Arnold Kling on Twitter, FTX, and ChatGPT
Dec 19 2022

angry-twitter.jpg Economist and author Arnold Kling talks with EconTalk host Russ Roberts about the recent drama in the tech world--Elon Musk's acquisition of Twitter, the collapse of FTX, and the appearance of ChatGPT. Underlying topics discussed include the potential for price discrimination to make social media profitable, whether you could tell Jeff Bezos from Sam Bankman-Fried early on, and the role of human beings in the world of artificial intelligence.

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Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Dec 19 2022 at 8:16am

Arnold – “Price discrimination explains everything”

Mike Munger – “The answer is always transactions costs”

Russ Roberts – “It’s complicated”

Bob Lynch
Dec 19 2022 at 12:55pm

The blockchain is immutable. It’s the exchanges that are the problem. Put Bitcoin in cold storage and wait for the exchanges to shake out.

Peter Scott
Dec 19 2022 at 8:13pm

I found the swipe against Effective Altruism surprising, since this sounds very much unlike the EA movement I’m familiar with:

“I mean, I think months ago that the effective altruism stuff that he was pushing, I thought that that’s committing the sin of believing that you know how to fix the world. It’s the same sin that a politician–an authoritarian politician commits–of saying, ‘My central planning is superior to the market’s trial and error.’ It’s really the same thing.”

One of the big core ideas in EA is that it’s not at all obvious what will actually help people. A good story and a plausible mechanism are nowhere near enough; in order to be at all confident, you have to do the work of actually checking if something is working. This is why organizations like GiveWell have such an empirical focus. So, given this tradition of epistemic humility, what can we reliably say about the best ways to help the poor? Ideally we want things that have a history of working well across many times and places, with evidence so overwhelming that it hits you right between the eyes.

The obvious one is capitalism, which is rightly very popular in EA circles. But (a) it’s not at all obvious how to help this along, short of just putting money in an index fund, and (b) for tactical reasons the EA movement is trying to stick to the less political stuff, in order to get more people in their big tent and avoid being demonized by major political factions. So, what else?

Adding iodine to salt was amazingly low-hanging fruit, but it’s already being done; another dollar on the margin won’t help. So, what else?

Vaccination has an amazing track record against diseases like smallpox and polio. It’s reliable enough that even the most feckless central planners can’t mess it up too badly, and the results have been great. It’s also relatively easy to see if you’re succeeding by looking at e.g. how many people are dying of smallpox and comparing that to how many dollars you’re spending.

Sanitation is more difficult, but also has a great track record pretty much everywhere it has been tried. The robustness of the effects in this case should be easily enough to overcome the Hayekian prior.

Harder still would be a major campaign of reducing standing water to cut down on mosquito populations, which is the standard way for countries to properly eradicate malaria and keep it gone. That one is probably not a tractable EA thing; rather, it’s the kind of thing that I’d expect to see once a country becomes wealthy enough to pay for it, and their government capable enough to implement it.

And then there are a bunch of more speculative, shoot-for-the-moon efforts under the broad EA umbrella. Without commenting on how feasible I think those are, I will note that the EA community tends to only bother with ones that have a very big plausible payoff — because the movement is humbler than you might suppose, and the people working on those long shots will typically tell you straight-up that they’re probably going to fail, in the same way that most startups fail.

(If anybody disagrees with my claims of the historical efficacy of vaccination, sanitation, and mosquito control for malaria eradication — my claims that we do actually know a few reliable ways to partially fix the world — then I’ll be sure to check back here to read rebuttals.)

Dec 19 2022 at 9:55pm

You picked a very interesting day to claim that Elon Musk’s version of Twitter has more free speech.

We know people really hold a principle when following said principle demands that they behave in ways that they are otherwise costly to them. When one applies that to free speech, it’s pretty clear that it’s not a very widely held belief.

Shalom Freedman
Dec 19 2022 at 10:06pm

Russ is always interesting even when he talks about subjects that I know very little if anything about. The part of this conversation with Arnold Kling which most interested me was about ChatGPT which as I understand it attempts to write articles in the way individual human beings write them. This kind of exercise and its possible success does not cheer me but rather creates great anxiety. The new technologies have proved better at all kinds of tasks than human beings. Are they going now to prove better at the one skill I have given my life to, the one which to me most defines my identity? Are they going to be better writers than me at writing me? I understand from this conversation and Arnold Kling’s criticisms that they are far from this now, and only at the beginning of where they might develop to. But I am rooting for another of Russ’s guests Gary Marcus who believes in limitations to their skills, and their hitting dead ends. Technological progress may be great but not if it destroys the value and usefulness of human beings to themselves.

Dec 21 2022 at 11:34pm

Eh, I wouldn’t worry too much about AI being able to write better than you. Even if technology ends up with such capacity, so what? There are TONS of people currently living who are better writers/creators than me, and it doesn’t bother me in the least. Why should AI be any different? If your creative endeavours have had an impact on at least one person, then you can sleep peacefully knowing your works have made a positive net benefit on humanity. And just in case you haven’t heard it lately, I love reading your comments 🙂

Shalom Freedman
Dec 23 2022 at 4:12am

Thanks. I enjoy your comments also. Had I been a bit more optimistic I would have perhaps hoped that the AI readers would be a bit more interested in my writing than the humans have been. All the best.

Dr. Duru
Dec 21 2022 at 12:54am

I asked ChatGPT to “write an essay about Arnold Kling economist”. I got a very different answer than the one Kling reported in the podcast. The essay did not provide a birthday, birthplace, and had no mention of “The Myth of the Rational Voter.” Is it possible the algorithm has already improved its knowledge? I didn’t see any way to input information for the model to train on. Or perhaps the actual question was different?

