0:33 Intro. [Recording date: November 13, 2013.] Russ: Our conversation will be loosely based on a forthcoming article in the City Journal he's written called "Is Growth Really Over?" Now you open with a famous quote I've heard many times attributed to Charles Holland Duell, a late 19th century American patent commissioner. He allegedly said: Everything that could be invented has been invented. You point out that he never said that; that's an apocryphal, inaccurate statement. What he actually said was the opposite: "In my opinion, all previous advances in the various lines of invention will appear today--will appear--totally insignificant when compared with those which the present century will witness. I almost wish that I might live my life over again to see the wonders which are at the threshold." Now, why are we so eager to believe the incorrect version of that quote, that everything has already been invented and there's nothing left? Guest: I don't know. That's a very good question, why we're so eager to believe it. I suppose everybody looks for some kind of straw man, so you are going to say: Here's some idiot who said America would never be discovered five years before Columbus. Or the earth is flat. And then we'll have a good laugh at this. Poor man--he never said it. People have actually researched this in some detail. Quite clearly he was thinking quite the reverse. So I suppose we all look for straw men and people to beat up on, after we make our point, and even if he didn't say it--it's essentially like Winston Churchill, you know; he probably didn't say half the things that are attributed to him but it sort of sounds good. Russ: Mark Twain has the same issue. Guest: Exactly. Russ: Now, Robert Gordon has written that stagnation is the new normal and that future growth rates are not going to equal past growth rates and that there are these headwinds that are going to keep us from reaching the levels of growth we have in the past. Do you agree? Guest: No. No, I don't agree. Let me push this metaphor a little bit. So, Robert Gordon, who of course is my friend and my colleague here at Northwestern, with whom I respectfully disagree, he talks a great deal about these headwinds. Now, some of these headwinds I think are more serious than others. But what he's completely leaving out is that at the same time there are headwinds, there are tailwinds. And he isn't saying anything about the tailwinds. Now I'd like to add perhaps that if you worry about headwinds, there isn't a century in which there have been more headwinds, globally, than the 20th century. I mean, you think about it, compare it to the 19th century, for instance. This is a century in which we have two global major wars, the worst Depression of all times, between 1929 and 1939, the rise of totalitarian regimes of both the left and the right. The Cold War, with an incredible amount of waste of resources on nuclear arms. On and on and on. Plenty of headwinds, and yet this has been the most successful century in terms of economic history that ever happened. So, Duell was absolutely right. And the odds stacked against it were just enormous. And so what people like me have to do is actually come out and explain how despite all these sort of political and institutional disasters, basically the human race has been able to lift itself up to a standard of living that would have been unimaginable in 1900. That's I think the issue. Russ: But of course it is possible that there is a headwind, there is some force working against growth. This time could be different. Guest: No. It could be, but I don't think so. I think there is very good reason to believe quite the reverse. If we look at what's happening to technology, there are very good reasons to believe that it's going to do things that nobody imagined 10, 15, 20 years ago; and there are things that are happening now, and the things we are not imagining at the moment, that will take place 10, 15, 20 years from now. And on and on. I think that that basically is what is going to happen. Now, it won't all be good. Technology always is a mixed bag; it's not for nothing that Joseph Schumpeter called it 'creative destruction'--it's creative but it also destroys a lot. There's always pain to go with the gain. And sometimes the pain is pretty bad. But that's the nature of the beast; that's just what innovation is about. But basically my attitude is, when you look at technology--and I'm not making any predictions about politics and what's going to happen to democracy and things like that because that's not my field--my attitude is you ain't seen nothing yet. The best is still to come.

