Arthur Diamond on Openness to Creative Destruction
Aug 12 2019

Openness-to-Creative-Detruction-212x300.jpg Arthur Diamond of the University of Nebraska at Omaha talks about his book, Openness to Creative Destruction, with EconTalk host Russ Roberts. Diamond sings the sometimes forgotten virtues of innovation and entrepreneurship and argues that they should be taught more prominently as a central part of economics.

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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.


Michael Gray
Aug 13 2019 at 6:41am

Two observations about the comment that socialism is where the idealists go.

In one sense, socialism depends on people’s being idealists, indeed on their being “ideal” in the truest sense of the word. It cannot happen; the crooked timber of humanity will see to that, and so socialism must fail even if the “idealists” go there.

Moreover, the genius of the market is that it does not need idealists. Adam Smith nailed this first: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner…” Michael Novak made the point decades ago that the genius of market based capitalism is that it harnesses our self interest.

So, there’s no need to lament the idealists’ fondness for socialism nor to pretend that the market attracts or needs idealists. Indeed, spare us from benevolence. Give us self-interested efficiency over incompetent benevolence every day of the week.

Arthur Diamond
Aug 13 2019 at 1:51pm

Young people, and the rest of us too, seek meaning in our lives.  Specialization and exchange among income maximizers can bring us our dinner.  Dinner is good.  But when our stomachs are full, what next?  When Steve Jobs was trying to recruit Pepsi’s John Sculley to join Apple, he asked him “do you want to spend the rest of your life selling sugared water or do you want a chance to change the world?”  Idealists will never reach perfection, but like Steve Jobs they strive to improve themselves as they strive to improve the world.  (Schlender and Tetzeli’s Becoming Steve Jobs is wonderful on this point;  see also Catmull’s Creativity, Inc.)  We sell entrepreneurial capitalism short if all we emphasize is that it brings us our dinner.  It does that.  But we should emphasize that it is the system that allows the Steve Jobs of the world to bring us Macs, iPhones, and Toy Story.  And even more important, it allows each of us the chance to achieve great projects ourselves, if we work hard, take risks, and persevere.  Innovative dynamism (a better name for entrepreneurial capitalism) allows us to eat, but just as important, it allows us a chance to pursue, and sometimes to achieve, our dreams.

Aug 13 2019 at 5:47pm

Michael, I think reading Deirdre McCloskey’s Bourgeois Era trilogy would really reframe your perception of Adam Smith.

Firstly, Adam Smith was wrong about quite a bit.  For instance, he believed in the labor theory of value.  More specifically, he believed, like many modern economists, that capital accumulation is the driver of growth.  The point McCloskey made, and Schumpeter before her, and Arthur Diamond after her, is that innovation is the driver of growth.

As for the rest of your comment, I’m reminded of the Werner Sombart quote, “All socialist utopias come to nothing on roast beef and apple pie.”
Standards of living have improved drastically since Sombart’s time, and that is due largely to innovation.  I hardly think roast beef and apple pie are what this country flaunts anymore when discussing the virtues of entrepreneurial capitalism.

Mort Dubois
Aug 13 2019 at 8:20am

We have an example, in the US, of a market where the government has been explicitly forbidden from an ordinary level of regulation:  guns.  So what has happened?  Guns are available in a very wide variety of forms, right up to the limit of what is legal (machine guns, tanks, rocket launchers are all tightly regulated, but if they weren’t then you would know someone who owns one.)  The majority of users can handle the responsibility, and there’s a large number of people who abuse them but stay out of public notice (murders and suicides), and  there are a small number of people who take advantage of their freedom to do truly appalling things to innocent victims.   What makes you think that pure unregulated innovation would play any differently with any other potentially dangerous technology? Flying cars – what could possibly go wrong?  The internet was unregulated, and we got a lot of good out of it, but we also have constant hacking attempts, swindles, and the potential for a society-wide disaster.  Medical technology used to be totally unregulated, and you had probably as much harm being done on a given day by medical innovators and swindlers as good.  We’ve already seen major airports shut down by a drone, and there’s sure to be more of that on the way.  I don’t think it’s so terrible to ask what could possibly go wrong as new technologies emerge, and then do something about it prior to the harm.

Arthur Diamond
Aug 13 2019 at 4:11pm

Neo-Austrian economist Murray Rothbard used to argue that the ultimate defense of freedom was a well-armed citizenry.  Most reasonable people would shake their heads and dismiss Rothbard.  But would you dismiss him, in this moment, if you were a disarmed Hong Kong student protesting for freedom as the armed Chinese army masses nearby?  In the United States, if you banned guns, would the bad guys turn in their guns, or would only the good guys turn in their guns?  And if you found a way to get all the guns away from the bad guys, would that turn them into good guys?  Or would they turn to killing people with knives or with trucks driven into crowds?  The world will never be perfectly safe.  The question is how can we best make it safer, and still allow innovation?  Human betterment through innovation has resulted in much less violence (see Pinker’s The Better Angels of Our Nature.)  But innovation occurs through a trial-and-error process that sometimes causes harm.  St. Thomas Aquinas is often paraphrased as having said:  if the captain’s only goal was to preserve his ship, he would never leave the harbor.  The bigger the innovation, the less we can know in advance the steps that we need to take to achieve it.  The chemotherapy “cowboys” of cancer medicine used trial-and-error adjustments of their chemo cocktails until they eventually succeeded in bringing cures (not just remissions) to some children with leukemia and some adults with Hodgkin’s lymphoma.  With each new adjustment, they knew that something could possibly go wrong (and sometimes it did go wrong).  But if they did not try the adjustments they also knew that their patients would surely soon die of cancer.  As Vince DeVita shows in The Death of Cancer, current FDA regulations restrict the kind of trial-and-error adjustments that brought cures in the past, severely slowing the progress toward curing other kinds of cancer.  As a result, people die who could have lived.   With unregulated innovation, consumers would still have recourse.  If someone irresponsibly causes harm, they could be sued, which would encourage reasonable care.  And consumers often would be able to choose the levels of risk they are willing to accept in order to speed innovation.  When the Edison firm was first learning how to wire homes, they started a fire in P.J. Morgan’s home library.  Morgan chose to allow Edison to try again.  He was what Amar Bhidé calls a “venturesome consumer.”

Peter Pitsch
Aug 13 2019 at 8:57am


Just finished this week’s econ talk (I’m a big fan) re being open to creative destruction and the above book by Andreas Wagner about how evolution leapfrogs suboptimal local solutions. Serendipity strikes again. As Diamond and Roberts noted too often economists focus on efficiency as Wagner notes biologists focus on natural selection. He uses the landscape metaphor to illustrate how genetic drift and recombinatorial sex allow species to leapfrog local suboptimal peaks that natural selection would trap them on. What are the analogs for creative destruction? Great idea for future guest.

Aug 13 2019 at 10:19am

Along the lines of the mention of medical scope of practice laws, an anecdote:

Medical professionals always had difficulty hitting my father’s veins but he got some shots in the military and he said those guys without diplomas hit this veins (really arteries) every time because they were giving so many shots. Medical scope pf practice laws might be counter productive.

Ed Kless
Aug 14 2019 at 1:36pm

Another great episode! Thanks, Arthur Diamond for mentioning George Gilder. I am hoping Russ will have him on to discuss both Life After Google and his recent controversial piece, The Huawei Test.