So I asked “when was arnold kling economist born?” December 23, 1952 (wrong). I assume then wikipedia entries were not used to train the model. “Where was Arnold Kling economist born?” THIS answer is definitely problematic as it can lead to unjustified inferences:

“I am not able to find information on where Arnold Kling was born. However, he received his bachelor’s degree in economics from the Massachusetts Institute of Technology (MIT) and his Ph.D. in economics from the University of Virginia, so it is possible that he may have grown up or lived in those areas.”

Wikipedia does not provide an answer.

Finally, “who wrote The Myth of the Rational Voter”. It got the correct answer “Bryan Caplan.”

So, hit and miss. Something tells me basic information available from human curation is not a primary use case.

But it IS interesting to think about how providing a 100% confident narrative can deceive information seekers!

Russ Roberts
Dec 21 2022 at 3:36am

Arnold did not attend the University of Virginia. His PhD, not his undergrad degree is from MIT. Similarly, when I asked it to write an essay on me it said:

After completing his graduate studies, he held a number of academic and policy-related positions, including serving as chief economist at the U.S. Civil Rights Commission and as an economist at the Federal Reserve Bank of Kansas City.

Not true. So ChatGPT has a ways to get to match Google search. Maybe it will get there, but for now it is quite flawed in this kind of activity.

Fredrik Ribbing
Dec 21 2022 at 2:14pm

Would you, Russ, say that this show is moderated? And if so, would you think that the show would reach its goal better if it where not?

I guess both questions could be understood as retorical ones, but after this show I’m really interested to hear your take on them.

Because though I’m often opposed to the conclusions you reach in this show I’m totally fascinated by your ability to pose questions and replies that make the discussion go both wider and deeper than most shows and conversations on offer. And, in the end, isn’t that what we want the features of a town-square for society (i.e. twitter) to deliver? Why then should moderation of it be such a bad thing?

I understand the difficulty of choosing who should be the moderator or arbitrer between moderators. But I don’t count that as an argument against moderation. I think there is more of us that can judge what a good moderator does to a conversation even when we don’t agree with their conclusions.

Robert William Humphreys
Dec 22 2022 at 10:34am

The suggestion that big corporations have large bureaucracies to ensure that they don’t “bet the farm” on a bad idea is absurd and contrary to reality. I spend several decades in senior management at two global businesses that rely on R&D for most of their profitable growth and I found that the so-called innovation process was acceptable for commercialization but fatal to novel research that would alter the competitive landscape. What I mean by this is, big business is not fatally wounded by well known competitors. They are ambushed by novel technologies that come from out of the blue (off of the corporate radar screen). Sooner or later, it will happen. Any world class research function is working on such insights and ideas, which requires exactly the kind of research people who are terminally allergic to the innovation process once it extends its tentacles into the real research. The innovation process and the innovation funnel are perfectly designed to weed out game changing ideas that could change forever the existing business or business model. People have gotten famous by writing about such innovations. The sad thing is, some of the corporate casualties even invented or developed the game changing innovations that eventually ruined their businesses because they were unable to adapt their culture and business model to what became the new world of competition. I hope I don’t need to list the most famous examples from the 20th century on a site such as this one. My experience is that every good and experienced research leader can relate a story about missed opportunity from personal experience based on this scenario. Business schools and economists simply do not understand the process from the inside. Seems it will always be thus.

Mike S
Dec 26 2022 at 5:31pm

I believe it was George Schultz, and not Henry Kissinger, who was on the Theranos board (Elizabeth Holmes).

Comments are closed.


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TimePodcast Episode Highlights

Intro. [Recording date: December 11, 2022.]

Russ Roberts: Today is December 11th, 2022, and my guest is author and economist Arnold Kling.

Arnold has a very nice Substack account called In My Tribe. This is his 18th appearance on EconTalk. He was last here in October of 2021 talking about reforming government. Arnold, welcome back to EconTalk.

Arnold Kling: Thanks. I'm chasing Mike Munger, I think.

Russ Roberts: Yeah. We all are, by definition. You're definitely in the top five. You might be two or three. I don't know exactly where you are.

Arnold Kling: Okay.

Russ Roberts: But, Mike might be untouchable. We'll see.

Arnold Kling: Yeah.


Russ Roberts: Our topic for today is a number of recent developments in the tech world. I want to start with talking about Twitter. What are your thoughts on Elon Musk's acquisition and its significance in general for social media that he's taken a very--it appears more of a hands-off approach than Twitter had before he took over in terms of what's allowed to be said and not said, etc.?

Arnold Kling: Yeah. Well, I think this issue of content moderation is a very interesting problem. I think it would be an interesting problem in the abstract because you can make two types of errors. You can allow content on that you really shouldn't, or you can ban stuff or downweight stuff that you're wrongly banning or downweighting. I don't know how to avoid that dilemma, that you're going to make mistakes either way.

What's weird about it at this point in history is it's being done in the context of--there's at least one group of people who are just very determined to have certain content banned and they think it ought to be banned. So, the free speech culture has been on the decline. And, the phrase 'free speech' itself, which used to be automatically a positive thing--a motherhood and apple pie thing--is being questioned really for the first time in my lifetime. So, it's a weird time to try to deal with that, the dilemma.

Russ Roberts: Do you think of this as a free speech issue? I mean, there are two things that I think are important on Twitter that are in the conversation. One is so-called hate speech, or let's just call it ugliness; and the second is medical opinions that some people thought shouldn't be promulgated. And, in real freedom of speech, the government does not crack down on either of those. But on a private platform like Twitter, how do you think about that? It's a very unusual private platform, obviously.

