--:-- Dwarkesh Patel: Look, I want a small government, but I want a government to be able to do what it's supposed to do at the time it's supposed to do it. Okay, today I have the pleasure of speaking with Professor Alex Tabarrok, who's the Bartley J. Madden Chair of Economics at the Mercatus Center and a professor of economics at George Mason University. And of course, he's the co-author of the popular Marginal Revolution blog with Professor Tyler Cowen, who I've also had the pleasure of talking with on the podcast. So, Professor, thank you for coming on the podcast.
--:-- Alex Tabarrok: It's great to be here.
--:-- Dwarkesh Patel: Awesome. Okay, so first I want to ask you about the Grand Innovation Prize. Can you explain what this is? And I'd like to ask you some more questions about it.
--:-- Alex Tabarrok: Sure. The basic issue is that clearly speed really matters at this point in time in the midst of the pandemic. We've already been too slow. We've been behind the virus every single step of the way. So we want to find a way of speeding up the incentives to produce a vaccine or a diagnostic or a therapeutic. You might say, don't the companies already have an incentive to be quick? To some extent they do, but not as much as we would like from social incentives.
--:-- Think, for example, about a vaccine manufacturer. Typically most vaccines fail. They're hard to produce, they're complex, and most of them fail. What this means is that a vaccine manufacturer won't be willing to build a factory, to ramp up a factory, to get the doses flowing, until the vaccine has been proven safe and effective and it's going to be approved. So they're not going to start moving really until the vaccine is approved. If you want them to move faster, you've got to give them bigger incentives.
--:-- There's a variety of ways of doing that. One is to have a big prize, a billion dollars to the first vaccine which meets a set of criteria. It's effective at 60%, 70% with such and such safety criteria and so forth. Or you could pay directly for manufacturing costs in order to get the firm to build the factory. You can say, we're going to pay some of your costs. There are pluses and minuses, but the basic idea of a prize or advanced market commitment or advanced market purchase or paying for at-risk capacity is that the firms don't have as strong an incentive to ramp up the vaccine quickly as we would like. So we want to give them some extra juice.
--:-- Dwarkesh Patel: Gotcha. And the incentive is even weaker because you can only sell somebody a vaccine once, if it works at least, right?
--:-- Alex Tabarrok: Yeah.
--:-- Dwarkesh Patel: Okay. So I have a question about how do you get money to the people? I guess you could give grants for manufacturing, but if somebody has a great idea for creating a vaccine, there's a billion dollar prize for making that vaccine, but they don't have the initial funding to get that manufacturing or even testing up to par. What do you do about that?
--:-- Alex Tabarrok: Right. So there's a tricky set of trade-offs. On the one hand, the government really is not good at picking winners and losers. We know that from industrial policy, and that holds just as well for vaccine policy. That pushes you towards just having a prize where you just have all comers. Another advantage of that is we really don't know what kind of vaccine is going to be the most successful. There's a whole bunch of different types. There's the traditional live attenuated vaccine, a killed virus vaccine. There are some new vaccines using mRNA technology, some DNA vaccines. Maybe it's not going to be a vaccine at all. Maybe it's a therapeutic, which could serve the same kind of purpose. Or maybe there's some other innovation.
--:-- When you have a prize, you really are opening up the field to the crazy ones, to the ones who wouldn't necessarily get through the NIH committees. That's the classic longitude story of the longitude prize, which was won not by Newton, but by this watchmaker, clockmaker. However, we also have the tradeoff, which is the point that you mentioned: some firms may not have the capital. For those firms, there's a greater argument for funding them up front. There's no easy solution in a pandemic. I kind of think you want to go at all guns blazing. You want to use almost all the tools that you have available to you.
--:-- What I've been working on this problem with Michael Kremer, a Nobel Prize winner who is famous for the advanced market commitment for the pneumococcus vaccine which probably saved 700,000 lives and was given to millions of children. In that, the primary tool was the promise of a fixed price if you were to produce such a vaccine. We're more working on the COVID vaccine, we're more pushing towards paying up front for a large fraction of the manufacturer's costs for producing a factory or for repurposing capacity. It turns out it's cheaper in our context to do that in this way. We can talk more about that. But there are all these trade-offs, for sure. Right now, we're kind of pushing towards paying more for manufacturing capacity.
--:-- Dwarkesh Patel: Yeah, that's very interesting. Why can't it be the case that financial instruments can be created so that VCs make their living off of these high-risk, high-reward investments? Maybe they can have a deal with a researcher that they'll fund a lot of their testing and manufacturing, and if the vaccine works, then they get half the returns of the prize.
--:-- Alex Tabarrok: Sure. When the markets are working well, that's what would happen. It just takes a long time to set these things up. And at every single stage, there are these information problems. We say that the government is not good at picking winners and losers, but the truth is that the VCs aren't that great at it either. They have a comparative advantage. They have an advantage over the government. They have skin in the game. But for a VC to learn enough about vaccines and to figure out which are the scams and which are a real possibility of working, this takes time.
--:-- Look, here's how I put it to a few people I've talked with. I've said, I'm a sort of conservative or free market economist, so I rarely, if ever, say things like this. But what I've been telling people is, now is the time to throw money at the problem. That's not something I usually say. But the costs of the COVID disaster, which are now running in the trillions, are so large that it's really going to pay to advance on all fronts. We're going to lose money doing this. There's going to be waste. We're going to fund some vaccines which look great and then fail.
--:-- The AstraZeneca vaccine, for example, was early out of the gate. This is from Oxford. It looked great. They have pre-ordered like two billion doses. This is really the most promising vaccine. A lot of countries have bought into the AstraZeneca vaccine. As you might know, last week, one of the clinical trials was shut down because they had a negative effect. They're not sure whether it was due to the vaccine or due to something else, but it's a danger. That could happen. I'm not saying the AstraZeneca vaccine is going to fail. I hope it doesn't. I hope this turns out to be a false alarm. But that could happen at every stage in the process. So you really want to have a diverse set of vaccines in your portfolio. Some of them pay for manufacturing capacity, some of them have the guaranteed price, we're going to have some fast grants, like Tyler has been giving out. Take a lot of shots on goal, because we don't know which shot on goal is actually going to be the one which succeeds.