6:09 Russ: I'm very sympathetic to that view. I'm on your side in this debate. I think one of the problems we have in getting people to believe it is they say, Well, how do you know? And then you say let's go to the past and say, Twenty years ago when the Internet was a tiny little phenomenon it was a totally different world and you could not have imagined not only the technology that was coming and the things we would do with it, but the jobs that would be created and the opportunities for human expression that didn't exist then. Guest: Absolutely. I'm a historian, so for me, the Internet is all recent stuff. But I look back at the last, say, 400 years. I'm very happy to start in 1600. And actually I don't belong to the school of people who say, If you want to predict the future, just look at the past and try to extrapolate. I don't actually do that. We are living in an age in which everything is so different that there are very limited things you can learn from the past. But here is one of those limited things. So, the way that innovation occurs is it has a very complicated and subtle interplay with what we know. So essentially you could think about technology as something that we do, right? Techniques are nothing more than a set of recipes. Here is how you bake a cake. That's not different in principle at least from: Here is how you make an ingot of steel, or here is how you build a nuclear reactor. The recipes are recipes are longer, more complicated, but essentially this is what techniques are about. They are lists of instructions. Behind that-- Russ: It's the application of knowledge. Guest: Yeah. Behind that of course there is a set of natural laws and regularities that we have understood. So you could call that science, but there is more to it than science because that all involves some very bound[?] knowledge, like in Chicago it's hot in the summer and cold in the winter, something like that. Doesn't have to be science, but it's something we know about our environment. Now here is the way I see things. These two types of technology interact with one another in a very subtle way. It's not just that we discover laws of science--we discover relativity or quantum mechanics and then we go and build a nuclear reactor. It's much more complex than that. By building a nuclear reactor or by building television sets or smart phones or something, we learn more about science. And back and forth. So these two reinforce one another in a very subtle way. So here is one way in which that reinforcement occurs, that I think is critical. Science can proceed when it has better instruments and tools to study nature. Now, these instruments and tools are built by people who make things. So there could be, say, opticians who make their microscopes or better telescopes or somebody else who makes a set of lab instruments. But basically science can advance largely because it has better instruments at its disposal. So it is not by accident that we think of the 17th century as an age in which a scientific revolution occurred, because that is when opticians for the first times build a set of lenses by which Galileo could look up and in the sky and find the moons of Jupiter, which had never been observed by a human being because our eye isn't equipped to do that. So, the telescope and the microscope and the vacuum pump and the whole bunch of things like that basically helped trigger what we call the scientific revolution of the 17th century, culminating in the grand crescendo with the work of Isaac Newton. That's all pushed in large part by better tools, better instruments. Now, if you think about what we have done in that dimension today, is that we have added a tool that no one would have dreamed about before, namely, high-powered computing. You look at what's happening in science today, in any kind of research, not just natural sciences--it's unimaginable to do without computers. They gave a Nobel Prize in chemistry this year to a bunch of people who basically started to simulate large molecules with computer programs. There is something that Antoine Lavoisier, founder of modern chemistry, could not have imagined, because he couldn't have thought about the kind of computer power that these people have at their disposal. If he had to do a calculation, he had to do it by hand. And that's the way it was until fairly recently, in an historical point of view. Today the computer power that we have is so immense that endless problems that we've been struggling with all of a sudden are within solution, all the way from the solution of, say, very difficult mathematical equations that have no solution but can be simulated and calibrated by means of machines, all the way down to studying 15th century authors and doing a word analysis by the means of computers. So this is the most power powerful research tool that humans have ever invented. And we just started to scratch the surface. We just began this. Now, you think about the chemistry and the physics and the nanotechnology that these machines will develop and you see what they will then do to further instruments, you will see this mutually reinforcing process that's basically going to launch us into an orbit that we today even cannot imagine. That's why I'm an optimist. You see, that's the way things actually work.