Arnold Kling: Yeah. Well, I think the latest revelations are portrayed as showing pretty close to collusion between government and Twitter, so that, I think, brings the whole free speech issue right back into play.

As far as a private entity, I don't know. It's a great attempt by libertarians to create a distinction. But nowadays--I mean, let's say, are universities private entities? I mean if they're getting government funding?

So I think, in terms of a free-speech culture, that people have to believe that the mere expression of opinion is not a threat, it's not violence. And, the term 'hate speech' is something that I don't think should be thrown around very much, if at all. So, I'm one of these people--we're both Jewish--if somebody wants to deny the Holocaust, go ahead, in my view. The right answer isn't to ban them from saying it: it's to present evidence that reasonable people would agree supports the view that you shouldn't deny the Holocaust.

Russ Roberts: I mean, I agree with that. I think that what's interesting to me is that Musk sees this--at least he says so; who knows what he really thinks. But in his tweets, he seems to see freedom of speech as an important value for Twitter.

My view used to be, like you said, as a libertarian: Well, it's different. It's a private platform. It's not a government project. They can do whatever they want. They can ban people. We could have a left-wing Twitter and a right-wing Twitter and some other kind of Twitter. The challenge, of course, is that there's really only one Twitter, and it's very hard to have a second or third Twitter.

Arnold Kling: As people on the Left are discovering, right? They were hoping they could leave Musk in the dust, and that's just not so easy to do.

Russ Roberts: It doesn't seem to be happening. Yeah. Do you have any forecasts on what's going to happen?

I mean, what I found entertaining is that in the first days of Musk's tenure, he proposed this $8 blue check and was met with a firestorm of both criticism and disdain--disdain that this could possibly be a good idea, that it was obviously a mistake. And, this view was propagated on Twitter without any knowledge of what it was actually going to be, right? It wasn't clear what the actual program he had in mind was, but people were so sure that he was an idiot.

And, I've mentioned this before: I foolishly said I thought he has some skin in the game. $44 billion would seem to encourage him to think carefully about what he does. And of course, if it turns out to be a mistake, he can change it, which he appears to have done. I think it's too early to tell. But, he's free to do whatever he wants. He owns it. And, the question is whether--is that good or bad, given that we now have these silos of social media owned by powerful, somewhat intriguing entrepreneurs, right? It's a very interesting time, but I don't think we have a very clear way to think about it.

Arnold Kling: Yeah. I feel more on solid ground myself when I talk about the economics of trying to support social media. So, if you want to switch over to that, I'd be happy to--


Russ Roberts: Yeah. You had a post on your Substack where you gave Elon some free advice. Talk about that.

Arnold Kling: Yeah. So, a problem that's been very acute in the Internet but actually precedes it, is a problem that: a lot of things that you want to sell don't have the standard economic textbook--it's called a U-shaped average cost curve, where you produce output up to a certain quantity and the average cost is declining. And then, you get beyond that point and average cost is increasing. And so, the solution to that, in most cases, the optimum is to set price equal to marginal cost.

Russ Roberts: Define that, Arnold. What's 'marginal cost' in that?

Arnold Kling: It's the cost of producing the next unit.

Russ Roberts: And, in that U-shaped example, the cost of the next unit might be rising because you have to produce more and more. You're going to have to draw resources into your firm that are more and more expensive. Let's say you need more land for some agricultural aspect or some project, and the land that's available is scarcer and more valuable than the early land that you used, and therefore it's going to get more and more expensive to expand. And so, prices are going to have to rise as the business gets bigger.

Arnold Kling: Yeah. As somebody once put it: you can't grow all the world's wheat in a single teapot. So, like you say, if you have to expand land, at some point the cost of growing wheat is going to be increasing.

The other type of good--it's often called a natural monopoly--it has a very high fixed cost and low marginal cost. So, a classic pre-internet example would be a pharmaceutical. Well, let's say you can produce a pill for pennies, but the fixed cost of getting it developed and tested might be hundreds of millions of dollars. So, if you price it at the marginal cost of pennies, you'll never recover the fixed cost.

And that problem is very widespread on the Internet, because the cost of distribution is approximately zero. Cost of copying is approximately zero. So, you've got a lot of goods. Maybe the standard circumstance on the Internet is for there to be high fixed cost and low marginal cost.

And, that's very much true of these social media outfits. In fact, it's even more extreme than that because, in some sense, the cost of an additional user is negative. You want to have more and more users if you're Facebook. So, you can't get away with charging a marginal cost of zero or negative and recover the high fixed cost of developing Facebook or Twitter.

Russ Roberts: And of course, those platforms have used advertising as their way of dealing with that, right?

Arnold Kling: Right. Anyway, and that's only one mechanism.

So, I go back to what I guess you could call a 'classic' book--although something that comes out around 1999 or 2000, can you call it classic?--Information Rules by Hal Varian and Carl Shapiro. And, they point out sort of all the ways that you can support something with high fixed cost, low marginal cost. Advertising is just one of them.

The one that I find most interesting, because you observe it in so many places--in fact, so many places that I have this catchphrase, 'Price discrimination explains everything'--that we observe price discrimination. And, for something like Twitter, I think that's a very natural thing.

So, he wanted to charge $8 a month for the blue check. I would almost guarantee you that he can charge $8 a month for something, because Twitter is a bundle of things and it's very valuable to some people, and you can find some bundle of privileges that people will pay for. My initial guess was: having, let's say, more than 1,000 followers, plus the ability to direct message people. There's some bundle of rights and privileges that people would pay more for. And, yet you still can keep the casual user on--because you want to do that: the marginal cost of keeping them on is zero or even negative. You want them on. So, you want to keep the casual user and charge something to the user who has what we call 'inelastic demand'--that is, they're going to be willing to pay. And so, you want to charge more for the people who are willing to pay.