Arthur Diamond
Aug 14 2019 at 4:35pm

I thought of mentioning Gilder’s Life After Google in my already-dissertation-length reply to Mort’s defense of government regulation.  Mort worries about problems in the internet that can only be solved with regulations.  Gilder worries about some of the same problems, but argues that they can be better solved by the blockchain technologies being developed by innovative entrepreneurs, some of whom have been blessed by libertarian iconoclast Peter Thiel.  I do not understand blockchain well enough to have a credible opinion.  But I hope this is one of those cases where Gilder’s delightfully exuberant optimism is justified.

Arthur Diamond
Aug 14 2019 at 5:40pm

I thought of mentioning Gilder’s Life After Google in my already-dissertation-length reply to Mort’s defense of government regulation.  Mort worries about problems in the internet that can only be solved with regulations.  Gilder worries about some of the same problems, but argues that they can be better solved by the blockchain technologies being developed by innovative entrepreneurs, some of whom have been blessed by libertarian iconoclast Peter Thiel.  I do not understand blockchain well enough to have a credible opinion.  But I hope this is one of those cases where Gilder’s delightfully exuberant optimism is justified. 

Ed Kless
Aug 15 2019 at 3:59pm

Thanks, Arthur for the reply. I am no expert on blockchain either, but I think Gilder’s argument is quite powerful. I have switched to DuckDuckGo based on Russ’s recommendation, and to the Brave browser based on Gilders. It quite a powerful one, two combo to get started.

Again, a great podcast with Russ!

Svetlana Bekman
Aug 14 2019 at 2:31pm

This was, as always, a fascinating discussion that nicely pushed my intuitions around.  Regarding medicine and medical research, thought, it was a very mixed bag.

Richard Feyman said: “The first principle is that you must not fool yourself and you are the easiest person to fool.”

Double-blind, randomized, placebo-controlled trials may be expensive – is there a way to make them cheaper? – but what is the alternative?  Without them, researchers and research subjects would indeed fool themselves and we would not know whether an intervention works.

Bemoaning that there is still “no cure for cancer yet” is like bemoaning that there is no cure for disease yet … Cancer is not one illness.

I don’t know whether government or some other expert body should protect the consumer, but well-meaning and malicious quacks and charlatans are legion and an average person cannot be expected to distinguish between snake oil and a safe and effective intervention.

I highly recommend to Russ and Arthur the following blog: and podcast:

Indeed, I think that the force behind the above ventures, Steve Novella ( would be a great guests for Russ.




Arthur Diamond
Aug 14 2019 at 5:13pm

The key paper on clinical trials is Smith, Gordon C. S., and Jill P. Pell.  “Parachute Use to Prevent Death and Major Trauma Related to Gravitational Challenge:  Systematic Review of Randomised Controlled Trials.”  British Medical Journal (BMJ) 327, no. 7429 (Dec. 18, 2003):  1459-61.  The authors argue that the only source of real knowledge is a double-blind, randomized, placebo-controlled, clinical trial.  After conducting a thorough review of the literature, the authors conclude that no one has ever conducted a double-blind, randomized, placebo-controlled, clinical trial of the efficacy of parachutes.  In the absence of such a trial, we have no way to know that parachute interventions work.  I conclude, therefore, that pending a clinical trial, some government regulatory agency should ban parachutes, lest we fool ourselves into believing they work.

Aug 15 2019 at 10:47am

I am generally on Dr. Diamond side on this argument as Hill’s criteria lay out how to find answers to medical problems without a clinical trial.  However, using those techniques has produced several medical advances  that were over turned when done in trials (most prominent might be low fat diets and hormone replacement both tested in the Woman’s Health Initiative).  So, while there may be situations where trials don’t make sense, the majority of medical science should be as rigorously tested as possible in well conducted clinical trials.

Arthur Diamond
Aug 15 2019 at 3:50pm

If rigor was quick and free, I would agree with Kevin’s conclusion.  Unfortunately it is slow and costly.  Only empty tautologies can be known with absolute deductive certainty.  Most of what we know in life, including in some life-and-death situations, is not known through clinical trials. And even the results of clinical trials are sometimes later overturned.  I prefer to have more therapies available, and to have them available more quickly, even if the efficacy of the therapies is less certain.  I am allowed to choose to climb a mountain or drive a car.  If I choose to be a venturesome consumer of therapies, why should I not be allowed that choice too?

Harrison Prather
Aug 21 2019 at 2:47pm

Thank you for making those points. Listening to this episode felt as though Russ and Diamond believed the FDA materialized in a vacuum and exists purely to foil creators and inventors. (I’m sure they don’t actually believe that but I would love to hear a well-thought-out rebuttal from someone who can speak about the history of medicine and charlatans) Steven Novella would be a wonderful guest to challenge the libertarian bent that Russ and Diamond took because he (and his amazing podcast – The Skeptic’s Guide to the Universe) deals with the people that would surely take advantage of a system along the lines of what Russ and Diamond are advocating for.

Patrick Rousseau
Sep 6 2019 at 9:56am

I concur. I would love to hear a conversation between Russ Roberts and Steve Novella on the value of the FDA. In this clip, Steve explains that while competition and free market typically leads to greater choice and quality, an unregulated market does not necessarily lead to better quality in medicine. He illustrates this with the unregulated supplement industry versus the regulated drug industry. Market forces do not drive quality in supplements, because the personal experience of people taking supplements is unreliable. Anecdotal evidence leads people to believe conclusions they wish to be true, not conclusions that are true. In an unregulated market, there is no incentive for industry to do the rigorous and expensive studies needed to support their claims.

I’m sure he would provide a nuanced perspective regarding concerns that Dr. Roberts and Dr. Diamond share of the FDA.

Arthur Diamond
Sep 7 2019 at 4:26pm

I sometimes buy supplements from Amazon or GNC.  Before I buy a new kind of supplement, I look at the feedback from previous users.  The feedback is not uniformly positive; it often is very negative.  I bet everyone wishes the supplements they buy will be effective.  But many people are objective enough to honestly report when their wishes are not fulfilled.

I thought of buying some eye drops that some claim can dissolve cataracts without surgery.  Enough feedback was negative, so that I did not buy the eye drops, even though I strongly wished that the eye drops were effective.

If patients find that passing a clinical trial adds enough certainty about the effectiveness of a drug, won’t they be willing to pay more for the drug after it has passed a clinical trial?  If so, then drug companies would have an incentive to conduct some clinical trials as part of their marketing efforts, even in the absence of the FDA.

Aug 15 2019 at 11:04am

The discussion on cancer and the innovative idea of trying to develop drugs for early cancer instead of testing them on late had several underlying assumptions which are not tenable.

The first seemed to be that early stage cancer and late stage cancer have a different biology and therefore might be amenable to different therapy.  This is not the case (Except for some very technical distinctions).  Drugs that kill a cancer at the first stage are the same drugs that are first used in the advanced stage if the patient has not had them because the data support that those drugs are the best first drug in all stages of cancer.