--:-- Dwarkesh Patel: Okay, so let me ask you about prizes generally then. Are you emphasizing prizes in this context because it's such an immediate and big problem that we should try out different funding mechanisms? Or do you think prizes generally could be a useful solution in many fields where the problem space or the solution space is big?
--:-- Alex Tabarrok: Yeah, exactly. The latter. I think one advantage of the prize in the current context is it's just easy to explain to Congress. Just do something. This has been incredible frustration to me that Congress has been so lazy, so slow. They're so complacent. They're not doing anything. It took them ages to set up funding for testing. And then they set the funding and they haven't spent the money. It's just incredibly frustrating.
--:-- I thought a prize, because you can announce it even before you've gathered the funds or figured out who's going to be on the prize committee or anything. Just announce the prize. We're just going to give this pot of money. It'll be there a year or two from now. We'll figure out who gets it. That could be done fairly quickly. In fact, in the code from Obama's time, every agency has the right to set up a $50 million prize, up to a $50 million prize, and they can be accumulated. So you could have two or three agencies or four agencies right now set up a $100 million, $200 million prize just by getting together. They haven't done that, but they could do that. So that was one thing, just the speed.
--:-- The other point is the one you just mentioned: prizes are particularly good when the experts have kind of failed. Usually the experts are right. Don't get me wrong. I'm not anti-expert. Usually the experts are the best people to go to. But sometimes you have a problem where the experts have run against the wall and you need to take a very broad view and you need to get the crazies in and you need to get the out-of-the-box thinkers. A prize could be very useful for that.
--:-- Dwarkesh Patel: So why don't we have prizes in other fields? Like why are grants the dominant way of funding research?
--:-- Alex Tabarrok: It's a good question. I don't really know the answer. Prizes were much more common in the 19th century, and then they kind of trailed off in the 20th century, and they've seen a little bit of a resurgence in more recent decades. One reason, perhaps, is that giving out money is kind of a powerful job. If you're doing it at the NIH or a committee, the people you bring in, you give out the money to the people who are giving out the money. That's a very nice kind of job to have. A prize, if it's set up correctly with fairly strict guidelines as to what meets it and what doesn't, and you only get it if you win, that gives less power to the prize givers. Maybe that's part of it. But I'm not really sure, actually. It's a puzzle as to why grants have been used much more than prizes.
--:-- Dwarkesh Patel: But why don't we see evidence of the clear efficacy of prizes? Because there doesn't seem to be a clear coordination problem here. An altruistic patron could just decide to set up prizes for a lot of other problems. And if for many problems prizes are more effective, we should see that the results from these prizes, the innovations they create, are just much more effective than the grants that are afforded in that field. So why aren't we seeing the clear evidence of the superiority of the prize?
--:-- Alex Tabarrok: Well, we do have some evidence on this. For example, there are these Howard Hughes grants. Howard Hughes actually tried to set up a tax dodge and ended up founding the Howard Hughes Medical Centers, which have lasted much longer than his tax dodge. The distinguishing feature of these Howard Hughes grants is that they say, here's a bunch of money. Come back to us in five years and tell us what you did with it. You don't really have to come up with a plan or tell them what you're going to do. They're sort of like a genius grant in some ways. It turns out that those grants are much more effective. The researchers who get them, that research tends to be much higher cited, more patents, and so forth.
--:-- Now, of course, you have to control for the fact that the researchers who get these grants are different than the researchers who get other types of grants. But even when you do that, even when you set up some fine controls, it looks like giving money with less strings attached actually is more successful. We'll also see with my colleague Tyler Cowen, who has given out more than $20 million in COVID grants and given them out incredibly quickly. I think Tyler gave out $20 million faster than the NIH had given out a single grant. So we'll see how effective that has been. There have already been some good returns from that. So maybe there'll be a resurgence in prize giving or fast grants, however you want to call it.
--:-- Dwarkesh Patel: Interesting. Okay, so now let me ask you about the Baumol effect.
--:-- Alex Tabarrok: Yeah, Baumol.
--:-- Dwarkesh Patel: So we have these industries where every year the prices just seem to keep going up and up and up without fail. Education, both primary and secondary education, as well as university education, is one example where the prices sort of inexorably go up. Healthcare is another one. But there are other ones as well. Those are the ones which are big and the most common. But another thing people have noticed is that fixing things, repairs, seem to go up a lot over time. It's much more expensive to have a pair of shoes repaired today than it used to be. Auto repair has been going up in price over time relative to other goods and services. So much that, for example, I had to replace the blade on my lawnmower. The blade on my lawnmower got dull. Even 30 years ago, you'd probably go to a sharpener, but I didn't do that. I just went to Amazon and ordered a new blade. No one sharpens their blades anymore, maybe for like a $200 knife, but not for a lawnmower. You just buy another one, which is what I did.
--:-- So the question is, why is it that some sets of goods and services appear to be going up over time? William Baumol is an economist. He has an explanation for that. Traditional explanations say there's something wrong with the education industry. There's too much government. Or there's something wrong with healthcare. In each case there's some special story. The story that Baumol gives, which is one of the reasons I like it, is one theory to rule them all. That's kind of the background. So we have this set of industries, prices appear to be going up year after year after year, and the question is why.