And, I'm confident that if they were to experiment and keep trying, they could find a way to price discriminate and make the service profitable.

Russ Roberts: Well, you can't be sure of the profitability, but you'd certainly get more revenue maybe than they're getting now. He fired a bunch of people, I think, as far as we know; and I thought it was a little strange. People said, 'Twitter still works. So, obviously, they were doing nothing.' I don't think that follows.

Arnold Kling: Yeah. My understanding is that the advertising model on Twitter is unlike something like Google AdWords where it's a turnkey thing. You go on to Google, you say: I want to buy 1,000 impressions of the word 'Arnold Kling' or 'AP Statistics', or whatever I might feel like buying the AdWords for. On Twitter, because it's not a mass audience where you can easily identify your target, the ad campaign actually has to be designed professionally, really by the help of people from Twitter. So, some of these people--and maybe they weren't fired or maybe they were--were involved in designing ad campaigns, and so they were revenue producers.

Russ Roberts: But I find--everyone noted this before Elon Musk bought it--that the role of advertising on Twitter is so ineffectual. I get the occasional 'promoted'--is how it's described--post.

Arnold Kling: 'Promoted tweet,' or whatever. Yeah.

Russ Roberts: Yeah. And, it's almost never of interest to me. I never click through. I don't know whether--

Arnold Kling: Yeah, I've never liked the advertising model on the Internet in general. I think there are better ways to try to support content, but somehow the advertising model became the standard thing. But, my view is that Google gets x percent of advertising, Facebook gets y percent, and everybody else collectively is fighting for 1 minus x minus y percent. And that's not going to--you really shouldn't try to play that game. You should try to find some other revenue model.

Russ Roberts: Yeah. Well, it'll be interesting to see what Musk does. I see glimmers throughout Twitter of innovation. I was struck by--and again, I'm not going to judge whether previous ex-employees were productive or not--but it was a pretty static platform. There wasn't a lot going on there. And, I see more innovation in the months that Musk has owned it than before. So, we'll see.

Arnold Kling: Yeah. Okay.


Russ Roberts: Well, let's move on to FTX [Futures EXchange, the three-letter stock market acronym for the company selling a specific bitcoin-like currency token called FTT in which FTX specialized--Econlib Ed.], another recent exciting event in the tech world.

The bizarre aftermath of the collapse of FTX has been Sam Bankman-Fried, the founder, doing the rounds of various--I mean, he did an interview with The New York Times. He did a late night email exchange with a reporter that seems--was surprisingly honest.

First, what happened, as best we know? What do you think happened there? What is FTX? What happened to him, as best we know?

Arnold Kling: Okay. As best we know--okay, so let me take a little bit of a step back. So, everyone should understand that I have never been a crypto optimist. And, one of my lines is that I think the worst thing that happened to crypto was the speculative boom in Bitcoin and other currencies, because that gives people the impression that the use-case for crypto is wild speculation. And, you don't want that to be your primary--there are other use-cases that seem like there'd be more promising--more that you'd want to build your reputation on.

Russ Roberts: More sustainable.

Arnold Kling: Yeah. So, I mean, just to keep digressing a little bit: I think the interesting use-cases are to get around badly managed financial systems/regulations. So, if you're in Argentina and I'm your relative living in America, and I want to send money to you, Argentina might--if I do it above board--Argentina might set an artificial official exchange rate, let's say, of two pesos to the dollar, when it really should be five pesos to the dollar, like, in a free market. So, if I send you a remittance and do it above board, I'm sacrificing over half of the value by transacting at this artificial official exchange rate.

So, in that case, Bitcoin becomes--you know, keeping it, your remittance, outside of the view of the official government, but keeping it with something that can retain more of its value. That's a real use-case. So, remittances are a real use-case.

The other is if you have a banking system that just doesn't work. So, the example that I've read, supposedly, of this is Vietnam, where if you put your money in your bank, that's actually riskier than putting it in crypto. And, that could either be because the banks are poorly regulated, or because the government doesn't stop inflation, or what have you. So, that's another use-case.

But--and this gets to my view of it--is that, all these use-cases are somewhat adjacent to criminal activity. That is, that you're getting out of the regulated world, out of the formal world into the informal world, into the underground economy. So, you're lying down with dogs, so to speak, and you're probably going to wake up with fleas.

Maybe that's wrong. Anyway, that's--

Russ Roberts: But, to get at the romance--

Arnold Kling: Yeah, go ahead.

Russ Roberts: No, go ahead. Finish up.

Arnold Kling: No, you finish.

Russ Roberts: So, we had a recent episode with Devon Zuegel on the use of crypto in Venezuela--which is crazy. And then, Marc Andreessen made this point that crypto is important because for countries that don't have good banking systems or reliable banking systems, it's important.

But--and, I think I've remarked on this program--my daughter is in London, and if I want to send her money, it's a remarkably expensive and not easy to do. Expensive, meaning there's a big chunk taken out by PayPal or whoever it is. They'll say they don't charge a fee, but then they get you on the exchange rate that they use--which I just despise.

And, the dream is that crypto is this relatively frictionless digital currency transfer. But, if my daughter can't do anything with it, it's not a very good system.

Arnold Kling: Yeah. No, I think if the point is that if the financial system's working well, it will at some point figure out an efficient way to do cross-border money transfers. There's an incentive to do that. You can use computers. You don't have to use computers in the really complex, resource-intensive way that Bitcoin uses it.

