Listen now (65 mins) | On this week’s show, I’m talking to the political scientist Steven Rhoads, author of the influential book The Economist’s View of the World, which was recently reissued in a substantially updated edition. Steven thinks the fundamental principles of economics can help even non-economists see the world in a more rational and solution-oriented way, and I have to say, I agree!
I am so impressed by Dr. Loury's intellectual humility -- and by his persistence in trying to get as much of the best possible information out to his readers, listeners, and viewers.
I really enjoyed this conversation. It certainly seems to be sexy to be against capitalism these days. I love the moral conundrum of who has done more cumulative good for humanity Thomas Edison (for profit) or Mother Theresa?
Not nearly enough is made of the morality of capitalism. Virtually all transactions are made at arms length. Which implies that individuals making the best decision for themselves have concluded that these goods or services are of equal or greater value to them considering the costs.
I had heard Dr. Loury discuss that previously the model for an educator was a simple single factor equation that he would simply maximize wisdom and knowledge imparted. Now that equation has been meaningfully complicated by being maximize wisdom imparted while minimizing for many other variables. His conclusion being that this dilutes those efforts. I fear this exact same issue is happening in capital markets. Stakeholder/Stockholder debate has been the discussion for forever in business ethics. The end conclusion largely had been to maximize shareholder value. Today with the new antipathy for western capitalism and the advent of ESG and "Stakeholder Capitalism" this has done the same thing. What was maximize shareholder value has now turned into maximize shareholder value while minimizing for a million other things that are not relevant to the business. Personally I think one has to examine how you maximize shareholder value. You maximize value by maximizing free-cash flow growth over a very time. This implies that you cannot "exploit" your employees or suppliers etc. That would be great for 1 or maybe even 2 quarters, but nothing beyond. As for as external societal costs that is literally why we have regulators.
Capitalism's critics will always benefit from the fact that the gains are diffused. (Example - 10k auto manufacturers are laid off and replaced by robots). We see those harmed in one concentrated area, but we lose sight of the fact that everyone benefits from a marginally less expensive car for millions. The sum of those losses vs. the societal gain is going to be clearly a gain for society. This is how we get to the point that so many items that were previously for the elites are now available for all. It's this iterative process that results in cell phones, HVAC systems, encyclopedias, computers, 60' televisions, cars etc. are not available to the masses that were previously only available to the wealthy. It's because businesses don't over pay for anything.
In the scenario where the critics of capitalism win the real loser is the people on the margin. They valued the car at $20k, but the price of the car was $21k. If they had laid those workers off they could have valued the car at $20k. Everyone on the margin that would have been able to afford the car between $20-21k don't purchase the cars. Those are the people that lose, but they are nameless and faceless victims with no one taking up their cause.
A great discussion!
The issue with C suite pay is that the cost/benefit is not in line with the pay scale. There are legions of examples of highly paid execs making terrible business decisions. Sometimes, these are punished by the market, sometimes not. Sometimes businesses have such a strong position that even terrible mistakes can't hurt much.
Given the nature of healthcare and health insurance, it's possible to have patients make some economic decisions, but certain things interfere with this. First of all, if someone goes to a doctor, then the doctor usually has more input to which services will be demanded than the patient does. The doctors let the patient know which tests and procedures should be chosen although good doctors give patients alternatives. Conversely, if someone walks into a grocery store, then the grocer does not decide which things a customer should purchase. Second, insurance covers most healthcare costs so any co-pays and deductibles will have an impact, but it will be limited. Well managed insurance companies are careful in how they set-up cost sharing. For example, they will not have cost-sharing for screening colonoscopies because these procedures save money by catching problems upfront. Similarly, patients are much better off if they take anti-hypertensive medication, and doing so also saves a ton of money, so well managed insurance companies do not charge co-pays on these medications. Some insurance companies also provide incentives to doctors who avoid medical errors because many of these errors can lead to bad patient outcomes and high additional costs. I could give many other examples. There are many problems, but thought is often given to economic incentives that improve quality for patients and save money.
Dialogue was a bit too elementary, though that is probably because I taught Econ 1 for over 2 decades. I think there are larger problems that were not discussed but should have been:
1. What is the cost of the total ignorance about economics by citizens in a "democracy"? If citizens, and their attitudes, remain trapped by the false "logic" of "common sense" and/or emotion, how can a society EVER transcend ignorance to increase economic welfare and rational decision-making? Answer --> It can't. So, for now, and as far as I can see into the future, the problem of applying "irrational" solutions to rational problems will NOT be solved efficiently. Simply put, we (as a society) are trapped as prisoners of our own myths (emotion and ignorance). Examples-- Rent controls help the poor. Appeals to populist slogans like "People above profits."
2. The "language" common folks (including most college grads) use to discuss and analyze economic choices contain non-sequiturs that doom us from a rational consensus. Consider the use of the word "exploitation." Usually mis-applied and mis-understood. Who is exploiting whom when person A buys a marriage ring for $13,000 for person B? When Joe buys an abstract painting from his neighbor for $400,000? When the Univ of Smartfolk pays 3 million to its head football coach, regardless he does/not produce a national champion?
Or take the word "fair." What is fair? Ever hear or read where a liberal can define the word? Every market transaction. If the buyer is winning, why did the seller, sell? Or "equal opportunity"? Can non-Indians legally operate casinos to capture revenues to reduce taxes while other racial/ethnic groups are prevented from the same activity to promote welfare of "their" citizens?
Or, consider trade between nations/states/cities. What economist has proven David Ricardo was wrong? If we only promote domestic trade and consumption, from whom should Wisconsin buy its oil or refined gasoline (it produces none)?
So much more, but as a simple comment, I'll suggest another book: The Economic Way of Thinking -- by Paul Heyne.
Finally, the issue of nuke power. Can anyone define the costs and risks, so that we might consider it as an alternative? How can risks of pollution from nuke waste be defined? Or, should we simply mandate that those who seek to develop/profit from nuclear power -- also sign an agreement with the force of law that those decision-makers MUST retire on the future city that the nation will build ON TOP of the nuclear waste dump. The risk of nuke pollution or an errant steam/nuke explosion will be born by those who decided to create more nuke power. And, it should also be stipulated that at least one child of each decision-maker must live on that city for 10 generations.
The division of labor produces great benefits . So should the negative consequences of stupid decisions. Those who make poor choices should be forced to endure the consequences of their decisions.
Glenn is right that the loss from doing schools remotely has had a much bigger impact than any lives that it may have saved. It's not just economists who are saying this, however. John Ioannidis, Monic Gandhi, Marty Makary, and many other prominent Medical Doctors are saying the same thing. Of course, Ioannidis and Gandhi are also biostatisticians. The decisions to do schooling remotely were mostly political decisions after getting pressure from teachers' unions. Some doctors supported the shutdowns, but others did not.
Great episode, Professors Loury and Rhoads! And Wahoowa to Professor Rhoads!
Regarding the debate between Glenn and his wife, it seems to me that it is not a question of moralizing or otherwise casting aspersions on the long-term unemployed, but rather of historical evidence of what happens when benefits for the unemployed are increased or decreased quantitatively and/or temporally. Unless my understanding of the evidence is inaccurate, it's the difference between how we'd like things to be and how they actually are.
I like the observation that economists don't focus enough on human well being. I don't know if it's true or not though but it seems so. Andrew Yang has very much built his image around a similar message, GDP is a shoddy way to measure the well being of a society. I don't know if you'd be willing to but as you mention someone like Joseph Steiglitz and definitely Binyamin Applebaum could be great guests.