--:-- What we did, Eric, Alan and I in this little book, is first of all we looked at the kind of traditional story. Is it unions? Is it regulation? It just doesn't appear to fit. So what is the Baumol story? I'll explain it in a different way today. I think the way to think about it is to think in terms of real goods and services. Forget prices for a second and think about the real economy. You have some sets of goods and services which are increasing in productivity every year. Computers are getting faster and more powerful every year. Manufacturing, we're able to manufacture a car using less steel than ever before and in a shorter amount of time using less labor. So these goods are increasing in productivity.
--:-- There are some other industries which, for whatever reason, are just slower increasing productivity. You're bound to have some randomness or just some differences. Some industries, for technological reasons, are increasing in productivity faster than other industries. So you have two different types of industries: one is the progressive sector, the other is the slower productivity sector. It doesn't have to be negative productivity, just growing more slowly in terms of productivity. In the progressive sector, you get a lot more output per input over time. In the stagnant sector, only very slowly does output grow per unit of input.
--:-- If you think about that, then it has to be the case that prices in the stagnant or less productive sector have to be going up. The simple reason is because goods trade for one another. If you can get a lot more goods in the progressive sector, that means if you want more of the stagnant sector, you have to give up a lot, because you can get a lot. The classic example is the symphony, or the string quartet. In 1826, the string quartet takes four people 40 minutes to do a high-end string quartet. In 2020, it takes four people 40 minutes to do a string quartet. Their productivity hasn't gone up at all. But what you can get, the opportunity cost of that, has gone way up. In 1820, to hire four people for 40 minutes, you are giving up a bicycle or whatever. But now, if you give up four people for 40 minutes, that's worth a lot. You can get the movies and a dinner out and two bicycles or whatever. You're just giving up a lot more. That's really why the price has gone up, because of the progressive sector.
--:-- To put it the other way, it's not that there's a problem with the stagnant sector. It's not a direct problem. It's not that there's something wrong, unions or regulation or something like that. What's really going on is something good about the progressive sector. That's why things are getting more expensive, because you have to give up a lot more because this sector is becoming much more productive.
--:-- Let me give you one other way of thinking about that. What this implies is that prices in the stagnant sector will start to go up less quickly when the progressive sector is slowing down. So prices in the stagnant sector go up much more quickly when you have a lot of growth in the productive sector. Now with the great stagnation, as growth is slowing down, we're actually seeing healthcare prices going up less quickly. When did healthcare prices really go up? The big increase in healthcare prices was in the 50s and 60s. That's when healthcare prices really exploded. They grew much more quickly, like 10% a year. That's when productivity was going up. Now productivity is slowing down and we're seeing prices are not going up so quickly in these stagnant sectors. That tells you this is not a good thing. Higher prices could be a good thing in some ways and less price inflation could be a bad thing.
--:-- Dwarkesh Patel: Yeah, it's such an interesting explanation. It just changes all of the prevailing wisdom that you hear everywhere about why these industries are getting so much more expensive. But I have a few questions about that. As you laid out, one of the explanations of the Baumol effect is that one of the main inputs into many of these sectors is labor. If you can get more out of labor in one sector over time and not so much in the other sector, they're willing to pay more for labor in the progressive sector, and that raises the price of labor everywhere. But how can labor be getting more expensive at a time where we keep hearing about wage stagnation?
--:-- Alex Tabarrok: About what stagnation?
--:-- Dwarkesh Patel: Oh, wage stagnation.
--:-- Alex Tabarrok: Oh yeah, right. Right. So first of all, we hear about wage stagnation. This is something which Helen and I actually add to the Baumol effect in our book. Baumol was exactly, as you said, most focused on kind of labor in general. We just give it a slight twist in our book. We say, look, it's skilled labor. Skilled labor in particular has gone up in price because a skilled laborer is much more valuable in Silicon Valley than they used to be. You think about healthcare, you think about education. These are sectors which involve a lot of skilled labor.
--:-- I have a PhD. I teach typically like 30 students. We'll talk about online education later. But I teach 30 students a semester. That's a really expensive use of someone with a PhD. I'm teaching 30 students and I don't want to say like I could go to Silicon Valley and be rich or whatever, but someone like me could. That is the trade-off which we're talking about as a society, not Alex Tabarrok could suddenly move to Silicon Valley. But somebody who has the opportunity of getting an economics PhD, they can spend their lives teaching 30 students at a time, or they could go work for Uber, which a lot of economics PhDs do, or for Amazon. The opportunity cost of a PhD has gone way up because now they can be hired for Amazon or Uber. But they're still doing exactly the same thing in the classroom. They're still just teaching 30 students. So that price has got to be going up.
--:-- Dwarkesh Patel: Does the Baumol effect suggest that AI automation fears are overhyped? Because more and more of the economy is service-based. That sector isn't growing more productive, so it's not growing smaller. And also the value of labor goes up over time as the sectors that are becoming more productive can produce more.
--:-- Alex Tabarrok: Yeah, yes and no. It's definitely true that the service sector has grown over time. In general, the stagnant sectors will grow over time because there's only so many cars you can have or want really probably. Even when cars get less expensive, people might have one or two and the quality goes up somewhat, but there's kind of a limit to revenues in that sector. So the stagnant sectors do tend to grow. Education and healthcare have become a bigger part of our economy, which is kind of natural.
--:-- Now, does this mean that AI is overblown? I think it means that we're not going to run out of work. That's true. But I do worry, and as we're already seeing, that certain types of labor can be overrun by automation. Less skilled labor, their wages have not been going up. Partly that's automation, partly that's trade, and that is only going to become more serious with remote work and with automation. So I do worry about if you can't raise your education level, you can't raise the skill level of your workers, then you're in real trouble.
--:-- People are very flexible, that is true. But I think about horses. When we introduced the automobile, it's not like horses all found alternative employment. They found the glue factory. Horses are pretty flexible. You can do a lot of things with horses. But it's not like they all slotted into different areas of the economy. We did have more horses for recreation and so forth. But no, overall, the number of horses is down. So I worry about less skilled labor.