So, anyway, back to FTX. If--one of the challenges that crypto faces to do legitimate use-cases, like cross-border between the United States and the United Kingdom--is that it's not easy to learn how to use. There are all these stories about people losing track of their key, so that they've effectively lost their crypto. I know people who say that they're very technically competent but cannot--don't feel competent to actually own their own crypto.

So, this reminds me of the state of the worldwide web around 1994, when what was holding back mass adoption was that it was very hard for an individual to figure out how to get the Internet protocols onto their computer.

So, the mass adoption problem tends to be solved--unfortunately, from my idealistic point of view--by large, centralized entities. So, as the Internet became hard to search; Google kind of takes over. As people became interested in this social media phenomenon, Facebook takes over.

The dream as of the early 1990s was that--because the Internet structurally was very decentralized, you know, just in terms of the underlying technology--that the kind of social systems and economic systems that would be built on top of the Internet would be equally decentralized and we would all be in this kind of, sort of libertarian utopia of a decentralized system.

Well, that idealistic dream has come back with crypto. But, my experience leads me to believe that you'll need these centralized entities to--that that will be a necessary condition for mass adoption and for overall efficiency.

So, in crypto, what that means is third parties, like exchanges, become very important. And, that's what, kind of, FTX was supposedly positioned as: as an exchange. An exchange can make money--either it can make money by charging a fee. Like you say, a bank can charge a fee for trading dollars for pounds. Or, it can make money on what's called a 'dealer spread,' which is again, like, charging you one exchange rate to go from dollars to pounds and a different exchange rate to go from pounds to dollars, so that it in effect makes a profit on both sides of the transaction.

So, that's how an exchange should work.

But, in the world of crypto, I guess these exchanges are holding your crypto. They're not just sort of instantly making a transaction between these two. Maybe they should. Maybe there are exchanges that do that: they don't really hold onto it.

But, FTX was doing that. So, in that sense, it's acting like a bank, right? I've got my--supposedly, I've got my cryptocurrency being stored there, and I can take it out any time I want.

But, when you're running a bank, there's always the possibility that you'll loot the bank doing whatever. In this case, they had the--he had over a hundred different entities that he was the owner of or founder of, one of them being this Alameda firm.

And, as far as we can tell, he took a lot of people's money that they'd put into the FTX exchange and kind of did a round trip trade with Alameda that somehow made both of them seem to have better balance sheets than they really had.

And, somewhere in this process, either Alameda or FTX caused a lot of this money to disappear. And sort of, could be bad investments, maybe things that--maybe consumption by Sam Bankman-Fried and his cronies. Who knows where the money went? It's mysterious how so much money could, kind of, disappear. I mean, I can't begin to tell you how it actually happened, and I'm not sure at this point anyone can.


Russ Roberts: I don't think we know at this point. As you said before we started recording: It could be fraud. It could be incompetence. The part that's entertaining about it is--

Arnold Kling: Yeah. When you mentioned all his [Sam Bankman-Fried] media tour, some of that could be that he's just addicted to that. He was a great--he was superb at hyping himself in media terms. Or in some sense he's preparing to plead insanity. Like, who would be crazy enough to give a media tour if people are suspecting you of fraud? So, 'I must be crazy. So, go easy on me.'

Russ Roberts: And, just as an aside, he is, of course, the funder of a number of Effective Altruism projects. He is, on paper, at least in his public pronouncements, a utilitarian par excellence. And, Erik Hoel, past EconTalk guest, has written about that quite eloquently. We'll put some links up to his essays on this. I don't know whether--

Arnold Kling: Yeah, I always hated that.

Russ Roberts: Which part?

Arnold Kling: I mean, I think months ago that the effective altruism stuff that he was pushing, I thought that that's committing the sin of believing that you know how to fix the world. It's the same sin that a politician--an authoritarian politician commits--of saying, 'My central planning is superior to the market's trial and error.' It's really the same thing. And, I kind of called him out on that months ago, said I just didn't like the guy for that reason.

Russ Roberts: And then, in his interviews he's hinted at the possibility it was just a ruse to gain credibility. I don't know if that's true.

Arnold Kling: Yeah. He does seem like a very disturbed individual. And, but somehow he's disturbed in such a way that he appeals personally to a lot of people.

And, in addition to his personal, quote-unquote, "charisma," he threw a lot of money around to people in the media in order to get good publicity. Including, like, supporting their publications, giving them, like, a quarter of their funding, or what have you. And, you don't know to what extent he bribed individual journalists.

The potential for conspiracy theories here, I think, is just huge. I mean, I think this is--

Russ Roberts: Why? What do you mean?

Arnold Kling: Well, again, we don't know what extent it was deliberate fraud. This guy, I think it's Marc Cohodes, who called out FTX back in October, just said, 'It's a bunch of interns running around trying to do an exchange. They have no more business--they shouldn't be running a lemonade stand, much less an exchange,' was one of his lines. He thinks that one of the main attorneys for Bankman-Fried was really running the whole show.

Well, so you get the picture that he was using Bankman-Fried as this frontman where he was deliberately pulling off fraud.

So, there's all these potential conspiracy theories. So, the fact that he gave so much money to politicians and then was invited to weigh in on regulation. And, he's been invited to testify in front of Congress. Usually, when somebody like that is invited to testify in front of Congress, it's the chance for the Congressman to get to show up on TV yelling at the guy. Who knows? Maybe these are all people he's paid for and he's going to be treated well. I don't have a specific conspiracy theory, but I guarantee you there are going to be a lot of plausible conspiracy theories coming out of this.