12:31 Russ: So, I want to bring up two challenges to that view and get your reaction. Edmund Phelps was a recent guest on the program and he was dismissive of science and inventions as important causes of human advancement. He emphasizes much more small trial-and-error applications at a very micro level. You seem to disagree with that. Guest: I do disagree with that. I know Ed, Ned, and I know his book, Mass Flourishing. I've read it, and I've actually reviewed it. He's a great economist, but I think he's wrong about this. I think he doesn't quite understand that every once in a while what we need is a conceptual breakthrough without which these mass little things that he's talked about--which I'm not at all denying; they are important. A lot of innovation is happening in very small increments by entrepreneurs. But basically if there is no further expansion of our understanding of nature, and of physics, chemistry, biology, then at some point Ned's mass flourishings are going to run into diminishing returns. Every economist understands that if you have a fixed factor and you add a variable factor, at some point this is going to run into diminishing returns. And so classical physics as it was culminated in the late 19th century work of people like Kelvin, basically could take you just so far. It could not do for you what quantum mechanics did. And so you need a big [?], a big step. And once quantum mechanics is around them a whole bunch of electronics and things in other fields follow. But I don't think it's conceivable that things like quantum mechanics and relativity, and the list goes on and on, could have developed through Ned's mass flourishing. So he's telling half the story, but he's forgetting about changes in the fixed factor. Russ: So, he uses his examples like the railroad or the steam engine and suggests they are over-rated. Guest: Well, no. I think his view of technology history differs quite materially from mine. Let's talk about the steam engine, because I know stuff about it and I've written about it. So, here's the thing about the steam engine. And he's absolutely right--the steam engine, the first working model of the steam engine was installed, by all accounts, in 1712, by a guy called Thomas Newcomen, who was sort of a blacksmith and instrument maker in England. Now, you think a little bit about the thing that he built, and what he built was an atmospheric engine. Okay? So it was based on the principle, later much modified, that if you create a vacuum in a cylinder, that the pressure of the atmosphere will allow you to push the piston up and down as the steam expands. So, now what do you have to know to build a machine like that? Well, clearly you don't have to know what we call today thermodynamics, which was developed really a century and half later than the steam engine, and connected more with the result of the steam engine than the other way around. But he had to know one thing, Russ: you had to understand that the earth is surrounded by an atmosphere. We are actually living at the bottom of an ocean of air. Now, everybody in the world today knows that and understands that, but the truth is that this wasn't really fully realized until one of Galileo's students, called Evangelista Torricelli, who was the first to fully realize that there is atmospheric pressure that is pushing us down on this earth. So, once you have that, ever since you build the barometer, and then people were running up and down mountains and showing that the pressure was actually going up or down--as you went up the pressure went down, and so forth--and that the pressure of the atmosphere could be used. So there is this famous picture; many people who have taken a course in the history of science, of these two separate copper globes that were put together by a German scientist called Otto von Guericke, who was also Lord Mayor of the city Magdeburg; and he put those two copper globes together and by the means of an air pump he sucked out all the air; and then he spans two horses to each side of the globe and showed that they couldn't pull it apart. That the pressure of the atmosphere was so strong that horses couldn't pull these two globes apart, simply because there was a vacuum inside. Now that was a major breakthrough. And this is not a case of mass flourishing. This is a bunch of highly-trained, highly educated, extremely imaginative people--Torricelli, von Guericke, Blaise Pascal the famous mathematician was involved in this, a whole bunch of people. And by sort of 1660, this becomes widely known. There is no doubt that Newcomen must have understood that, because without that, the whole idea of an atmospheric engine was--the Newcomen variety, or there was a slightly different variety developed before by a guy called Thomas Savery--you couldn't have imagined a steam engine without knowing that there is an atmosphere. And so people were asking, could the Chinese have built a steam engine? And the basic answer, is: No, unless they had discovered what the Europeans discovered in the 17th century, which is the existence of an atmosphere. Now, once you have that knowledge, then a lot of things [?] and a lot of little improvements will get you a long distance. Without that, the idea of the steam engine is no more imaginable, no more plausible than building a nuclear reactor without understanding, you know, atomic theory. So, in that sense, I think Ned is wrong. He has to know something in order to build an advanced machine. And much of the [?] come subsequently, I totally agree. But there are times when science makes a big step forward and says, All right, now we can do this and we cannot do that. Here is another example. Now you've got me going. So, think about modern chemistry. Modern chemistry has been an incredible source of progress. Without modern chemistry we wouldn't have fertilizer, we wouldn't have synthetic materials. Anybody understands it. Now, chemistry as we understand it today was essentially the product of, I would say, at most a dozen people working between 1760 and 1800, okay? The largest of which was Antoine Lavoisier, but there were other people involved. But this is a major scientific breakthrough, after which a lot of mass flourishings are possible. Without those people, without modern chemistry, this would have been inconceivable. Because people had the totally wrong model of how materials work. And nothing would have really worked out. You want another example?