--:-- Dwarkesh Patel: And how much of the great stagnation can be explained by just the economy over time being more and more dominated by the sectors that are growing in productivity the least?
--:-- Alex Tabarrok: Yeah, I think that's exactly right. As you shift to the service sector, you see a decline in your growth rate simply because you're buying more of the things which are growing more slowly. That's going to continue. It can be part of a naturally growing economy. There's a new good book on this. I've forgotten the title. The author is going to be mad at me for not remembering. I'll come back to it. But there's an optimal stagnation. It could be good that we are growing more slowly in the sense that you have focused your spending on sectors which are growing more slowly. That's kind of a natural change. Obviously, what we would like is for all sectors to boom. Maybe we could do something about that. But it's not going to be easy.
--:-- Dwarkesh Patel: So speaking of one of these slow growth sectors, let's talk about education. You write in the paper, to decrease the college wage premium and the relative price of goods and services that use college educated workers, we need to increase the educational attainment of the US workforce. Now, my first guest on the podcast was your colleague, Bryan Caplan. He would argue probably the opposite. He'd say you're just increasing the cost of signaling if you make people have higher educational attainment, because they have a signal relative to the other counterparts who are now more highly educated. So how would you respond to that?
--:-- Alex Tabarrok: Yeah, so Bryan is clearly right that there's a lot of signaling involved, particularly in college education. That's not the only type of education that counts. In Germany and Austria and many of the European countries, they invest a lot more in apprenticeships and worker training. The interesting thing is that we have this crazy system in the United States. The high school graduation rate is actually quite low compared to other countries. I think at the time I wrote my book, it was only like 75% for men. It's gone up since then. It's maybe like 80, 85%. But we still have a large chunk of our workforce which does not graduate high school. But then of those who graduate high school, we send a huge proportion to college, way more than in Europe or Germany. We're sending like 60, 70% of those who graduate high school on to college. In Germany, it's more like 40%. I can't remember the exact figures, but it's something like that. It's a completely crazy system. On the other hand, in Germany, almost everybody graduates high school, like 97%, something like that.
--:-- I think we can rebalance here. Definitely more people should graduate high school. More people should be highly skilled. Does that mean they should be going to college? No, because when a lot of these kids go to college and then they take, I'm going to upset some of my friends, then they go into journalism, which is a terrible field, or psychology. These are terrible fields to go into for jobs. And yet these fields, journalism and psychology in particular, have grown. The number of people going into computer science has been flat for like 30 years. You would think whatever field has grown more than computer science, you would think it would be booming. But actually, no, it's pretty flat. What increases we have seen in people going into computer science has all been foreign students. The foreign students, if you're from South Korea or India, you don't come to the United States to do a journalism degree or psychology. Your parents aren't going to allow you to do that. You come to get some hard science. I think the US students should do more of that.
--:-- Dwarkesh Patel: I promise I'm not contributing to the problem. I'm right here at university studying computer science.
--:-- Alex Tabarrok: I didn't want to make any presumptions, but I'm glad you fit the correct modus operandi. You're doing the right thing.
--:-- Dwarkesh Patel: Yeah, it would have been pretty funny if I was right here studying journalism and had to hear you say that.
--:-- Alex Tabarrok: You actually could be a good journalist. There might be room for you.
--:-- Dwarkesh Patel: So let's talk about something that you have launched, Marginal Revolution Online University, which is trying to change up the system a little bit. You've written about online education and how these massive open online courses are going to select for the best teachers. What's going to happen to the rest of the people who are trying to teach right now or already teaching?
--:-- Alex Tabarrok: Yeah. So I think the long run is pretty bad for teachers. We always complained that we pay our teachers less than our sports stars, like basketball or something like that. What's going to happen is we're going to pay our teachers more like basketball stars and baseball stars, but there's just going to be a lot fewer of them. When you teach online, I said earlier I teach 30 students, but with Marginal Revolution University, I can teach 300 students and I do. Hundreds of thousands of students. So frankly, people like me, if not me, are going to drive a lot of people in the teaching business out of business. That actually would be a good thing. The problem is education has always been difficult to scale, right?
--:-- Alex Tabarrok: It's such a one-on-one kind of business. If you're able to scale education — and we're being forced to because of the pandemic — there are huge, massive returns possible. Whoever cracks that nut, and I don't think it's been cracked entirely, is going to do incredibly well. You go from one person teaching 30 students at a time to literally teaching the entire world.
--:-- And if you tie education to a progressive sector, instead of tying it to a labor-intensive sector, you tie it to technology. Then all bets are off. Everything can change really, really quickly.
--:-- Artificial tutors are already as good in randomized controlled trials as real tutors. An AI can look at hundreds of thousands of student responses on a test, see your pattern of errors, and figure out what concept you're not grasping. Instead of just repeating the lesson, the artificial tutor can pinpoint and direct the student exactly to that piece of knowledge they need to unlock the key to learning. Students can advance much more quickly. There are huge possibilities for artificial intelligence and for video online learning.
--:-- Dwarkesh Patel: You give these optimistic scenarios, but a pessimist might say we've had these predictions since Edison said the motion picture would change education forever. The same thing happened with radio, books, television. What's different this time? How is this going to disrupt a system that's been around for a thousand years?
--:-- Alex Tabarrok: You're absolutely right. With books, you can get all this knowledge and carry it around, read it at night — it has a lot of the advantages I claim for online education. So this makes me humble. I could be wrong.
--:-- But I do think a group of technologies come together where small differences can make big effects. Consider the Apple Newton. It was basically a cell phone, a portable computer. But it wasn't quite fast enough, wasn't connected to the internet enough. It never took off. Yet it's just a small step from the Newton to the iPhone, and the iPhone was huge. Technologically there's very little difference, but one was a failure and one was a huge success.