Russ Roberts: Well, I don't find it surprising that someone like Sam Bankman-Fried gets a lot of attention in the media. He's so outside the box. The media loves that. He makes for good copy. He appears to be so generous, totally unique and unlike other people; and the rules of the game don't apply to him. And he's doing this pioneering thing. Elon Musk has some of the same charisma surrounding him. And, these kind of people do generate an immense amount of media attention. We could mention Elizabeth Holmes, another example. She was somebody who--

Arnold Kling: She's--

Russ Roberts: Go ahead.

Arnold Kling: Yeah, she's on the cover of lots of magazines and clearly charmed Henry Kissinger and other dignitaries--I think it was Kissinger, was one of the people on her Board. I hope I'm not maligning him.


Russ Roberts: So, the part that you wrote about--which we haven't gotten to yet, that's all nice background--the part you wrote about, which I thought was fascinating, was comparing Sam Bankman-Fried to Jeff Bezos and how your view of the two changed; and what it tells us about the role of venture capital versus corporate--innovation within a venture capital world. Innovation within a corporate world.

Arnold Kling: Well, yeah. So, if you'd looked at the very start, I would have been skeptical--equally skeptical--of Jeff Bezos as an entrepreneur and Sam Bankman-Fried as an entrepreneur. As they start out, they're doing wildly ambitious things. They've got a lot of personal charisma, and you can't believe they know what they're doing. Like, my line on Amazon as they were getting going is, 'Okay, so what Walmart has to do to compete with Amazon is develop a website. What Amazon has to do to compete with Walmart is develop a whole logistics system for international shipping of goods and so on. So, who's going to win? Well, it's clearly Walmart if all they have to do is develop a website.' And, that didn't turn out to be the case at all.

So, it turned out that Jeff Bezos had tremendous substantive skill--I think amazing substantive skill--as a business leader. I mean, there are always people who will denigrate anybody, but to me he's, like, the most amazing business leader you could find. And, Sam Bankman-Fried turned out to be a total fraud, or a total incompetent, or some combination of those two. And, if you're a venture capitalist, it's probably hard to tell them apart at the beginning. I mean, clearly there would be people who would. But, the ambition--a venture capitalist once described it as, 'I'm not going for singles and doubles. What I want is not even a home run, but a home run that goes outside the stadium and rolls down the street.'

For an ordinary investor like you or me, if we're going to put money into a particular stock--which we typically don't: we typically buy index funds--but if we're going to do that, sort of we'd say, 'Well, I really want to avoid losing everything.' And, the upside doesn't have to be unlimited. And, with a venture capitalist, it's the other way around: 'Oh yeah, I lose everything on a lot of my investments, but every once in awhile I hit the jackpot.' And, that kind of mentality means you want to back a founder who has ridiculously high ambitions and who has very grandiose visions.

And so, as they're starting out, Sam Bankman-Fried has a grandiose vision, or he promulgates one, and Jeff Bezos gives you a grandiose vision. And it seems like you should back both of them. And in fact, I think what a lot of venture capitalists feel if they've been around a long time is, if they missed Amazon, that's the kind of error they don't want to make again. Whereas, betting on Sam Bankman-Fried is, like, 'Okay, made that mistake. Lost some money. Happens all the time.' So, it's a very different perspective than what you and I would have looking at an individual investment.

Russ Roberts: It reminds me of Rory Sutherland's observation here on EconTalk, when he said--I thought this was very profound--'If you ask a person to hire 10 people, it's a very different phenomenon than asking 10 people to hire one'--within a corporation. So, you have a corporation and you ask 10 people to each recommend somebody: well, they have to recommend somebody safe. You can't take a chance. It's high risk. It'd be foolish. But, if you can hire 10 people, you might be happy with an outcome where two of them thrive and are spectacular hires and eight of them are just so-so or even mediocre or bad.

Arnold Kling: So, yeah, there's just a different incentive and a different kind of experience base that venture capitalists are dealing with.

Russ Roberts: But your point, which is not unrelated--

Arnold Kling: So--

Russ Roberts: Yeah, go ahead--

Arnold Kling: Yeah, so it's susceptible to a charismatic goofball in a way that the rest of us wouldn't be.

Russ Roberts: But your other insight is that within a corporation, that there's a vetocracy--a power of veto that plays a role.

Arnold Kling: Yeah.

Russ Roberts: Explain that.

Arnold Kling: Yeah. Basically, if you're in middle management and you propose some very potentially spectacular project for your company, you're going to have to sit in meetings. And, they are going to be 10 people in the room, and if one of them says, 'This won't fly,' that's it. You're done. And, that's actually rational from the corporation's point of view, because as a middle manager, you have very little skin in the game. Suppose your project is going to cost $20 million; the upside is $500 million or a billion dollars worth of value. You're not going to get very much of that upside.

On the other hand, if the corporation loses the $20 million, you're going to lose zero of the downside.

So, you don't have much skin in the game when you're playing with the corporation's money. And so, a corporation that doesn't set up a bureaucracy that's skeptical of ideas that come from middle management is just going to end up throwing money at lots of projects that it can't--that don't turn out well, and it just squanders its money.

So, a vetocracy, in short, is a rational thing to have. But, that's why--so, that's why innovations typically start out outside of big corporations, because it's just rational for them to not approve projects for people who don't really have that much skin in the game.

Russ Roberts: And as you point out: venture capital, it's the opposite, right?

Arnold Kling: Yeah. Yeah, you need the upside, and you're right. And, the founder does have a lot of skin in the game, typically.