Testing of new drugs is therefore done on late stages for practical reasons that do not depend on the FDA or regulation.  A drug may have a role in a cancer but testing it against the best current drug is not productive since the trial must be more expensive and will take longer.  Testing it against our least effective therapy is cheaper and allows for sampling of more new therapies for cheaper.  Drugs that succeed in the advanced setting can then be rapidly advanced to early stages as the drug has proven successful.   A good analogy might be a player that is interested in taking up tennis and asking if he should start playing with his friends or jump to the Wimbledon tournament.  If he loses out at Wimbledon than next you need to test him at each level of the game until you find his appropriate level.  If he then loses out to everyone, he and his competitors were put through many competitions for no benefit.  Clearly, the best way is for him to “Start at the bottom and work his way up.”  Its the most efficient and cheapest way to identify talents and is not a manifestation of govt interference (although maybe the cost of the trials is).

A good recent example of this are checkpoint inhibitors (immunotherapy).  They started in people that had very advanced lung cancer and were very successful.  In about 7  years they have gone from medications that are used only in the most advanced cases to being used in early cases of lung cancer.   If you have cancer 7 years is far too long, but in the course of medicine this is the system functioning at high speed and doing very well.

Arthur Diamond
Aug 15 2019 at 4:14pm

Is it clear that the biology of the early stage of a cancer always is the same as the biology of the late stage?  Early stage melanoma, that does not go too deep into the skin, can often be cured with surgery, but melanoma that goes deeper is cured less often.  And the biological challenges of treating melanoma on the skin are less daunting than the biological challenges of treating melanoma when it enters the brain.  If so, then a therapy that works early, is not necessarily a therapy that works late.  [AstraZeneca’s “bold” and “risky” strategy is to find more and better cures by targeting early stage cancers, is documented in:   Roland, Denise.  “Drug Giant Tests Bold Tactic to Battle Cancer.”  The Wall Street Journal  (Tues., May 28, 2019):  B1 & B5.]

But Kevin’s discussion does suggest that the key issues could be better stated.  The key distinction is not between early therapies and late therapies.  The key distinction is between therapies that cure and therapies that extend life by a few months.  Clinical trials are very expensive and are difficult to populate with enough appropriate patients.  Drugs that are only incremental improvements over current drugs, are less costly to test, and are more likely to “succeed.”  Incentives push toward the incremental.  In addition, the large, incumbent,  bureaucratic firms that can afford mandated clinical trials, have the internal culture, incentives, and constraints that encourage incremental innovations and suppress breakthrough innovations.  (Proctor and Gamble employs more PhD scientists than the sum of those employed by Harvard, Stanford, and MIT;  as a result, they are really good at creating better soap.)  Researchers such as William Baumol and Clayton Christensen have shown that breakthrough innovations tend to come from entrepreneurial start-ups.  So the standard that mandates clinical trials results in many incremental extensions of life, but fewer cures.

Kevin ends with the promising example of immunotherapy.  Immunotherapy pioneer Steven Rosenberg has documented that early knowledge came, not through clinical trials, but through trial-and-error experimentation.  He also documents that progress was slowed, and his morale diminished, by FDA regulation.

Aug 18 2019 at 8:43pm

Thanks for your reply.

I have no love for the regulatory issues involved and the government morass and agree with you entirely on these problems.

I think my points are too medically technical for the discussion and these corrections have a very narrow audience, but since I started….I will continue.

Surgery in melanoma is not a question of biology, it is a question of presentation and location.  Surgery fails to cure lots of melanoma because it is eventually discovered it has spread.   If you find melanoma on the skin and find it in the brain than it is no longer useful to treat it on the skin with surgery despite the fact surgery can be curative in early cancer.  The biology is the same, the efficacy has changed because the situation is different.  A therapy that can cure is now not even used because now it offers nothing.  This is true across lots of cancers and consistent with the idea that the biology is stable and drugs directed at advanced cancers will also be effective in early cancers.

The idea that some therapies are a priori designed to extend life and some to save life seems inconsistent with the efforts of most researchers.  This assumes there is a research scientist who wakes up and does research with the hope and dream that “I can extend the life of stage 4 metastatic prostate cancer patients by 3-4 months.”  Everyone is trying to cure cancer and other medical problems  (and anyone who says otherwise is just trying to compete better for grants and get noticed), it just turns out that some therapies end up not working as well as we hope.  Now once a drug is found and companies run the math on the finances – I agree with you they may market a new not much better drug for the cash, but that’s a different issue.

Immunotherapy rarely cures cancer – it simply extends life by a few months.   I know Steve Rosenberg didn’t wake up thinking – wouldn’t it be great if I could prolong the survival of lung cancer pt by a mean of 6-9 months?   He was doing research for a cure and it fell short but still is an amazing leap forward.  This is the most ground breaking cancer research of this generation and already won a Nobel prize – it doesn’t cure cancer is most cases.  (And of course early knowledge came from trial and error – that is a trivial observation, no one starts with advanced human trials).

Talking about cures instead of incremental changes sounds like me  asking why economists talk about trade offs instead of solving scarcity.   They should just put more effort into solving scarcity instead of wasting all this effort on research that might only make things a little better…


Aug 15 2019 at 5:11pm

I am a long time listener
I am capitalist and steadfast believer in emergent properties, and open and free society.

I also believe that single payer health care is worlds superior to the current system in the US and worlds superior to the somewhat vague utopia Russ describes where patients vote with their pocket books.  I suspect it is a utopia where middle class blue collar workers are able to understand complex medical decisions that are presented to them by a their doctor who has a financial interest in the decision they are recommending.

In a single payer system the payer (public insurance company) can dictate what they are willing to pay for based on the evidence based efficacy of the different options.    It solves the problem that Russ often describes where the people making treatment decisions (Dr. and Patients) are making the decision but the insurance company is paying.  In a single payer system the “payer” lays out the rules about what outputs it is willing to pay for based on evidence based outputs.   The payer is looking for the best outcomes for its citizens and all citizens are equal in the eyes of the state.  Rich or poor, the most critical get treated first.  A quick readering of the OECD studies on health outcomes indicates that a country like Canada gets as good and better outcomes then the US.  A dozen or more countries in the world are more or less on par so whenever you hear someone saying “Sure it costs more but its the best in the world” you know  that they are wrong and that they have no real arguments.

I was not impressed with your guest saying people are choosing being capitalism and socialism.  It is just not that binary.  If you look around the world all the major western nations, the share of the economy from public spending is very close.  So is it fair to say that the USA is 38% socialist and the UK is 42% socialist because that is the share of the economy from public spending?  If the USA went to single payer and government spending bumped up from 38% to 40% would that suddenly make them ‘Socialist!!!”   Or to think of it another way, is avoiding single payer worth it just so that you can say that you are 4% less socialist then the UK?



Arthur Diamond
Aug 16 2019 at 11:39am

Science is a process of inquiry, not a set of propositions chiseled in stone.  The set of propositions that a majority of scientists salute, is constantly changing.  Science thrives, not by adherence to propositions, but by the process of open, tolerant, critical inquiry.   (If you seek others who agree with me on this, check out the philosopher C.S. Peirce and the physicist Richard Feynman.)

“Evidence based medicine” sounds imposing.   But evidence itself can be noisy, and can be interpreted in different ways.  Eric Topol, and others, have argued that some drugs are effective for patients with certain genes, but not effective for patients with other genes.  Let’s say a clinical trial, performed on a broad representative sample of the general population, does not reach the mandated threshold of efficacy.  Then the government mandated system (let’s be honest and drop the soothing euphemism “single payer”) would not only refuse to pay for the drug, but would probably ban it.  But what if the drug worked very well for the 20% of the population who have certain genes?  The evidence from the clinical trial would be misleading, and banning that drug based on that “evidence” would deny useful therapies to the 20% they could help.