--:-- With the speed of things online, the quality of animations, music, artificial intelligence — you reach a threshold and then things boom. My students at George Mason tell me they prefer online. It makes sense because students have different learning methods, and the classroom kind of sucks. You can't hear the professor, you have to be there at a certain time, you can't pause. With online, if you didn't quite hear something, you just pause and rewind.
--:-- Think about podcasts. A lot of us listen at 1.5 or 1.25 speed, then slow down when there's something new. That's a huge advantage. Online students can go at their own pace.
--:-- And tying it to a progressive sector is important. We captioned all our videos in English, then discovered YouTube automatically translates them into dozens of languages. Every improvement in deep mind, every improvement in artificial intelligence, automatically improves our product. The captions get better without us doing any work.
--:-- Dwarkesh Patel: But Bryan Caplan might say you're solving the wrong problem. People aren't giving up four years of their life to get a better education. Your videos are much better than my high school economics course, but I still had to attend my high school and college economics courses. Unless we can figure out a way for people to signal their intelligence and conscientiousness through online courses, people won't substitute this for what college provides.
--:-- Alex Tabarrok: Right. That's why MOOCs aren't going to replace universities. But universities are going to go online. You still need that stamp. We haven't cracked that nut, maybe we will in some fields like computer science. But that's why universities will be the ones who go online. Not all of them will make the transition. We're seeing this with the pandemic — a lot of universities are falling by the wayside. The ones with a high reputation will be able to expand their market.
--:-- Harvard doesn't want to expand its market, but a place like George Mason would be happy to have tens of thousands of students all over the world. Georgia Tech has done this better than anybody. They have the largest computer science master's program in the world — something like 7,000 online students. The online students are treated exactly the same as residential students. The professors don't even know which is which. It graduates something like 7% of all computer science masters in the world. And it's a quarter of the price of the residential program. That's a trailblazer.
--:-- Dwarkesh Patel: Is it possible that the people who would have been teachers but are now being out-competed by the best teachers in the world will just become personal tutors? Can we get back to an older model of one-on-one instruction, or will that be too expensive?
--:-- Alex Tabarrok: Some of that will happen. The real nut to crack is psychology. People are going to need coaches. People laugh at life coaches because only the rich and famous have them, but that's a large part of education. In sports, everyone has a coach. Why shouldn't you and I have coaches? There will be an industry for life coaches — someone to encourage you, map out your skills, like what high school advisors are supposed to do.
--:-- Education will be debundled. The traditional lecture part, the transmission of information, will go online. A much smaller number of teachers will teach many more people. But the coaching and tutoring will be spread out, more hierarchical. One guy at the top will have a hierarchy of TAs. That's kind of how college works already, but multiplied by a factor of 10 or 100.
--:-- The model will be like what Tyler and I have started: you teach online, then show up at different places around the world for guest appearances. I've been to India a couple times. The students already know me from the videos. It's weird, but they're like, "Oh, Professor Tabarrok!" I can see a model like Paul Erdos, the mathematician who traveled the world co-authoring with different mathematicians, never had a fixed address. Some teachers will do that — teach a few days in South Korea, a few days in India, building community. Most teaching is online, but you get to meet the person occasionally.
--:-- Dwarkesh Patel: But with the Baumol effect, if education becomes a progressive sector, won't that exacerbate the increasing cost of things like TAs and coaches?
--:-- Alex Tabarrok: There are two effects going on simultaneously, which Baumol nicely captures. The stagnant sector becomes higher priced because the progressive sector is growing more productive. But that means you're also getting richer. There's a substitution effect and an income effect.
--:-- It's bizarre that even as the price of education and healthcare has gone up, we're spending more on them. If the problem were just regulation or lack of productivity, you'd consume less when the price goes up. You need two theories: one to explain why the price is going up, and another to explain why people consume more. In Baumol, you're pushing out the production possibility frontier while it becomes more curved. The price goes up, but you're also becoming richer. It's not contradictory that you'd spend more on a good even as its price rises.
--:-- Dwarkesh Patel: But you point out in your paper that even though we have more teachers per capita now, math scores haven't really increased. Shouldn't more teachers at least improve outcomes?
--:-- Alex Tabarrok: If we were dealing with a fixed set of students, I think that would happen. But many more people are going to college than ever before. The standards are going down. Students need a lot more handholding today. In the past, you had the elite going to college — people who could take care of themselves. Now we have a much wider variety of students who need more input.
--:-- There's another factor tied to the great stagnation that's very worrying. We seem to need a lot more input per unit of output even in progressive sectors. Computers are becoming much faster, but look at the number of researchers working on chips. You need many more electrical engineers to get the same growth rate today than in the past. The same is true in pharmaceuticals. Even putting aside FDA regulation, the R&D budget to create a new drug is much higher today. It seems to take many more scientists to get the same life expectancy increase. There was more low-hanging fruit in the past.
--:-- Dwarkesh Patel: As Tyler Cowen wrote about, and Nicholas Bloom's paper showed, we need 18 times as many semiconductor engineers just to maintain the same Moore's Law doubling of transistors every two years.
--:-- Alex Tabarrok: Exactly. It's very worrying. One hopes we'll see a quantum leap in some technology. You get a quantum leap, then diminishing returns, then another quantum leap. Maybe it's quantum computers. I don't know. But hopefully some sector will explode. Otherwise, those facts are really disturbing.
--:-- Dwarkesh Patel: They mentioned that every 13 years you need to double the amount of researchers to get the same growth. Every pair of 13-year-olds would need to have four research kids. It's disturbing because with more researchers, ideas are a public good — they flow everywhere — so you'd expect much more advance. But we've only barely kept pace.
--:-- Alex Tabarrok: I am optimistic that with China and India becoming richer, we get more scientists and engineers worldwide. That'll give us a boost. But so far, it's not the huge gain one would have hoped for.
--:-- Dwarkesh Patel: I plugged those numbers into code. If research productivity declines every 13 years, you plateau at like a 40% increase. But if it doesn't decline in the next century, you could get 600% growth. There's a small possibility of a very big gain if we get lucky, but the trend is not good.