Russ Roberts: Okay, let's move on to our last topic. It's about a week old, maybe two weeks at this point. It's a little bit new bit, maybe it's a little bit brash to talk about it, but that's ChatGPT [GPT is an acronym for Generative Pre-trained Transformer--Econlib Ed.]. It's a project of OpenAI. OpenAI is a project; The CEO [Chief Executive Officer] is Sam Altman, who is a past EconTalk guest when he was the head of the Y Combinator, which is an incubator for new ideas. A lot of people have been blown away by ChatGPT. I would think I'm one of those. Maybe you are less excited about it. But, what it is, is a place where you enter a query, or a comment, or a question; and it talks back to you. It goes back to, to me, the oldest attempts to have AI [Artificial Intelligence] help people. 'I'm feeling sad today.' 'Oh, what are you sad about?' 'Well, I'm having this--'

Arnold Kling: Yeah, that's ELIZA, right?

Russ Roberts: Yeah--

Arnold Kling: The artificial psychiatrist.

Russ Roberts: Right. So, ChatGPT has that, but it also does some rather extraordinary things, which we'll talk about.

Arnold Kling: Yeah. Yeah, I think right now it's at the level of an undergraduate BS artist who hasn't studied enough for the test. Now, computer--

Russ Roberts: It gets you a long way, Arnold, in a lot of situations.

Arnold Kling: Right. So, I think what's impressive--what strikes people--is that it can sound like a human being, and you can even have it imitate a particular human being. Like, if somebody has a lot of content out there, whether it's Shakespeare or Tyler Cowen or somebody, and you say, 'Write an essay about X in the style of Shakespeare, or in the style of Tyler Cowen,' it will imitate that. So, it has a great facility with putting together words. It's a great BS artist. But a lot of the stuff it does is BS.

One of the first things I did, is I said: 'Write an essay about Arnold Kling, economist.' And it proceeded to tell a bunch of lies. It said I was born in New York; I was actually born in St. Louis. It said I was born in 1960; it was actually 1954. And so on. It said I wrote The Myth of the Rational Voter; that's written by Bryan Caplan.

And, it just said this with a straight face--like, you know--and along with some things that were true about me, but it was just so--and somebody else described, they had asked it for an essay on Thomas Hobbes and it came back with something that was a description of the philosophy of John Locke, which it attributed to Thomas Hobbes, even though Locke is different--in some ways the opposite of Hobbes.

So, I get the sense that it sort of looks for connections related to the words that you include in your prompt, and then its real skill is assembling them into a good-sounding narrative--a narrative that sounds like what a human would put together.

Yeah, it may evolve into something different. There's this long essay by Gary Marcus, who is a real skeptic of the whole method of these sort of neural networks.

Well, so let me go back-- this may be a weird thing--but when I was with Freddie Mac in about 1991, 1992, 1993, we were looking for ways to automate the underwriting process. We thought we could start to use computers to supplement or replace human underwriters. And, the approach we first looked at was known as expert systems. Basically, you would program a computer with a bunch of rules that mimicked what a human underwriter would use.

And then, at one point we heard a presentation on credit scoring, which operates--which was kind of an early version of big-data machine learning as we now do it, in that it just said, 'Let's just look for correlations with default.' And, this wasn't even default on mortgages: it was just default on credit cards and so on. And, they found variables that statistically were important that human underwriters weren't even paying attention to. One was credit capacity. Like, if you have $30,000 of unused credit--that is you've got some credit cards: let's say three credit cards each with a credit limit of $10,000 and you're not using any of them--that's a real strong sign that you're not going to default. Conversely, making a lot of inquiries--like, if you've applied for five credit cards in the last two weeks, that's a real red flag. Well, human underwriters never even knew that. The computers figured it out.

So, long story short: The statistical-based or machine-learning type--what we would now call machine-learning approach to automating underwriting--won out and the expert systems lost.

And, what's happened in AI, I think, has been something similar. But, Gary Marcus claims that these sort of purely correlation-oriented, statistically-oriented forms without any domain knowledge entering the picture, that we've reached their limit. His claim is they're not going to get a lot better; and you're going to have to bring in other types of learning.

And, again, my experience would lead me to believe it's very hard to integrate them, actually. It's very hard to integrate two different types of learning, two very different methods, without one method hurting the other.

Just like, I think, in chess, it's become very hard to integrate a human's decision with the computer's decision. When the computers were first starting to get really good at chess, a human could spot a situation: 'Well, here's a situation where based on the layout of the board, the computer is going to make a mistake, so I'm going to override it.' But then, you reach the point where the human override on average ends up worse than not overriding.

Anyway, so it's very hard to integrate two completely different methods of learning. And so, we may have reached a point or come close to reaching a point where the ChatGPTs of the world don't get better.

Russ Roberts: It's a little early to tell. It's about a week old.

Arnold Kling: Yeah, it's way early--way early to tell.

Russ Roberts: Nah, I'm [inaudible 00:50:45].

Arnold Kling: So, you're more bullish than I am?

Russ Roberts: Well, I'm more impressed with it at its current level.

A week and a half into it, I asked it something about Adam Smith and it said, 'He wrote The Wealth of Nations, but you could also read Edwin Cannan's book An Inquiry Into the Nature and Causes of the Wealth of Nations, which summarizes the ideas in Smith's book.' Well, it doesn't. Cannan, I think, was the editor or whatever. But just a total blunder, like you're talking about.

At the same time, somebody sent me--I don't know. I think part of the fascinating part of this--you can't tell whether any of these things are legitimate or not. They appear to be written by a person. In fact, it appears to be like there's somebody, like, in a back room writing these, who is really good at creating text.