20:27 Russ: Let me challenge you with a different issue. I agree with you. Let me ask you a different question. Tyler Cowen, also a previous guest on this program, has said: Well, the rate of growth is slowing down and what's coming in the future is actually we are going to have some acceleration along the lines you've talked about because of smarter machines and tools, but for the average person it's going to be kind of bleak because smart machines are going to take away jobs and the skills that we have, which is our humanity, our creativity, our brains. And the people at the upper end are going to be happy and rich, but the average person might have a lot of trouble in a world of smart machines. As an optimist, how do you answer that? Guest: Well, this is a much more, I think, serious issue. I think it can be dealt with, okay, but that kind of danger always exists. Technology has the tendency to make skills obsolete. And the real problem is not that it will not create new jobs, new occupations, new specializations, new challenges. The problem is people who are losing their skill--they are not losing their skills but their skills become sort of valueless. These are people that typically it will very difficult to retrain in the new occupations. And so what you may well observe is a whole generation of people who go through what the hand-loom weavers went through in the Industrial Revolution, which is their skills became obsolete. They were too old, or for some other reason incapable of being retrained, and they died bitter and disappointed, and many of them poor. That is what technology does. Now, in the very long run, I think the economy will cope with that in a variety of ways, one of course will be that we are going to be creating new occupations that are a result of the new technology. So, you fast[?] somebody in a sort of a 1945[?], oh we'll forget[?]--suppose you told somebody, that machine that [?] von Neumann built is going to be really small and it will have 5 million times the computer power, and here's how it will look and do. And he will worry, Well, what kind of work will people do if machines will do all the thinking, all the computing? So here is an occupation that is birthed in 1945[?]; we are going to imagine--I am pulling something out of a sleeve--but you could say--a computer game developer, so people who write computer games, the notion that he gave the computer would have been rather-- Russ: Bizarre. Guest: Bizarre, for somebody in 1945. They would think of computers as calculating ballistic trajectories. But playing PacMan or fighting the Trojan War all over again, which I understand you can do today on computers--that kind. So there are or there will be new occupations for people, people who do cybersecurity or things like that. Here's another thing which just occurred to me the last few days because at NPR (National Public Radio) we are doing a series on this. But this is absolutely true. Modern technology allows us to actually engage in transactions that before that would have been extremely difficult because of a variety of informational asymmetries in transactions costs. So, you look at something like Airbnb, where people actually become sort of mini-hotel owners to other individuals. So this is peer-to-peer trade in which I contract with somebody in San Francisco to rent an apartment for a weekend. So that person now has a job--he has to clean the apartment, wash my sheets, blah, blah, blah. And I pay him. So that person now has an occupation that he or she couldn't have had before because without the Internet and without the sort of clever setup of the website, this could not have happened. Russ: Well, they could do it, but it's a small number of people because as you point out the transactions costs are very high. Guest: Transactions costs would have been too high. And what this site does, which is very nice, is you actually have a very strong incentive to be well-behaved about this and not to engage in opportunistic behavior. So that I am not going to go and rent somebody's apartment for a week and then trash it and break the furniture or whatever, because if I do then the website will know and they will penalize me by not letting me ever use it ever again. So it's very cleverly done. Here's another example of things that you can do which I just learned. So people who buy, like me, who are totally hopeless when it comes to putting things together, they go to Ikea or to a furniture store and they buy a new desk and it comes in a box, with, you know, a million metal parts and screws and parts and they haven't a clue about how to do this, and they spend two miserable days trying to put it together and then will do it wrong--you can actually go on the Internet today, hire somebody and get them to do this for you for a small fee. Now there's a market that we wouldn't have been able to imagine a while ago. So what I think is that after technology evolves, it will create new opportunities for people to engage in activities and occupations that we cannot today even imagine.

26:17 Russ: Okay, so I'm sympathetic to this view. And the example I like to use is agriculture. In 1900 40% of the American workforce was on the farm. If you told a farmer or an average person or anybody in 1900 that in 100 years it was going to be 3%, they'd assume we'd starve to death and there would be mass revolution. That 40%, 37% of them would have nothing to do. But of course it didn't turn out that way. As you point out, a bunch of jobs came along, and opportunities. But I think Tyler would argue, to give Tyler Cowen his due: Well, what happens when computers create their own computer games and the human beings can't do it any more? Because they can't compete with those really smart machines? Guest: Well, we are still groping about what computers can and cannot do. And it is quite--of course they can do a lot more things than we can do today. When I will have a robot do a root canal job on my tooth, I'll start really worrying about that. But I think that stage we will not reach in the foreseeable future. And of course what will happen is, as computers do more and more jobs that were uninteresting, routine anyway, more and more people will be able to get into jobs in which it will be very hard for computers to step in. Russ: Okay, so I am going to push back on that. Again, I like your argument, but what about the following: What if I'd said to you, 15 years ago, the same argument, and you'd said, Well, the day when a robot can take out my prostate because it's got cancer, that's the day I'm going to worry. But we do have essentially robots that do that. Now, they are guided by human beings. The issue, I guess, is whether the skillset that it takes to run that robot, to run that laser, becomes a very easy thing to do; as the machines get smarter and more effective, it's going to be harder to make a good living as a surgeon. Guest: It may be harder to make a good living-- Russ: Or a dentist. Guest: as a surgeon. It's true it will be harder to make a living as a surgeon doing what surgeons do today. But the whole point is that when robots are doing