that's right. Guest: You have to have some source of funding. Russ: Yeah, that's why I say that Republicans and Democrats are similar: they like to give money to their friends; they just have different friends. But they have one friend in common, which is the financial sector, and the reason is that that's the Willie Sutton theory of why you rob banks--because that's where the money is. So it's very hard to be tough on your friends when they finance your campaign. You go back to the last Presidential election, it's shocking to me that neither candidate was willing to address this crony issue in the financial sector. You had a Progressive, on-paper Democrat; you had a Republican desperate to show that he wasn't a plutocrat. And neither of them touched it. It wasn't that they didn't make it the centerpiece. They didn't touch it. And I suspect the reason is that they are beholden. Guest: I think that's right. Now, they were always beholden on banking and business interests, but before banking deregulation in the 1970s and 1980s, we had this very vulcanized and very inefficient banking system-- Russ: It was smaller. Guest: where laws against branch banking protected state and local banks against the New York banks. And once you eliminated those laws it made life much easier for us citizens and consumers--because you had to have Traveler's Checks to go from one city to another. But what it meant was that suddenly all of these politicians who could take on Wall Street because they were banked by the little small-town bank in Missouri or Mississippi, they are raising money from the same megabanks. And it's a real political problem. I'm optimistic in the long run simply because I think as deleveraging goes on as the process of inflating away or defaulting on a lot of these overhanging debts that are never going to be repaid goes on, that the overgrown financial sector in the United States may continue to shrink over time. And we could get back to a healthier situation in which we don't have an overly financialized economy, simply because they've had to shrink and swallow a lot of losses. Russ: It's imaginable. Guest: Instead of the counsel of despair.

52:18 Russ: I want to go back to something you said a minute ago which shocked me. You said that you were pro-business. It didn't shock me because you are a Progressive. It just shocks me generally. I think one of the worst things for my side of the debate is the conflating of pro-business with pro-market. They have nothing to do with each other. Guest: Oh, I understand that. Russ: But people do that. People try. Guest: No, I'm not--I said I was pro-business not pro-market for a reason. I understand the libertarian objection--that we're for markets not for businesses. I'm not a libertarian. I think there are some industries which are not naturally competitive industries, where it's in the public interest to have--companies. Including, like defense contractors. And in that case it makes sense to be pro-business even though there's no particular market there. That is, you would rather have-- Russ: Don't you think the defense sector is a little large for what we get from it? Guest: I think it's large compared to what we need. Russ: For what we get from it. Yeah. Guest: Yeah, no, that's right. I would downsize it considerable. But I would guess that my view of the minimal appropriate defense sector would probably be higher than yours or most people along the more libertarian side. I think that again--and again, I'm not a libertarian. I believe there are certain traded-sector industries that are essential for national defense which you want to have domestic producers in. Because at the end of the day you don't know who is going to be your ally and who will embargo imports or not. And that's simply--you know, you may disagree with the judgment but that's based on our historical experience. And what that means is that the Europeans will never allow their aircraft industry to be totally dependent on the United States. The Chinese are trying to build up their own automotive and aircraft industries, ultimately for strategic reasons. This doesn't mean that you are in favor of statism or collectivism or economic nationalism in general. It just means there are certain militarily relevant industries in which all of the potential great military powers are going to somehow sponsor or subsidize their domestic producers rather than buy the stuff abroad. Russ: I understand. It's an interesting argument. And I think it's just a question of scope, how broadly you think that should be expanded. Russ: Before we leave this area I just want to ask you about one other point you made which ties into this issue of pro-business versus pro-market. You wrote that without the support of the Koch brothers and various self-interested corporations, that there would be no significant libertarian intellectual or political movement. You want to try to justify that? And it suggests that the reason that people support libertarian causes is to encourage pro-business legislation. I find that untenable. But you can defend it. Guest: Well, this is my Washington perspective. If you look at what happened to the libertarian movement, it began as a very vibrant group of intellectuals, sort of like the Paleo-Conservatives, where they have their own principles and their own philosophies and have debates and it's largely academic but it's obviously got political implications. As I understand the history of the movement--and this was explained to me by an angry dissident West Coast libertarian, the Cato Institute and the East Coast libertarians, when they decided to get corporate contributions, suddenly they became silent, a lot of these corporate-funded libertarians, about crony capitalism, about defense contracts they object to, and so on, in order to become players in the conservative wing of the Republican Party. And, you know, Progressives make the same complaint about progressive intellectuals selling out in order to be players in the Democratic Party. So, this is true of partisanship in general. But you may disagree with that. Russ: Well, I have no affiliation with Cato. But I think Cato is a pretty ardent advocate for free trade. They are not protectionist. I think they are a pretty ardent advocate against the defense sector being larger. It seems to me they take lots of--they are against agricultural price supports. They take lots of positions that are "anti-business." And I think they are pretty good on the financial sector. I think. Maybe I'm wrong. They are pretty good about speaking out about crony capitalism. That would be true with the Mercatus Center, where I spent many years at, and I don't see any signs that they've been bought out. Guest: Well, you know, you influence the climate and the weather and, I don't know, maybe I've insulted them erroneously. But my impression is that the corporations who fund these--and it is corporations. I do know a case at a conservative think tank, not a libertarian think tank, where one of the policy wonks who criticized defense spending was let go the same day that one of the defense contractors complained to the president of the think tank. So--and the fact is, there is vastly, vastly more money available for libertarian free market think tanks in Washington than there is for, let's say, pro-labor think tanks. Or pro-consumer think tanks. So I assume they are getting something for their money. It may simply be changing the debate, moving it more toward the free market direction. But it certainly does not seem to represent the distribution of opinion in the public, where libertarians are so small as a percentage of the electorate that Patri Friedman, as you may know--Milton Friedman's grandson-- Russ: Previous EconTalk guest-- Guest: Yeah--has proposed that libertarians are such a minority they could never win elections in the United States and should move to seasteads, offshore, and create their own sovereign states. Russ: Well, where we agree is that we certainly have a tough time making the case for a radical change. As every radical group does, in the relationship between the state and the rest of us. Guest: But most radical groups do not have such nice offices and such deep coffers. That's my point. Russ: That's interesting. Guest: I actually think the libertarians, they might actually be more popular in the public, if instead of just taking grants from the Koch brothers and writing policy papers they actually tried to convert people. Ordinary people. Russ: You don't think we are trying to do that? You don't think those of us--the implication--the reason I found your quote so surprising was the implication that there aren't people who actually believe deeply in liberty. And there always have been. There always will be. Guest: No, my point is that if all of these corporate and donor subsidies vanished, there would still be a significant minority of libertarians. They would mostly be academics, probably. Or the occasional journalist. And they would be like other, you know, heterodox political groups, including Marxists, left-wing social democrats, communitarians. But none of those groups has access to the resources. Russ: Well, we're doing better than those groups, because our utopia has never been tried! Theirs has. It's the empirical evidence. Those Communists, they used to get a lot of money, but now it's harder for them. Guest: Well, there is a complete contrast I think between libertarians and at least the Marxist socialists, because the Marxists, back when you could still find some, I would ask them: Well, what kind of insurance system do you have after the Revolution? Like, how do you structure the public utilities? And they would say, that's a bourgeois question; we'll work all that out after the Revolution. Libertarians have these incredibly detailed plans in advance. Russ: That's right. Guest: Which makes it more plausible, frankly. Russ: It's good marketing. Guest: Something they've thought about.