Just as evidence on the efficacy of drugs can be misleading; so too can evidence on the efficacy of different countries’ health care systems.  Analysts were appalled at “evidence” that infant mortality rates in the United States were higher than in many other developed countries.  But it turns out that if you dig into the evidence, physicians in the United States are more likely to make heroic efforts to save the lives of very premature, very fragile, fetuses.  When they try to save them, the fetuses become “infants” and when they sometimes fail to save them, the deaths are counted as “infant mortality.”  In other countries it is more common to just stand back and allow these fetuses to be “stillborn,” never becoming “infants.”   This keeps their deaths from counting in the infant mortality “evidence.”  [On this example, see:  Pipes, Sally C.  “Those Misleading World Health Rankings; the Numbers Are Distorted Because, for Instance, U.S. Doctors Try So Hard to Save Premature Babies.”  The Wall Street Journal   (Tues., Feb. 5, 2013):   A13.]

Major medical advances mainly come from courageous medical entrepreneurs who pursue their hunches against the current “evidence.”  Min Chiu Li had the plausible hunch that even in the absence of clinical signs of cancer, chemotherapy should continue if the hCG level was still positive.  He went against the government mandated protocol that they had based on what they considered the “evidence.”  He continued to give his patients chemotherapy.   For that, the federal government’s National Cancer Institute fired him.

But then a strange thing happened.  The patients treated by the government protocol died.  The patients treated by Min Chiu Li lived.

Gregg Tavares
Aug 18 2019 at 12:18am

In a single payer system the payer (public insurance company) can dictate what they are willing to pay for based on the evidence based efficacy of the different options.

Doesn’t that assume non-regulatory capture? It’s just as easy that who ever is doing this dictating has a financial self interest in one method over another.

PS: not defending US medical system.

Bob Luxenberg
Aug 16 2019 at 12:53am

Dr Roberts

I am avid listener and love your podcast. I must say that I was extremely disappointed in your recent interview with Arthur Diamond.

I would be very surprised if any fathers of the internet besides Taylor would state that the government wasn’t vital to the development of the Internet – for two key points:

What makes the Internet the Internet is the fact that it’s protocols are open. It is naïve to believe that ANY private company would have put forward a completely open set of extensible protocols – with a scheme to perpetually enhance these. Certainly neither IBM’s SNA nor AT&T’s system 7 would have ever been made open and public.
The other key component that powers the Internet is the openness of the Unix operating system. Recall that Unix – developed by AT&T in the 70s — languished in academic labs for years before Berkeley made it (essentially) open; this, of course, later morphed into fully open Linux. Neither ATT nor any other commercial company would have made its bread and butter – the source code – public without Berkeley/Linux.

Frankly it is, IMHO, ignorant to an extreme to think that without an open protocol system and backbone that anything close to the Internet would have been developed.

Lastly, I can’t imagine any Internet ‘father’ other than Taylor would have ever said that the – or a – key part of the Internet is on the LAN side. Dr Diamond should have asked, for example, Dr Paul Mockapetris, which parts are important. Well, having known Paul when he was my Darpa PI, I’m sure he would say the extensible elements such as his DNS or the TCP/IP protocol suite (developed by Crocker, Cerf and Hahn) are fundamental. I know one of the original Ethernet pioneers (who was at PARC and did his PhD Thesis on Ethernet); I’m sure he doesn’t think that LAN technologies were in any way fundamental to the evolution of the ‘net.


Bob Luxenberg, WOODSIDE CA

Aug 16 2019 at 12:02pm

Bob, One issue I think I had with Diamond’s proposition that the government isn’t vital specifically pertains to military research.


There just isn’t an incentive for the market to develop weapons of mass destruction.


That being said, military innovations spillover into private market innovations. DARPAnet, became the internet. The Atomic Bomb led to nuclear generators. Hell, even plastic explosives led to silly putty (unless that’s just an urban legend, Idk).


So it seems like the government is good at military innovations and that the private civil society is good at commercializing those innovations.

Arthur Diamond
Aug 16 2019 at 10:52pm

The best military innovations often come from private contractors, rather than directly from within the government.  When the young U.S. army needed to fill its armories, they approached a young Thomas Blanchard, who had invented an ingenious tack-making machine.  He devised a machine in 1822 that could make precision gun barrels, which some view as a step in the development of what came to be called “the American system of manufacturing.”  The system used precision interchangeable parts to enable mass production, which brought many goods low enough in price to be bought by ordinary people.  [See:  Charles Morris.  The Dawn of Innovation.]

Innovations directly attempted by government have often failed.  Arthur Squires’s wonderful The Tender Ship has several examples.  One is the competition in Britain between the private R100 dirigible and the government R101 dirigible.  The R101 was a patchwork of half-baked ideas.  To serve his political ambitions, Lord Thomson ordered it to head to India before it had been adequately tested.  It blew up over France, with Thomson on board.  The private R100 made it to Canada and back.

When they were developing a new fighter, special interests in the Pentagon wanted to load it up with bells and whistles that greatly increased its weight and decreased its maneuverability.  Legendary fighter pilot John Boyd (also known for the OODA-loop method highlighted in Amy Wilkinson’s The Creator’s Code) fought the Pentagon tooth-and-nail, nurturing the simple, low weight, highly maneuverable F-15.  The Pentagon brass hated Boyd, never gave him the promotion to general he deserved, and boycotted his funeral.  But many fighter pilots owed Boyd their lives.  [See:    Coram.  Boyd.]

A more recent example can be found in Richard Feynman’s account of how political pressures led to the launch of the Challenger at temperatures known to be cold enough for the O-rings to become brittle, allowing the emission of fuel that caused the explosion.  [See:  Feynman, What do You Care What Other People Think? ]

When Leó Szilárd helped develop nuclear fission in 1939, he had been trying to invent a nuclear reactor for several years.  His research was conducted with borrowed money, in a loaned lab, at the private Columbia University.  The government bomb was more of an offshoot of the private reactor research, than the other way around.  (When Milton Friedman told us how neat it was to have Leó Szilárd stop him on campus to ask a question about economics, I remember thinking “who the heck was Leó Szilárd?”)

Silly putty?  The Wikipedia entry says the proximate inventors were either Warrick of the private Dow Corning firm or Wright of the private General Electric firm.

Ah, but DARPA, you say—what about DARPA?

The manager in charge of Arpanet was Bob Taylor.  He voted with his feet, leaving the government DARPA for the private XeroxPARC, from frustration with trying to innovate in the government.  XeroxPARC is where the internet, and much else, really got going.  Later Taylor penned a famous email explaining why Arpanet was not the internet.  [See:  Hiltzik.  Dealers of Lightning.]

Generally, I do not believe “the government is good at military innovations.”

