Steven Rhoads - The Economist's View of the World
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 begin by asking Steven how a political scientist came to write a book extolling the virtues of economics—why not write one about his own discipline? After all, economists are constantly saying unpopular things that can sound a little heartless (at least if you don’t understand the reasoning). Steven explains what attracts him to economics. We get into the concept where all modern economics begins: the market. Steven asks, if, as some people suppose, only right-wing ideologues champion the efficiency of markets, why do left-wing economists like Paul Krugman and Joseph Stiglitz praise them (with qualifications)? We then approach three ideas fundamental to the study of economics: opportunity costs, incentives, and marginalism. We approach these ideas through practical problems, like why it’s sometimes necessary to make roads and public spaces less safe. (Hint: It’s not because economists are walking calculators devoid of human feeling!) We end the conversation by talking through some pressing questions where economists really should be listened to. Is it a good idea to pay out unemployment benefits to individuals indefinitely? Is it rational to rely on nuclear power when we know the dangers of radiation and nuclear catastrophes? Should individuals be able to undergo as many medical tests and procedures as they want? And, finally, are we overcounting the number of deaths caused by COVID?
If you’re wondering how to start thinking like an economist, Steven’s book and this conversation are great places to start.
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0:00 Steven’s recently reissued and updated book, The Economist’s View of the World: And the Quest for Well-Being
5:28 Why is Steven, a political scientist, interested in how economists think?
9:41 The virtue of markets
17:24 Opportunity costs explained
27:07 If everyone needs water and almost no one needs diamonds, why are diamonds more expensive than water?
35:10 Prices, incentives, and compensation
45:43 Would unlimited unemployment benefits help or harm unemployed people?
50:47 Is it rational to expand our reliance on nuclear power?
52:58 The difficulty of reducing healthcare costs
56:58 COVID’s opportunity costs
Links and Readings
Steven’s book, The Economist’s View of the World: And the Quest for Well-Being
Steven Rhoads - The Economist's View of the World
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.