more and more routine things--appendectomies and things like that--skilled surgeons will be able to push the envelope out even further to do things which robots cannot do yet. And then robots get there. They will just keep ahead of them. Now, in the process, I think more and more jobs, more and more occupations will disappear. There I totally agree, I agree with Tyler. Most of the things that will disappear will be routine. So, let me take a step back. What mechanization has done over the last 250 years--as you pointed out, in agriculture--is basically eliminated much of the backbreaking difficult work that wore people out. Russ: And that's been great. That's been a good thing. Guest: And now we are in the process of doing the same thing with manufacturing. So a lot more backbreaking, boring, routine jobs are being replaced by robots. And it's not just in manufacturing. Agriculture. It's in services as well. There are very few people now who sell tokens to the San Francisco or Washington metro, right? You buy it out of the robot. It's not really called a robot. Russ: Right. It's an ATM (Automated Teller Machine) machine, it's a version of the same thing. Guest: These people, they are replacing really boring jobs, selling tokens in the metro strikes me as a deadening, dull job. And so we replace these by robots. Now, you know, what happens to the person who was selling these tokens? That's a hard question. Clearly nobody young is going to say, I am going to have a career in doing something that is routine and dull, because that's being done by machines; and I'm going to find something that's more fulfilling. And precisely because technology is pushing on, such new jobs will be opening up. Now, that said, I also think that what you see over the 20th century in the long run--not so much in the short run, but in the long run--is people are working class. We have a society, industrialized countries are enduring a hell of a lot more leisure than they did. They have longer weekends. They have, particularly in Europe, they have long, 4 or 5 week vacations. Even in the States, most people probably are down to something like, 1,950 hours a year, I think is the last numbers I saw. Which is, you know, considerably less than people worked at the beginning of the 20th century, which was somewhere around 3,000. So we have cut the working year in the United States by a third, and in Europe, probably more, probably by a half. So, people are working with, they are spending more time living a life of leisure as retirees and living a life of quasi-leisure as people accumulating their human capital. So we will have more time for ourselves, to do things that are fun. And a humanistic calculus[?]--what technology has done, it has hugely increased the value of leisure, because there is so much more to do with leisure today than there was even 50 years ago. Let alone the 19th century. The 19th century, people went to the opera and to the theater, but that was typically an upper and upper-middle class urban kind of phenomenon. For the vast bulk of people, the number of things you could do in your leisure time were by and large sitting around in pubs and taverns and drinking with your buddies. Russ: Well, maybe be singing a little bit. Maybe singing into the fire. Guest: Maybe singing a little bit. But think what the 20th century technology has done for us. It has created basically out of nothing an entire industry called spectator sport. And so today, you flip through your channels and you see hockey and basketball and football and baseball, and for those who like it, they can watch golf and bowling. Where is that coming from? Well, we have more time. People have more time because leisure is much more widespread, both at the sort of very young and old ages. But also for people who are still part of the labor force. And so in that regard, the notion that, the sort of old Puritan notion that old people who aren't working aren't doing anything valuable with their time, I think that's something that we have to be very careful about. And I would like to quote here the great economist John Maynard Keynes, who wrote a little pamphlet which many economists know, called "Economic Lessons [Possibilities--Econlib Ed.] for our Grandchildren," in which he predicts--and he is writing this in 1929 if I recall correctly-- Russ: Sorry; it might have even been 1932. He was writing at a very dark time. Guest: Maybe it was 1932. Maybe it was in the early 1930s. But around that time, in any case. Somehow the date escapes me, but it's easy to check. But what he points out is that future technology might actually create really short weeks, and for a lot of people essentially make work completely redundant. Now, of course, that requires complete reorganization of society, because these people have to have incomes from somewhere. And you can think of societies in one way or another have had to solve that problem already because of some windfall, so you think about it like Kuwait or Norway, and these countries are extraordinarily rich. And for all practical purposes in those countries, work has become a novelty rather than a necessity. And we may well move--if we are able to robotize things enough and automate things enough, there will be a hell of a lot more leisure to consume, and there will be far more things to do with leisure, including, of course listening to programs such as yours. Russ: Yes. Thank goodness. I wonder how many people right now are listening to EconTalk while they are "working." If you are, send me an email at mail@econtalk.org, whether you are taking leisure on the job. I'd love to know. Now, your point is related to a different point you made which I want to come to, but before I do that I just want to say one thing about the Keynes essay. It's "Economic Possibilities for Grandchildren." Guest: That's what it's called. Thank you. Russ: It was published in 1930. It may have been written before, so you could still be right. But--we'll try to put a link up to it if we can find one that isn't copy-protected. But I want to mention, the interesting side note about that essay is it has a strong anti-Semitic streak in it, where he blames the Jews for giving the world the idea of saving and compound interest and delayed gratification; and I'll put up something related to that as well. So that essay is very prescient. It has some strange, not-so-attractive ideas about the virtue of saving. So, Keynes in that essay really decries savings as a bad thing. Which he also was generally against for other reasons in 1930, probably. This is before 1936 when he wrote the General Theory, but I'm sure he was already thinking about it. Guest: He's already thinking about it. And you are absolutely right. He blamed savings for the Great Depression and so you can sort of see him thinking, moving in that direction. By the way: anti-Semitism was extremely common, of course, in those days, particularly he was writing in the late 1920s, early 1930s. I don't approve of it, but you know it's not as uncommon as you would think. Russ: I'm bringing it up as an historical footnote for people reading that essay.