Gregg Tavares
Aug 18 2019 at 12:47am

FYI: The author of the book mentioned as proof the internet was not invented by the government specifically says claims his book says nothing of the sort

Even Bob Taylor himself says PARC didn’t invent the internet

I’m sympathetic to some of the arguments that the government isn’t important for many things. In the late 80s and early 90s there were lots of competing network technologies and protocols. But like many things companies often realize they make more money by cooperating than competing. I’m sure there are examples on both sides but for example AFAIK the Wifi standards, the USB standard, OpenGL, C++, ECMAScript, and many others are basically run by committees and those committees are occupied by representatives from all the major companies. Whether it was important for the internet itself I have no idea but it was arguably where it started.

Arthur Diamond
Aug 18 2019 at 12:01pm

I thank Greg for drilling down on my sources for the Taylor email.  Most of what I know about Taylor, I learned from Hiltzik’s useful book Dealers of Lightning.  But I was wrong to cite Hiltzik as the source of the Taylor email.  My source for the Taylor email was a L. Gordon Crovitz Wall Street Journal column in which he quotes the email as saying:  “The Arpanet was not an Internet.  An Internet is a connection between two or more computer networks.”  [Crovitz, L. Gordon. “Information Age; Who Really Invented the Internet?” The Wall Street Journal  (Mon., July 23, 2012):   A11.]  Crovitz then explores how computer networks (LANs) were connected by the protocols developed privately, mainly by Robert Metcalfe at the private XeroxPARC.  For this part of the story, he cites Hiltzik’s book as a general source.  (My own read is that pages 261-262 of the Hiltzik book are useful.)

I had never seen The Los Angeles Times column that Greg usefully cites.  It shows that Hiltzik thinks the government was important and that Taylor, at least late in his life, also thought the government was important.  Questions remain.  Did Taylor change his mind from his 2004 email, or did Crovitz and others (including me) put too much weight on the technical point made in the email?  I am open to the latter:  even though the Arpanet was technically not an Internet, it still may have provided a proof-of-concept that an internet was possible, and provided some ideas about how it could be done.

But it remains true that crucial parts of the development of the Internet occurred at XeroxPARC and other private firms.  (The Wired article cited by Greg confirms that Taylor agrees.)  And the fact that the Arpanet was created by the government does not imply that an Arpanet-like network could not, and would not, have been created privately, or that the Internet could not have been created without the prior creation of an Arpanet-like network.

It also remains true that Taylor became frustrated working at the government’s DARPA, and voted with his feet for the private sector.

Arthur Diamond
Aug 16 2019 at 4:10pm

Bob claims that “it is ignorant to an extreme” for me to believe that the internet might have been possible without open protocols.  That’s pretty strong criticism.  Fortunately for me, strong criticisms are not always correct.  Steve Jobs maintained proprietary standards for Apple and Mac computers, and was out-competed by IBM-compatibles.  He received pretty strong criticism.  But Steve made a come-back, still sticking to proprietary standards when he combined the iPod hardware with the iTunes platform.  This time he received pretty strong praise.  [Christensen and Raynor in their The Innovator’s Solution, provide a plausible and nuanced account of when a propriety standard will work best and when an open standard will work best.]

But let’s assume that Bob is right that the internet could only have been developed with open protocols.  Even then, the open protocols would not have needed to come from the government.  Individual firms can develop (and have developed) standards that they then release, hoping that they will thus become universal, allowing the original firm to benefit from being the first-mover.  Adobe’s PDF format was always available for free and was made an open standard in 2008.   Ethernet, a key technology of the internet, was developed as an open protocol by Robert Metcalfe while he was at the private Xerox PARC, and later at his  3Com firm.  It was standardized by a working group at the private Institute of Electrical and Electronics Engineers (IEEE), and out-competed proprietary standards such as IBM’s Token Ring.  Many standards also have been developed by voluntary standard-setting groups like Underwriters Laboratories (UL), the International Organization for Standardization (ISO), and the American National Standards Institute (ANSI).

Apart from protocols, I still am skeptical of open-source software.  It can sometimes work, if those who maintain the software remain mission-oriented and have decent day-jobs.  But most of us eventually want to be compensated for our contributions to the world.  In 2014 the Heartbleed and the Shellshock software bugs rocked the internet, due to failures in the maintenance of ubiquitous internet open-source software.  Columbia University computer science professor Steven Bellovin, worried that the bugs might be a signal that the open-source community was “going to fall further behind in the quality race.”  [As quoted in:   Perlroth, Nicole. “Flaw in Code Puts Millions at Big Risk.” The New York Times  (Fri., Sept. 26, 2014):  B1-B2.]

Bob Luxenberg
Aug 16 2019 at 7:35pm

Dr Diamond – your criticism of open-source is essentially  ‘it works in practice…but does it work in theory?’. Since Linux runs the lions share of the Internet (which last time I checked seems to work like champ) I’d say case closed. And it doesn’t just run servers- it is also is vital to innumerable embedded ‘internet of things’ devices.

Of course people want to be paid for their work. I argued STRENUOUSLY in the late 80s that the open-source movement was doomed to fail. But reality forced me to change my dogmatism.

Bob Luxenberg


Michael Pettengill
Aug 21 2019 at 5:56am

Bob understates the number of proprietary network systems, like AOL, for example, plus SNA as noted, plus RJE, MS BIOS, Xerox based 802.x, Decnet, ISO OSI, plus perhaps a dozen more.

It was Congress that picked the winner by ordering the government funded Internet be transitioned to commercial use. That tossed two decades of industry standards work via IEEE, ANSI, ISO  in the dumpster just as commercial implementations were reaching the market to trigger government procurement under a Congressional mandate to buy industry standard products. The Internet was known to not scale globally, requiring creating IPv6, which is, 25 years later, still not ready for deployment so the NAT kludge is still used on a system effectively still IPv4.

The triumphed of the Internet is it thwarted innovation in better networking technology. The OSI standards offered a more robust framework for addressing many scaling issues. Fortunately, telecom is driven by international standards which the Intrrnrt is layered on, solving 90% of the technical problems, like mobile computers, unaddressed by the Internet protocols.

Nick Ronalds
Aug 16 2019 at 7:59pm

I was just going to leave a quick comment that this was an entertaining podcast, but also that Diamond came across as unpretentious and totally non-defensive, which helped make the conversation entertaining. There were also some fascinating nuggets, such as the anecdote about the development of the internet at–but mainly after–DARPA.

But the fact that Diamond is responding to so many comments makes him much more interesting, and suggests, at the very least, that he has an abundance of energy and a love of the fray.

The last guest who was so active in the comments section was Eugene Fama, so Diamond is in pretty good company.

Arthur Diamond
Aug 17 2019 at 11:08am

The fray is fine, but comments such as yours are very fine too—thanks!

Gregg Tavares
Aug 18 2019 at 1:43am

FYI: AFAIK the DARPA thing really doesn’t hold up. Bob Taylor himself says the internet was made by the government.

Of course Mr. Diamond’s opinion might be correct but the sources he referenced as evidence his opinion is correct don’t seem to agree.

Arthur Diamond
Aug 18 2019 at 2:58pm

See my longer response to Greg (further above).  But here, let me add that Greg’s statement (immediately above) is stronger than his own evidence supports.  In his longer account (further above), Greg cites both Taylor’s views from a 2009 Los Angeles Times article and from a 2012 Wired article.  Here (immediately above) Greg’s statement is:  “Bob Taylor himself says the internet was made by the government.”  But the latest Taylor view would be what he said when Wired interviewed him in 2012:  “The origins of the internet include work both sponsored by the government and Xerox PARC, so you can’t say that the internet was invented by either one alone.”  When invited to “The Internet’s 35th Birthday” celebration, Taylor emailed back his 2004 response that the Arpanet was not the Internet.  By 2012 Taylor gives the Arpanet more credit, but he still gives plenty of credit to XeroxPARC.