--:-- Let me ask about dominant assurance contracts. Can you explain what that is?
--:-- Alex Tabarrok: This is maybe my most important paper, though it's been overlooked until recently. It solves the public good problem — that's a bit of an exaggeration, but Paul Samuelson said this problem was impossible to solve.
--:-- The public good problem is that for a good which benefits everyone — non-rival, non-excludable — there's a free rider problem. People say, "I'll let the other guy contribute, then I'll benefit without paying." When everyone does this, you don't get the public good at all. It looked impossible to solve.
--:-- I solved part of it with the dominant assurance contract. It's easier to explain today because of Kickstarter. In Kickstarter, you contribute toward a public good and only pay if enough other people contribute to reach the threshold. That solves one problem: your funds are never wasted. They're only taken if enough people show up. That's an assurance contract.
--:-- The dominant assurance contract has one simple twist: if you don't reach the threshold, everyone who agreed to pay gets a refund bonus. So think about whether to contribute. There are only two cases. One: if the project succeeds, you get the benefit of the public good. Two: if not enough other people contribute, you want to contribute because you'll get the refund bonus and won't have to do anything. Either way, you're better off contributing than not. It turns an assurance contract into a dominant strategy to contribute to the public good, because you benefit either way.
--:-- It doesn't solve all public good problems. It works when you know the right size — like a bridge or lighthouse. You know how much it costs for the right size. For goods where you're not sure how much to produce, like defense — should it be $100 billion or $500 billion? — it doesn't solve that. But it solves the contribution problem.
--:-- My colleagues and I ran experiments. The dominant assurance contract doubles the number of successful projects. If you put this on Kickstarter, you could probably double successful projects.
--:-- Dwarkesh Patel: It's such a brilliant idea. It takes the equilibrium from being a free rider to actively contributing. But what about projects where the budget inflates over time? Like a bridge projected at $10 million that ends up needing another $10 million?
--:-- Alex Tabarrok: One problem at a time. That happens whether it's a public good or not. There's a tendency for big projects to inflate. In the United States, subways and tunnels are so expensive compared to the rest of the world. Part of that is unions, legalism, historical committees — we've put so many requirements on building that it's become really difficult and expensive. The dominant assurance contract doesn't solve all problems.
--:-- Dwarkesh Patel: Is the path for libertarian-minded people to set up alternative institutions based on ideas like this, instead of convincing the majority to adopt our ideas?
--:-- Alex Tabarrok: I think that's a very progressive way of thinking. We need many more public goods, especially local public goods. A dominant assurance contract is a way of bringing this out. If we can create a regime using these mechanisms — some using blockchains — to produce public goods, designing a market to produce public goods could change everything. Instead of saying the government is always doing it wrong, let's create an alternative institution that can do things better.
--:-- Dwarkesh Patel: Eliezer Yudkowsky wrote *Inadequate Equilibria* detailing three ways civilization can fail: asymmetric information, decision makers not being beneficiaries, and suboptimal Nash equilibria. You wrote about asymmetric information becoming a smaller problem. Dominant assurance contracts address the other two. Is this the future? Is this how we solve coordination problems?
--:-- Alex Tabarrok: We'll see. You never know until the paper gets out into the world. Democracy itself is a mechanism to collect and aggregate preferences and limit government. We've had 200-250 years of experience. It works well in some cases, less well in others. It's not a great preference aggregation mechanism, but it's a pretty good way of limiting government. Democratic governments don't starve their own citizens — a low bar, but many governments fail to meet it.
--:-- Democracy isn't the end of the story. There are different types of democracies, different mechanisms. As we live online much more, many more of these mechanisms become viable. Online satisfies the Tiebout conditions — you can move from world to world at low cost online. It's much less costly to set up a new type of government.
--:-- Every new blockchain project has its own governance system. Most are terrible and will fail. But when in human history have we had as many experiments with governance mechanisms as today? Tezos has its mechanism, Ethereum has its mechanism. We're doing much more experimentation in how to organize collectively.
--:-- Collective organization is an unsolved problem. How do we act collectively to solve public good problems without becoming dictatorial or falling under rent-seeking? If we can crack that nut, that's huge. The plethora of online worlds and experiments is one way we're going to do this. The last time we did this was transitioning to democracy after World War II. There were maybe eight democracies then; now we have hundreds. Now with online worlds, we can have thousands of experiments with new governance mechanisms.
--:-- Dwarkesh Patel: What do you think of Robin Hanson's idea of futarchy, where prediction markets decide policy?
--:-- Alex Tabarrok: Robin's idea is remarkable. I tell my students that in the whole history of the world, there have really only been about four types of government: monarchy, dictatorship, oligarchy, and democracy. Aristotle understood all three of those. Then you had Rothbardian and David Friedman-style anarchism — maybe that makes four. Robin has a new one, which is incredibly rare. That makes five: futarchy. It's an entirely original idea for governance by futures markets. He's created powerful arguments for it. I'm a huge promoter of futarchy — I'd love to see experiments with it, with dominant assurance contracts, with Glenn Weyl's radical exchange ideas. I want to see a lot more experimentation in these big ideas. Online worlds are maybe one way of doing that.
--:-- Dwarkesh Patel: Can we consider your idea of dominant assurance contracts as a sixth form of government, with actual consent of the governed?
--:-- Dwarkesh Patel: It's pretty good. Yeah, it's pretty good. I wouldn't quite put it up there with monarchy or democracy, but it's a mechanism. It's a mechanism. I'm not sure I can run the whole government with dominant assurance contracts. So I'm going to give Robin his kudos for creating the fifth governance system. It's pretty amazing.
--:-- Alex Tabarrok: Yeah, yeah.