But, somebody asked for me to opine or write about a sandwich. And, it started talking about, among other things--all of which were pretty good--how a sandwich is an example of the division of labor and specialization. Which is something I've talked about in EconTalk--one of my favorite episodes, by the way--about Smith and Ricardo. We'll link to it. If you haven't heard it, please check it out.

And, I would also add, you should--since we're in the holiday season coming up--you should think about EconTalk swag for your gift-giving needs. So, we'll put a link up to the EconTalk swag store, which is at We don't make any money on it: it just covers our costs, but it's a nice way for you to spread the word about EconTalk.


Russ Roberts: But, the part that impresses me--yes, it [ChatGPT] is going to make mistakes about who Arnold Kling is--it's not as reliable in many ways as Wikipedia or Google--but the part that's amazing about it is it's really good at writing in things where it's not having to think deep thoughts.

So, the example I'll give you is: I asked it to write an invitation to a party where I'm afraid the person won't come. It was a brilliant three- or four-paragraph imitation. I did a couple of those.

I'm a pretty good email writer. I've helped a number of people--I'm sure you have too--or I've given them counsel on how to structure an email for a job interview or for an awkward situation. This kind of puts that kind of skill out of business, and it's a week old or two weeks old.

So, I think--and the obvious example that people are worried about are written assignments and the inability to distinguish plagiarism. That might be good for education, by the way. Maybe we'll have fewer assignments that ask people to write up stuff they can find on the Internet.

Arnold Kling: Yeah. No, I think the most immediate impact I can see is that it will create a big issue of deception and of detecting deception in terms of, first of all, content.

Like, the biography of me that it put together immediately raises the issue of, you'd have to look through it to find out what's true and what's not.

And then, the issue of deception, self-deception of: is this who it says it is, right? So, if it gets really good at imitating Russ Roberts, could there be 100 Russ Roberts tweets out there and only one of them really comes from you? I mean, just the ability to deceive other people or deceive people about who you are as a bot.

And, naturally, the response is going to develop a bot that can detect--tell the difference between a bot and a human. So, you've got this arms race going.

You've got, on the one hand, the bot is trying to super-pass the Turing test and convince you that it's a person and a particular person. And, on the other side you've got a bot that's trying to distinguish between the two because the human effort involved in determining the difference between a bot and a human is too difficult.

I mean, that's I think why Elon Musk's $8 to get the blue check didn't work. It probably costs more than $8 a person to verify that the person is who they say they are.

So, all of a sudden we're going to have this arms race over something that wasn't so much of an issue before, of phony identity--either phony identity as a human or phony identity as a particular human. So, people trying to achieve that, or computers trying to achieve that--the ability to mimic a particular human being--versus how do you detect and stop that?

And, the only way you can do that at scale is with another bot. So, that's just a whole new arms race that I think is going to be the most immediate impact of these open AI projects.

Russ Roberts: Yeah. I'm going to suggest that it used to be that you would see these outputs of these programs and you'd just laugh at them. There'd be a grammatical error or there'd be a goofy thing. Now, occasionally there would be something like your example of getting your birthday wrong, or where you were born, or misunderstanding something about you. But, for these sort of text-writing applications--like invitations, emails, short paragraphs, introductions--I don't think you'll be able to distinguish them between a human being and a bot.

You know, I get--the most primitive version of this is already in email, right? In Gmail, when I want to reply to someone, it gives me a couple suggestions: 'Thanks,' 'Great job,' 'Awesome.' Right? It's one word or phrase.

Arnold Kling: 'Works for me.'

Russ Roberts: 'Works for me.' Yeah. And, this is a whole new level.

And, I don't notice when someone responds to me, 'Works for me,' that I don't go, 'Oh, I bet that was a Gmail response.' I just go, 'Okay, it works for him,' and I move on. And, it's fine. Nothing's at stake there. There's nothing wrong with getting that kind of help. There's nothing disturbing about it. If it was in French, you'd say, 'Well, I'm surprised he speaks French. I didn't know that.' But, these are just the daily things that go on.

And, I think that piece of it could be greatly life-enhancing. Somebody mentioned to me--I forget where I read it--but somebody whose English was imperfect, they were trying to reply to a bunch of job interview questions or job interview requests, and they didn't know how to phrase the emails in English to sound normal. And, this helped them, and it gave them access to things they wouldn't otherwise have gotten. Is that cheating? Yes, sort of. Is it a bad thing? I think it's probably a good thing. I don't know.

Arnold Kling: Well, it depends. If, on the job, they're going to need to talk fluently in English with people, it's probably a bad thing. No, I mean, that's going to be it. There are going to be use-cases where it's okay and use-cases where it's terrible, and being able to separate the two is going to be really hard.

No, but, I do agree with you. It's an amazing development. It's amazing how fast it is. A week ago, I was in Austin and met this kid who probably started shaving six months ago and says, 'I'm really into machine learning.' I said, 'Well--' I wish I could buy shares in the guy. I mean, it's clearly going to be the big trend for a while.

And, one anecdote is there was somebody who found a 16-question IQ [intelligence quotient] test and they gave it to the ChatGPT, and he said it scored about as much as a human who has an IQ of 100. My experience with computers is, once they reach a certain point and they're on the up-curve, it's not like they stop. So, will it take less than six months for the thing to come back with an IQ of 130? Probably. So, watch this space. I'm sure I've said at least one thing discussing it that's going to look idiotic a few months from now.

Russ Roberts: My guest today has been Arnold Kling. Arnold, thanks for being part of EconTalk.

Arnold Kling: Okay, thanks.

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