36:45 Russ: But the issue that you raise is this issue about leisure and the unimagined amount of leisure that we have and what we are able to do with it because of technology and the Internet and television, etc. Spectator sports. Which is a sign of our tremendous wealth and our standard of living. You raise an interesting point elsewhere about measurement issues. So, one of the issues you hear--and Tyler Cowen talks about this in a different book, The Great Stagnation, is that--and Phelps, also, and others talk about how, well, things are slowing down; we've picked all the low-hanging fruit; the stuff that's left now isn't as good. And your claim, which I agree with, is part of this is a measurement problem. And you write the following. You say, Many of the most important inventions of the late 19th and 20th century are things we would not and could not do without, yet they made little impact on the national accounts, because they were so inexpensive: aspirins, light bulbs, water chlorination, bicycles, lithium batteries, wheeled suitcases, contact lenses, digital music. Moreover outdated conventions of national income accounting do not count leisure as a valuable good. People who are not working are not producing, and this is "bad" by Gordon's accounting because they are not adding to output. But it may well be that a quiet life is not only the best monopoly profit, as Nobel Prize winner John Hicks famously noted in 1935, it is the very end of a life of hard work. So talk about this measurement issue, that what we are calling measured growth or measured standard of living may be grossly understates its real value. Guest: Absolutely. So in some sense this is one of the dirty secrets of the economist's profession, which is we all seem to be worrying a great deal about growth and about things that depend on national income or Gross National Product for their measurement. You look at things, not just GDP per capita (Gross Domestic Product per capita) or things like that, which is a standard measure--you look at things like total factor[?] of productivity which is essentially the same divided by some measure of input, and this is what everybody uses. But everybody actually knows that these numbers are extremely misleading. And they get more misleading the more we use them for long-range comparisons. So, comparing this year's, say, GDP per capita with last year's, saying the economy grew at, say, 2.8%--that's in some sense a reasonable statement because we don't think that in a year there is a great deal of the underlying structure of the economy that is changing. But we always have to keep in mind that these measures were designed for sort of a [?] wheat and steel economies. So an economy that uses up a bunch of goods of more or less of constant quality, the same sort of basket of goods are being produced, and if we can next year produce more of it--because we have better machines or better technology or more work harder or more people join the labor force, we actually have more output and so we have more income. And we are rich and everything is good. The problem of course occurs when you start looking at these things over longer periods of time, and you start realizing that it becomes very, very difficult to compare two years in which a whole bunch of new goods and services have become available that a previous generation not only didn't have access to but really couldn't even dream about. So, we have an economics concept which we call 'consumer surplus,' which is basically a measure of how much better off you are as a result of a new good or a new service, and sort of different ways of measuring it, standard ways of trying to imagine going to a consumer and saying, Well, how much would you demand to be paid if we took that good away from you and put you back in 20 years ago when that good didn't exist? So we can play this game with cell phones and we can play this game with GPS (global positioning systems) and we can play this game--and so you've got how much would you have to be paid if we took the GPS out of your car, and you scratch your head and say you've got to go back and buy maps and study them while I'm driving. So there's a loss of wealth. It's probably not huge. So, my example of a very small invention for which we could ask this question is anesthesia. So you go to somebody who is about to have surgery and you ask him, How much would you demand to be paid if I took out your appendix without anesthetizing you, without putting you to sleep? Nobody would agree. The sum would be infinite. What can anesthesia contribute to GDP when it was introduced in the 1850s and 1860s? Russ: Could not be very much. Guest: Nothing. It's very small. But that is exactly the kind of thing we fail to account for in our calculations. So that's why I gave that whole list of things; and we could make this list infinitely large. It is the small things that actually don't amount to an awful large part of our income and product that actually have improved life a great deal and that we really wouldn't want to do without any more. And the fact of the matter is despite the best efforts of economists, it's very difficult to account for that. Because not only new goods are showing up that never existed before, but also the old goods are getting considerable better. And there are techniques of dealing with that called 'hedonic' techniques, but they are not very good because goods have many attributes. So you look at your laptop and you ask yourself in which way is this laptop better than the 386 [IBM 386--Econlib Ed.] that I had in the 1980s? You'd say, I can give you a list of 50 ways. It's not just speed of