--:-- Dwarkesh Patel: So let me ask you about the different ways in which you've been creating content. You write papers, you write books, you've written a textbook with Tyler Cowen. And of course, you did the online videos with Marginal Revolution University. Which have you found to be the most effective way of communicating information to your audience?
--:-- Alex Tabarrok: Well, it's pretty amazing when I get emails from students around the world from India and Pakistan and South Korea and so forth. They say, "Thank you, professor. I was able to pass my class because of you." And of course, I don't know who these people are. But it's amazing that I have students that I've never met and probably never will meet. Sometimes when I do travel, I get to meet some of these students, which is great.
--:-- This idea that a teacher can teach thousands, hundreds of thousands, millions of students is pretty remarkable. I'll tell you a secret: between Tyler and I, our goal is to teach more people economics than anyone has ever taught in the entire history of the world. Right now we're behind Adam Smith. We're behind Marshall. We're behind Mill. And we're catching up to Mankiw. I think we might overtake Mankiw, which would make me very, very happy. That's a conceivable dream—that Tyler and I could teach more people economics than anybody else in the history of the entire world. I'm not saying it's going to happen, but we're climbing the ranks.
--:-- Dwarkesh Patel: Have you not already done this? I don't know how many copies of The Wealth of Nations have sold, much less how many have been read. But I can imagine that Marginal Revolution University has had more views than there have been reads of The Wealth of Nations.
--:-- Alex Tabarrok: The Wealth of Nations has been around for a while. It was a pretty big bestseller in its time. So I think we have a while to catch up with Adam Smith. Indeed, the world would do itself a favor by learning Adam Smith, which it still hasn't done. So Adam Smith still has some lessons to teach. So we're catching up, but we're not there yet.
--:-- Dwarkesh Patel: Also lessons that can be learned through your videos as well though.
--:-- Alex Tabarrok: True.
--:-- Dwarkesh Patel: Okay. So to close out this interview, which has been really fascinating—actually, before I ask the final question, I want to ask: you have all these ideas—dominant assurance contracts, prizes for increasing innovation during pandemics, tons of other ideas, very related to Robin Hanson. Is it frustrating to be an economist and you're putting all these ideas out there, but very few of them are adopted by the government, and you know how useful they would be? What is it like to be an economist putting all these ideas out there?
--:-- Alex Tabarrok: Yeah, it's frustrating at times for sure. Like I just said, the world is not caught up with Adam Smith, let alone with dominant assurance contracts. I do think that in economics, we are very fortunate that the skills which we are taught as a profession are widely applicable to a large range of fields. They're very general. And we do have credibility in policy and with the administration.
--:-- So while I don't feel that I'm super listened to, I found myself talking with people at the White House and the Council of Economic Advisors, me and Michael Kremer. So Operation Warp Speed—I don't know how much they listened. But being in Washington, I feel I'm certainly not at the heart of things, but you do feel that you're sort of close to the pedestals of power in some ways.
--:-- Coase said that an economist could earn his entire lifetime wages just by stopping one bad idea. So I guess I feel I've done that. Maybe that's enough to justify.
--:-- Dwarkesh Patel: I find that very comforting that you're being consulted with, because all I see is Paul Romer getting incredibly upset at how little his advice is listened to. And then I feel bad that other advice isn't listened to as well.
--:-- Alex Tabarrok: No, absolutely. Romer has been pounding on testing right from the beginning, and he's been absolutely right. I've been incredibly frustrated talking with people in Congress. They're always like, "Well, nothing's going to happen in this bill, but maybe in the next bill." I don't understand it. It does seem that something is wrong, to be frank. We haven't solved that problem. I hate to end on a negative note, but there's something wrong.
--:-- Dwarkesh Patel: What can you expand on that?
--:-- Alex Tabarrok: Well, this is part of what Tyler called "state capacity libertarianism." This is something I've written about—I didn't use that term, but I've talked a lot about it. Look, I want a small government. But I want a government to be able to do what it's supposed to do at the time it's supposed to do it.
--:-- Even I was shocked. The CDC—their entire reason for existing is to stop a pandemic—and yet they completely failed. They botched the first test. Then the FDA came in and said, "Private companies, you cannot use your testing. You have to apply to us to get approval for your test." That slowed everything down at the beginning of the pandemic until the virus got ahead of us.
--:-- It just seems that in the past, the government might have been smaller, but it was able to do things—sometimes bad things, for sure. But the way we ramped up for World War II was a remarkable achievement. And it's not all Trump's fault. Trump is terrible, blame him as much as you want, but you cannot blame the failures of the CDC and the FDA all at Trump's doorstep. Congress has completely failed as well. Congress is the one supposed to be passing the laws. Where's Congress's testing plan? Where is Congress's vaccine plan? Why is it that the only good thing that has come out of the administration on the pandemic is Operation Warp Speed? Why didn't Congress do that? That's actually Congress's job.
--:-- So Congress has completely failed as well. There's a lackadaisical attitude, a complacent attitude, which given that some of them are getting the virus, I completely fail to understand. Boris Johnson actually got the damn thing. You'd think he would want to solve this problem.
--:-- It seems that not only are we not getting the government that we paid for, we're getting less. I at least want to get something for what I pay for. Responding to a pandemic, responding to a war—they're high on my list. I'm worried now in a way I never was before that we would lose a war with China or something like that. That never even occurred to me—the United States, the greatest military superpower in the history of the entire world, by far the largest economy, highest per capita incomes. To think that we might lose a war never would have occurred to me. But now I just think things are so dysfunctional that anything is possible.
--:-- I am worried. It's not just about the pandemic. I think that is just the canary in the coal mine, which tells us that this government is not working. The danger is that with a Biden administration, the liberals will be so happy that all thought of fundamental change will end, which is what happened under Obama. Under Bush, there was a big anti-war effort, big anti-war protests and movement. Obama came into power and that all went away, but the war kept going. We're still in Afghanistan, still in Iraq, still bombing countries around the world. Obama did not solve the problem, but the protests went away.