Srinath Ponduri
Aug 17 2019 at 3:42pm

As usual a very informative and interesting podcast. I liked the clarity with which the guest spoke. However, while listening I was constantly reminded of Russ’s quote (I guess he is quoting someone else)– the story we are telling is the dots we have left out of connecting and we need to explain why we have left them out.

For an academic I am surprised how black and white the guest makes the story about innovation. It appears like if it is not for the government that these feral innovators would produce all the gadgets needed out of thin ether. This, I guess, is to add the needed emphasis on the innovators but nonetheless was jarring. For all his examples I could think of the ecosystem that engendered them. Marconi did invent the radio but the story started with Faraday to Maxwell to Hertz who were doing their work with no particular invention in mind but just to quench their thirst of knowledge of how the universe works. Einstein was just trying to understand gravity but his insights became crucial in GPS (Another massively public funded system which keeps the whole banking system in place among other things). Most of the government funded research might not end up in spectacular gadgets that we can all use but it creates enough knowledge that can be used by innovators. The Wright brothers did invent the airplane but the commercial aviation owes some of the credit to public investment during the intervening world wars.

Only  few years ago no body would have assumed that scientists will ever be able to measure gravitational waves. But the sensors they invented and the data processing tools they came up with look almost like science fiction. The knowledge that is gained in this process (done at the margins at very high cost and often by governments) would trickle down to the everyday gadgets people will use (again thanks to some entrepreneurial innovator) just like the cancer drugs in the guest’s example.

The example of outsiders in fracking felt strange to me. The barrier of entry into coding industry is almost non existing. You can pick up a book and a computer and do some courses online and if you are any good you will be sucked into it. The frackers might be unconventional when compared with oil giants but the entry barrier into fracking is much bigger than silicon valley. You have to be a geologist or petrochemist or somebody who spent a lot of time in the oil industry. I guess you have to be an insider who has not drunk the kool-aid.

Arthur Diamond
Aug 17 2019 at 9:48pm

I used to hold the plausible “linear” view of science and technological progress:  technological progress is driven directly by scientific progress.  So for the first 20 or so years of my career, I spent most of my time studying the history, philosophy, and economics of science.  But I gradually have come to believe that the truth is more complicated.  I still believe that technological progress depends on science in the sense that both theoretical  science (when done well) and technological progress depend on the Galilean revolution that privileged observation and experiment above all else.  But much of the best technological innovations depend only obliquely on scientific theory, and depend much more directly on trial-and-error experiments and nimble/novel use of available inputs.  (The late Stanford economist Nate Rosenberg saw this before I did, and mentioned it in Rosenberg and Birdzell.  How the West Grew Rich.)

In a sadly little-read article, William Baumol points out that many breakthrough innovations were achieved by those without college degrees.  He suggests that the mental processes that allow mastery of current theories are not the more creative mental processes that enable  innovations.  An academic master of genetics had contempt for Crick because Crick could not remember the names of the four bases that make up DNA.  That did not stop Crick (with Watson) from discovering the double helix.  [The too-little-read Baumol article is:  Baumol, William J. “Education for Innovation:  Entrepreneurial Breakthroughs Versus Corporate Incremental Improvements.” In Innovation Policy and the Economy, edited by Adam B. Jaffe, Josh Lerner and Scott Stern. Cambridge, Mass.: MIT Press, 2005, pp. 33-56.]

Marconi’s hunch violated the then-current understanding of physics.  But he went out and sent telegraph waves across the Atlantic anyway—forcing the theoretical physicists to scurry to patch their theory.  Venter’s method of sequencing the genome violated the then-current understanding of genetic biology.  But Venter went out and used his method to sequence more of the genome in 3 years than the government scientists had planned to do in 15.  The academic experts on information science rejected Robert Metcalfe’s dissertation on the Ethernet.  But he went out and built it anyway—leading him to observe “Ethernet works in practice but not in theory.”

The whole story is more complicated nuanced than I sketch here, and deserves further study.  For instance, science that is more empirical, such as much of chemistry and geology, can prove more directly usable by innovative entrepreneurs, than science that is more purely abstract, such as much of theoretical physics.  And if the government pours enough money into a technological project, one that is implemented by sufficiently mission-oriented civil servants, then the project can sometimes succeed (Manhattan project, moon landing).  Do not forget, though, the opportunity cost—money that is taxed away from citizens to fund a government project is money that is not available for citizens to spend in their garages developing the next breakthrough innovation.

The key contribution of science to entrepreneurial innovation remains Galilean science’s privileging of the facts:  “nullius in verba.”

Srinath’s final paragraph is an aside doubting that the frackers were outsiders.  He should read Zuckerman’s wonderful The Frackers.  Or if time is short, he should listen to Russ’s wonderful EconTalk podcast with Zuckerman.  (Or if Srinath is on vacation at the beach, he should do both 😉  Harold Hamm was the 13th child of poor sharecroppers.  His education ended with high school and he started work at a gas station.  No Y Combinator or venture capitalist or angel investor helped him.  He cobbled together his funds, slowly building from one success to the next.  He was an outsider, for sure.

Lee O'Neill
Aug 19 2019 at 7:58am

This was one of the best Econtalks of the year so far. I found several of the ideas being discussed absolutely fascinating and I couldn’t wait to get a copy of the book to explore them further. I went straight to Amazon only to find that the price for a hardcover was $84, for a paperback $25, and for an e-book $28. Those prices are outrageous and they point directly to the failed market of the communication of academic ideas.

Let’s start by observing that structurally, there are some similarities between the economic model of health care and that of higher education. Principally, the activities of a research university are heavily subsidized by taxpayers. If it is a state-run institution, the majority of students are paying below-market rates for tuition with the state picking up the difference, but there are large subsidies beyond that. Higher education tax-exempt status itself is a huge subsidy – universities don’t pay taxes on tuition or endowment income and alumni are incentivized through the tax code to give money to universities.

Yet unlike health care, taxpayers aren’t encouraged to overconsume health care services but are discouraged or prevented from having access to the output of higher education. If we put aside classroom education for a moment, the principal activity of a university is research and the principal output is (or should be) the communication of that research.

Yet the communication aspect is effectively limited to those who are members of the academy, even though the research receives significant public subsidies. Articles are usually available only through journals or databases that are prohibitively expensive to those unaffiliated with a university. Books are priced at levels that far exceed the trade press equivalent and provide profit margins that are less than half that of trade presses, creating a significant disincentive for retailers.

In essence, the communication of academic research can hardly be called a marketplace of ideas when it is designed to communicate only to insiders yet is supported by public funds.

Arthur M Diamond Jr
Aug 19 2019 at 10:44am

I agree with Lee that higher education often excludes outsiders, both as consumers, and especially as producers, of knowledge.  Within my own small sphere of control, I have tried to be more inclusive.

During the next year or two, I will write and speak to audiences who may not have the time or money for my book.  The goal is to communicate to as wide an audience as possible, as many of the main messages of my book as I can.  That’s the beauty of EconTalk, right?  For a little time, and no money, you get entertaining summaries of some of the most thought-provoking new books.