calculation. The screen is sharper. On and on and on and on. The list is huge. The same is true about automobiles, about communication, on and on. So it's very hard to do this. And so in an age in which new products and new services come online all the time and in which the old things are getting better in quantum leaps, our national income accounting system completely fails us. Now, I should add that it doesn't just undercount things because it doesn't count improvement. It also overcounts. In some ways of course national income accounting overcounts how much we are producing because it doesn't take into account various inputs, various costs that incurred to society even if nobody obvious pays it. Russ: Foregone leisure. Guest: Well, foregone leisure, but you can also think about any kind of environmental damage that production causes, including for that matter global warming which may be the mother of all environmental disasters. What's happened is for 200 years people have been burning coal and natural gas and oil and emitting carbon dioxide in the atmosphere as if it was free. But it turns out is isn't free. Now, had we done the calculations correctly we should have actually charged them for contributing to the damage to the planet and deducted those costs from their net value added. We haven't done that because of course the atmosphere isn't owned by anybody. Now in the short run, comparing year to year, that doesn't make any difference. If you compare GDP today with GDP 150 years ago, it becomes meaningless. It may be high[?]-- Russ: I want to emphasize that, but I also want to make the point that I do think that pumping sulfur dioxide into the atmosphere, which I think we do less of--in many ways I think the environment is kind of cleaner than the last 25 or 30 years--when people make these growth comparisons. So you are right, pollution is a negative. I think global warming remains to be seen. It may have a catastrophic impact. It certainly is not--all that carbon dioxide you talked about, other than building it up, hasn't so far had an enormous impact on human wellbeing or longevity. Whether it will in the future is what we're worried about. Guest: Oh yeah, yeah. Russ: So, it's an interesting challenge to even conceptualize how you should measure it.

45:49 Russ: But the point you are making about the challenges of measuring--you talk about anaesthesia. The example I like is the worriers of negative folk like Tyler and others who argue that airplanes haven't gotten any faster. So, we figured out the airplane; that's glorious; but we haven't figured out the portable jetpack, and that doesn't seem to be happening; and so therefore we're kind of stagnating. What I'd respond to that, one of the things I'd respond, is that while of sitting in the airport, instead of having to hire a string of musicians to follow me around, I've got portable music when I'm on my trip. Which is only a luxury that a king could have had in the 19th century in his carriage. I have a thing in my pocket--in my pocket--that plays 10,000 songs at a quality that was unimaginable. So there are enormous improvements when, as you say, we look across all the different margins. Guest: But I will take this a step further, Russ. I totally agree with you. It isn't just the music. It's communications--you can actually do your work. I mean, I take a laptop with me and spend 3 hours on the plane to give a lecture somewhere and I'm actually fixing my PowerPoint while I'm sitting on the plane because it was something I need. Or everything I've written over the last 30 years is in that hard disk. And so if I say, gee, where did I say this and that, I go do a search and bang! There it is. At 30,000 feet in the air. But here is something even deeper than that. I think complaining as Tyler does and other people do, saying, Well, you know, after 40 years of technological change it just takes as long as it did in the 1960s to fly from New York to London--and that's basically like complaining in 1890 that it was no technological change: horses don't run any faster. That's--horses don't run any faster and there are probably not many ways in which we can make them run sufficiently faster to make much of a difference. But the point is the horses basically at some point are being removed from the fundamental means of transportation and replaced by something entirely different. I would think that one of the things that is--and this I think is a major change--is coming--it's not coming as soon as I thought it was going to come, but it is coming, is the death of distance. Russ: A fabulous point. Guest: We are basically no longer having to use airplanes in order to communicate for most of human needs. I'm saying most; I'm not saying all. I fully well understand that at times it's very important to have that personal contact, to share that beer, to have that meal together. But by and large I think what we are going to see is that communications as human interactions are going to be digitalized to a degree that we can't even imagine yet. Except when you are looking at two kids in high school sitting next to one another and instead of talking, they are texting. Russ: Yeah. Guest: And you go, What is going on here? Why don't they talk? They are comfortable with this. I'm not comfortable with it. I don't text, because I'm not 16. Russ: Too old. Guest: I'm no longer really good at getting onto that technology. But I can see kids who are 12-13 year-olds now, when they are going to be my age, this will be perfectly natural to them. Once you text with somebody sitting next to you, there is no reason for that person to be next to you. He could well