--:-- If Biden is elected, that's not going to solve the problem of complacency. That's not going to solve the problem that the government is riven with legalism, bureaucracy, inefficiency, and slowness. But it may take some of the force for change, take the wind out of the sails. That is a concern.
--:-- Dwarkesh Patel: Wow. Okay. What's the way we make our government more effective? Is there some solution?
--:-- Alex Tabarrok: I don't have a solution, but one thing which I think is going to be helpful is competition with other countries, such as China and India. What really made us go to the moon? We went to the moon because we were competing with the Soviet Union. They kicked our butts by putting somebody into space and made us look like fools, like technological laggards. So we got our act together and devoted a huge amount of money to innovation—to NASA, 12% of the US budget at the height.
--:-- One of the things I've said in my book *Launching the Innovation Renaissance* is that what we have today is a warfare-welfare state. We do two things: we invest a lot in the military and we invest a lot in various forms of welfare—Medicare, Medicaid, redistribution. I'm not even saying that's bad. But what I would like to see us be is an innovation state. As the warfare and welfare state have grown as a share of the budget, the innovation state has shrunk. We're investing much less in federal research and development than we used to.
--:-- I would like to shift us away from warfare and welfare and towards innovation. When we see China start to kick our butts—China developing new pharmaceuticals, artificial intelligence, genetic engineering—what are we going to do when the first Chinese with super IQs of 160 plus start marching out of their factories? Hopefully that will kick us into gear and we'll say, "We've got to respond."
--:-- I'm much more about cooperation than international competition. I don't think we're at war literally with other countries. I think our interests actually align. But in terms of igniting the passions of a nation towards innovation and away from complacency, competition in the sense of the Olympics—a good kind of competition, if we can keep it to that and not to blowing each other up—would do a lot of good in reigniting America to become the leading nation of the world, not just in innovation but also in freedom, liberty, racial and sexual equality. In many respects, we have led in the past. To reignite that—bring all people from Hong Kong, let's bring them to the United States. Let's bring the Uyghurs to the United States. Let us be that shining beacon on the hill. That's what I would like to see.
--:-- Dwarkesh Patel: I had the pleasure of interviewing Caleb Watney, who made a similar point that the path dependence of technology is very important, so it's important that it happens in a free country. Now that you mentioned *Launching the Innovation Renaissance*, do you mind if I ask you a question about the book?
--:-- Alex Tabarrok: Sure. If your audience can take it, I can.
--:-- Dwarkesh Patel: You explained that both the supply of innovation in terms of global talent will be increased because of globalization, and also the demand because we'll have a global market. So how do we explain the Great Stagnation, which happened during the same period as the time of greatest globalization?
--:-- Alex Tabarrok: Right. All of these trends should be very positive. The way I like to put it is that as China becomes richer, they're all going to be looking for a cure for cancer too. This is a problem which affects everybody. So you have a much larger R&D market. You already see in China leading technologies at Tencent, Baidu, and so forth. They're already investing a lot in these technologies which are public goods. Artificial intelligence is another one. So I think we have a lot to gain by this increased budget devoted to R&D.
--:-- What I didn't realize, I suppose, is that there is this countervailing wind. From the Bloom and Van Reenen work, as we talked about earlier, it does seem there were a bunch of low-hanging fruit and we are having to devote more and more resources to get the same output. Whether that's a fundamental technological factor, whether it's a regulatory factor, whether it's a temporary factor in response to quantum leaps in technology—we got electricity, we got the internal combustion engine, and it takes 50 years to grind everything out of them. Now we've got computers, it'll take some time to do that. Maybe biology is the next one, or quantum computers. There may be a next technology that gives us a leap.
--:-- What I can say is that globalization has been good for research and development. We would have been much worse off if we didn't have that.
--:-- Dwarkesh Patel: Good. And the final question which I'll ask all my guests: what advice would you give to a 20-year-old, or to yourself when you were 20, or just to a generic 20-year-old?
--:-- Alex Tabarrok: Well, I have a generic 20-year-old—I've got two of them. Look, the world is changing faster, so probably the advice of older people is becoming less useful over time. I used to say, "Don't play those video games," and now you can earn a lot of money playing video games. I got that one wrong. I should have told my kids, "Learn how to play this video game, be a sports star."
--:-- The return to skill is going up, so education continues to be extremely important. Get an education in a sector which is complementary to technology. You don't want to be competing against technology. You want to be racing with the machine, to use Erik Brynjolfsson and Andrew McAfee's term. So get educated in a sector like electrical engineering, computer science, or economics as well—a sector complementary to technology, data, data science.
--:-- What is increasing in the world faster than data? If you're able to analyze data, that is going to be an incredibly beneficial skill because we're getting a lot more of it. Extracting meaning from data is very difficult and making it accessible to human beings. So if you have skills from economics—causal inference—but also from data science, machine learning, and so forth, if you have skills to extract information from data, that's going to be very valuable going forward.
--:-- It's not all that. Marketing is going to continue to be important, oddly enough. You would think that's going to go away, but no. Design is going to be important. What is Apple? Apple is just a great design company, an absolutely fabulous design company. That's complementary to technology. You want to take the technology and find a way of putting it in human hands, which creates a delightful, satisfying experience. That's very airy-fairy, and yet that's an incredibly valuable skill.
--:-- So it's not just hard science. If you have an artistic impulse, that's fine. That's also going to be valuable if you can combine it with a technological field. An artistic impulse in design is going to take you much further than in just poetry, let's say. You want to combine these things.
--:-- Dwarkesh Patel: Very good advice. And thank you so much for being on. It's an incredible privilege to get to ask questions to somebody of your expertise. So thank you so much for your time.
--:-- Alex Tabarrok: Great being here. And you asked great questions. So thank you very much.