One unsatisfying answer to Lee is that his issues are getting somewhat better, and they sure could be a lot worse.  Take Lee’s example of the pricing of my book.  Lee was appalled to find the paperback at $25.  But it is quite common for academic books to be issued only in hardback for $100 or more.  So when I see a price of $25, I smile in relief.  Some friends of mine published a book with a trade press at about the same time as my book with Oxford.  You can get their Socialism Sucks in hardback for $23.39.  (It is not yet sold in paperback.)  So my book in paperback for $25 or their book in hardback for $23.39.  Not the same, but not orders of magnitude different.

In my book I quote Jeff Bezos as arguing that the world would be better with fewer gatekeepers.  Amazon’s self-publishing branch is a way for authors to get directly to readers without passing through the publishers’ gates.  I like Bezos’s idea.  But the problem is that gatekeepers provide some very imperfect quality filters.  If I had self-published through Amazon, your dollar price would be a lot lower.  But would Russ have invited me to EconTalk, if the book was self-published instead of from Oxford University Press?  And if Russ had not invited me to EconTalk, would you have ever heard of my book?  What good would it do you, or me, to have on offer a low price for a book you never hear of?

There may be ways to solve this—to certify quality without the imprimatur of a major university press.  But right now those ways are works-in-progress.

One final point.  Most academics mostly exclude non-academics from their sources.  I am way out on the tail of the distribution on my openness to non-academic sources.  I cite many examples that appeared in the Wall Street Journal and the New York Times.  I cite many history books and biographies of entrepreneurs, that were not written by academics.  I have been criticized for this, even by the most tolerant of academics—Deirdre McCloskey once gently chided me for quoting Bill Bryson a bit too often.

But I believe we can learn a lot by getting as close to the raw facts as possible.  Many philosophers will dismissively respond with the cliché “all statements are theory-laden, so there are no raw facts.”  But as the distinguished philosopher Willard Van Orman Quine argued in Word and Object, some statements are less theory-laden than others.  I often find the less-theory-laden statements in works written by non-academics; that is where the nuggets can be uncovered that academics have failed to mine.   [See Daniel Kahneman’s discussion of “theory-induced blindness” in his Thinking, Fast and Slow.]

Melanie Butcher
Aug 20 2019 at 9:21am

Love this podcast. I am a female entrepreneur myself (software). I’m working in a fast-growing gazelle company currently, and I was a part of a company that shut down when we lost investors in dec 2008.

One thing you might want to consider with the lack of a supportive environment in 2008 for gazelles…. is the unavailability of funding from investors in 2008. Was it a problem of regulations that were in place that cut off private investing in 2008, or was it just simply fear in that uncertain environment?

Arthur M Diamond Jr
Aug 20 2019 at 1:45pm

Your question is reasonable and important.  Both regulations, and uncertainty about future polices, can lead to fewer and slower gazelles.  Amity Shlaes in The Forgotten Man emphasizes entrepreneurs’ uncertainty about future FDR economic policies as one of the reasons the Great Depression was so deep and so long.  Likewise, I believe both regulations and policy uncertainty deepened and prolonged the economic Crisis of 2008.

But it would be useful to seek evidence on which mattered more.  (In the podcast Russ gently and justly pushed for broader evidence that regulations matter more than other forces.)  Patrick McLaughlin and his team at George Mason’s Mercatus Center have developed a useful time series data set on regulations.  I wonder if their data, or an augmented version of their data, could be used to answer your question?

Tim Scott
Aug 20 2019 at 9:39pm

Towards the end Russ and Aurther lament the selection of experts into positions of power – Lord Kelvin’s comments on aircraft are used as an example of the folly of trusting in the “expertise” of these masters. They propose that people who are not experts in the field are actually better at finding results and innovating as opposed to the people who know the subject well. Although I agree with their dislike of appointing the most credentialed as those who should be in power, at the same time it is worth noting that it makes far more sense that the reason so many innovations come from non-experts are simply because there are so many non-experts. I would guess that experts actually have a far higher “innovation rate” as opposed to the non-experts.

Arthur Diamond
Aug 23 2019 at 1:22pm

Tim’s plausible guess is that experts have a higher rate of innovation than non-experts.  My guess is that Tim’s guess is true for incremental innovations, but not true for breakthrough innovations.  For incremental innovations, thorough knowledge of the current theories and technology are helpful.  For breakthrough innovations, the habits of mind that allow mastery of the current, are not the habits of mind that allow brainstorming new breakthroughs.  [Relevant sources on these issues include:  Baumol, William J.  “Education for Innovation:  Entrepreneurial Breakthroughs Versus Corporate Incremental Improvements.”  In Innovation Policy and the Economy, edited by Adam B. Jaffe, Josh Lerner and Scott Stern.  Cambridge, Mass.:  MIT Press, 2005, pp. 33-56; Diamond, Arthur M., Jr.  “The Epistemology of Entrepreneurship.”  Advances in Austrian Economics 17 (2012):  111-42; and Diamond, Arthur M., Jr.  Openness to Creative Destruction:  Sustaining Innovative Dynamism.  New York:  Oxford University Press, 2019.]

Michael Pettengill
Aug 21 2019 at 5:33am

Humm, what do you mean no innovation startups?

Tesla, out of LA.

Destroying the high performance car industry.  Destroying the luxury car industry. Destroying the  peaker power plant industry.

Cars are highly regulated.

Pending destruction of trucking industry.

Sure, gas and oil guzzling vehicles still dominate, and will in various niches for decades, but the pioneer automaker is on a crash course to switch to electric power, as are European, and Chinese automakers.

Delivering requires major innovations in factories, applying economies of scale under one roof seldom attempted.

The same founder also took over SpaceX and has cut launch costs dramatically by reuse and rapid tempo of launch. Constant innovation and continuous improvement. Federal funding by Congress ordering NASA open bidding commercial cargo and crew to ISS.

Destroying all existing rocket and space launch providers.

Highly regulated.

Currently deploying satellite internet system.

Highly regulated.

Testing prototypes for a rocket larger than the largest government has attempted.

Highly regulated.

Out of frustration with traffic, proposed hyperloop, calling for others to take it on. But in his spare time, looking at tunnel boring decided he could tunnel faster than a snail, which moves faster than the current tunneling machines. In any case, he notes tunnels easily opens up ten times the traffic capacity of existing highways.

Oh, and he was a illegal immigrant according to Trump standards.

Elon Musk decided to solve a couple of problems for the future of the planet and was winning to commit $100 million he got as part of creating PayPal. He found dozens of innovators to start, and has probably gone through a hundred, with easily dozens leaving to start new car and rocket companies. Which was Elon’s primary objective almost two decades ago.

Jeff Bezos is no slacker either. Must have invested $10 billion of his own money in space launch, Blue Origin. Also competing in reuse and rapid tempo launch.

Plus several others in space flight, Paul Allen,  and serial innovator Branson backing serial space industry innovators, and others.

Arthur Diamond
Aug 23 2019 at 12:20pm

Michael gives some examples of innovations that continue, even in our current highly regulated economy.

Even in a storm, some candles stay lit; but fewer as the wind worsens.