be in Idaho and you could be in Maryland. You are just texting, communicating as if you were sitting next to one another. The same would be true for conferences, for meetings, for family reunions, for a lot of reasons are flying. Now it is true that for the moment airline traffic is still going up. But I will remind people of 2001 and 9-11, where airline traffic basically ground to a halt for a couple of months, and how clever we were at that time with a technology that's now vastly improved at actually substituting for travel and having meetings and conferences electronically. And I think that is going to be the wave of the future. If something, God forbid, were to happen to transportation, whether it's terrorism or something else, I think this technology would take off like a rocket. Now here's one more point about this. If that kind of thing is going to happen, it isn't just airline traffic that will be affected. It will be regular traffic. And so if you are stuck in a traffic jam at rush hour in Los Angeles or in Chicago or in Washington, D.C. or somewhere else, 20, 30 years from now the vast bulk of people who have to drive to their little cubicle or their little office, today, may well be able to do things from their living room at home. Russ: It's a fabulous point, and it's really an incredibly deep, deep point about the human enterprise. I think about what my life is like; here I am teaching economics to thousands of people around the world, which is an incredibly gratifying and wonderful thing that I get to do with this program. And in the old days, if you wanted to hear an economist, you had to go to him. If you wanted to hear Adam Smith in 1760 you had to go to Scotland. And that's the way the world worked. It's still nice, as you point out, sometimes to be face to face, for a thousand different reasons, a thousand different things. But I'm taping this program right now in my own house; I didn't have to get in my car today. It's wonderful, and my life is richer for it. I don't need my car to go faster to the office, to get to my taping equipment. I'm doing it from home. Guest: And think of the liberating effects that this has. It isn't just that we are saving innumerable human hours which are wasted in commuting. By the way, the cost of commuting is not figured in national income accounts, as you know. If you spend an hour and a half driving to work each day, bumper-to-bumper traffic, that counts as leisure. But if I can spare you that, then there'd be a major improvement in your economic welfare, without making one iota of difference to national income. [?] Russ: I've noticed. I have to interrupt--I have to say that I didn't want to presume when I used that example that I was anything like Adam Smith, and as esteemed and insightful as my guest is, I'm not comparing you to him, either. Guest: No, none of that. Russ: I just meant an old economist. Guest: No, none of us can compare to the master. But here is one more thing about this. And that actually is terribly important. The death of distance will not just save in commuting costs and of course pollution and gasoline used and wear and tear on tires and whatnot. It's also incredibly liberating, because what's happening is that for tens of thousands of years, until the Industrial Revolution, women were working at their homes while raising kids. And so they were multitasking, we would call it today; of course, they didn't use that term. That's basically what they were doing. So, they were producing textiles, they were milking cows and they were feeding the chickens, while at the same time taking care of kids. What the Industrial Revolution did, by creating the factory system and then later on the offspring of the factory system, like the office system, which is basically a factory system in which people sit at their desks but it's essentially the same, is they separated the worker from her household and put them in a different environment. And so that's what essentially the Industrial Revolution did. That didn't exist before 1750 or practically not. Everybody worked at home. By 1914 most industrialized people, whoever worked in industrialized nations, worked away from home. Now, with the electronic digital revolution we can return people to work at their homes if they so choose. And I'm saying this as a brand new grandfather whose daughter has a job and is now scratching her head on how she is going to go back to work. Who is going to take care of the baby? And part of the answer will be, You will, because you can actually turn on your computer at home and when the kid is asleep or playing with his toys, you can sit down and do your work. If you have be in the office, if you had to be in the factory, in the store, you would not be able to do that and you would have to find a nanny or a babysitter or a grandmother. Or worse, you would have decided not to have the child. Because knowing this in advance. And I think that kind of thing is what the death of distance will really do. It will return people to their families, it will return people to their homes, because they no longer have to go to offices and factories. Now, they still have the option; that if you really like to get out of the house or you need the work-cooler effect or you need to sit there with your buddies in the office and talk about sports or talk about work, that option still exists. But this sort of 9-to-5 commitment 5 days a week, that will slowly erode for more and more and more people. And I think that is actually a huge development. Because that is the way humanity lived before the Industrial Revolution. Russ: Yeah. It's a beautiful, and I think true, insight.