Walt Disney created “Snow White” in the midst of the Great Depression.  Thousands lined up at theaters to see it.  In a dark time, it gave hope that through courage and good will, those who persevere could emerge into the light.

One of the basic rules of economics is that if you increase the costs of doing something, less of it will get done.  Regulations increase the costs of innovation.

Adam Thierer of Permissionless Innovation fame is working on a new book that encourages innovators to keep innovating even in the face of regulations.  In The Prosperity Paradox Clayton Christensen and co-authors argue for continued innovation in developing countries, even in the face of corrupt regulatory regimes; even if bribes are required for the regulators to permit innovation.

I wish Thierer and Christensen well.  But at best they can mitigate.  Regulations increase the costs of innovation.

Aug 21 2019 at 10:43am

Are RCT’s required for cancer drugs?

First article is about FDA chief of oncology who has sped up approval of cancer treatments.  Second article talks about how comparison groups are not used in studies for approval of cancer drugs – so RCTs are not required for cancer drugs, right?  If so, I’m thinking FDA has already taken steps to address some of your concerns about cancer drugs – even though this accelerated approval may have led to approval of drugs that don’t provide any benefit.  Which I think lends weight to the argument that RCTs should be used in other therapeutic areas with less severe outcomes at stake.

Excerpts from article:

“Cancer medicines not only often fail to save patients but can accelerate their deaths and make their last weeks far more painful, and critics, like Public Citizen, argue that the F.D.A. focuses far too much on saving the few at the cost of cutting short the lives of many.”

“As it turned out, Ms. Pazdur suffered terribly from taking a second experimental drug in a clinical trial, in which Dr. Pazdur had no role, at the National Institutes of Health. Her heart swelled to near bursting, her blood pressure soared, and she became so tired that she could barely walk to the bathroom.”
Cancer Drugs Approved Quickly Often Fail To Measure Up Later

“Studies based on response rate don’t include a comparison group, so the scientists at Oregon Health and Science University argue that it’s difficult to say whether these new drugs are better than other drugs already on the market.

Sometimes there is no comparison group because these are rare cancers, or the drug targets a rare mutation in a common cancer, so it’s difficult to pull together a study that randomizes patients into different treatment groups, says Dr. Richard Schilsky, the senior vice president and chief medical officer at the American Society of Clinical Oncology.

But for other circumstances, “if we put the investment in it we would be able to do randomized controlled trials,” says Emerson Chen, an oncology fellow at OHSU. Those studies often add another year or more to a follow-up study, he says, but he advocates for them because they provide “more definitive information about the survival and the patient-reported outcomes.”

Arthur Diamond
Aug 27 2019 at 11:43am

Evan asks if RCTs (Randomized Controlled Trials) are required for cancer drugs?

I really like the first article that Evan links to.  It documents a case where FDA regulator Richard Pazdur tried to speed up the regulatory process after the issue became personal; after his wife had run out of drugs to try for her ovarian cancer.  From my read of the article, he took steps for the FDA to evaluate the results of RCTs more quickly, but after his reforms, RCTs were still required for cancer drugs.

Mrs. Pazdur volunteered for an experimental cancer vaccine drug that ended up causing her significant side-effects and did not affect her cancer.  Cancer vaccines have sometimes worked, so it was a plausible therapy for her to choose to try.

I salute the efforts that some have made to speed up, and allow more patient choice, in the regulatory process.  These include the right-to-try law, that allows terminal patients who have run out of options to try drugs that have not been approved.  But this law has proven less helpful than hoped, because the drugs are often expensive to produce.  While drug companies are allowed to give them to terminal patients for free, they are not allowed to charge a price for them.  As a result, although it is legal for terminal patients to consume these drugs, the incentives are structured so they often cannot actually obtain the drugs.  [An online article by New York Times reporter Linda Qiu discusses these issues:  ]

Evan’s second link highlights that some cancer drugs have been tentatively approved based on response rates, with follow-on commitment that the drug company do RCTs before final approval.  The “response rate” in this context means the percent of patients who see their tumors shrink.  The link describes that in many cases the shrinkage is only temporary, and that in many cases it does not correlate with longer life.

Even so, I still view this as a modest step forward in allowing patients to have greater choice.  Reasonable people can disagree about what choice is best.  Tumor shrinkage by itself can have some value.  When my father had his melanoma brain tumor reduced in size through surgery, he was again able to sign his name, and continue to write down the records he had kept through adulthood.  This was a small and temporary benefit, but one he valued.

In one of the studies mentioned in Evan’s second link, of 59 drugs approved based on tumor shrinkage, only 6 eventually proved to lengthen life.  Apparently it was not known in advance which of these drugs would result in longer life and which not.  Some patients would choose to take one of these drugs, knowing that the odds were against their living longer, but wanting to take the chance.  They may also have gotten some satisfaction from believing that their being venturesome patients might help advance knowledge toward a cure that would benefit others.

I am not arguing that this is the only good choice.  A strong case can be made for those with little chance of cure to choose palliative care.  But I believe that the patient, not the FDA, should choose.

Allowing drugs to be temporarily approved on the basis of their having positive tumor shrinkage, is a step forward.  But it is not the step I was most strongly advocating in my EconTalk mention of Emil Freireich, who cured some patients with childhood leukemia, and Vincent DeVita, who cured some patients with Hodgkin’s lymphoma.  These intense doctors achieved cures by adjusting the chemotherapy cocktails through nimble trial-and-error experiments, based on experienced observation and hunch.

My understanding is that currently researchers are required to submit their pre-planned protocol to the FDA, have it approved, and then follow it as approved—no nimble trial-and-error allowed.

Nick Ronalds
Aug 22 2019 at 8:28pm

I am blown away by Arthur’s genial responsiveness. I already got an Amazon book sample of his book but I’ll now feel like a jerk if I don’t just go and buy it.

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TimePodcast Episode Highlights

Intro. [Recording date: July 15, 2019.]

Russ Roberts: My guest is... Arthur Diamond. He is the author of Openness to Creative Destruction: Sustaining Innovative Dynamism, which is our subject for today.... Let's start with your view of creative destruction. Describe what it is and why we should be open to it.

Arthur Diamond: When I think about creative destruction, I think first about a phrase that Deirdre McCloskey used in her trilogy, Bourgeois Trilogy. She talked about the 'Great Fact of economic history.' And, I like that phrase because it gets you on the edge of your chair: 'Okay, what is going to be the Great Fact? What is it?' And, it turns out that what she's talking about is that for tens of thousands of years, people like us--homo sapiens--lived lives that were 'poor, nasty, brutish, and short'--to use Hobbes's phrase [Thomas Hobbes, "Leviathan"]. And then something spectacular happened--the Great Fact--somewhere around 250 years ago. The lives of many people, at first in Europe mainly but then throughout the world, got substantially better. And that's just the blink of an eye, in terms of the whole history of beings like us. And so that, the Great Fact, raises the great question, which is: How do you explain the Great Fact? And the way that I think the Great Fact is best explained is starting with Schumpeter [Joseph Schumpeter]--the idea of creative destruction. Schumpeter has this great book, Capitalism, Socialism, and Democracy, and he wrote it after he was depressed that what he thought was going to be his great book was not well-received and everybody was reading Keynes [John Maynard Keynes]. So he then wrote this off[?]. And in the 7th chapter, that's the chapter where he talks about creative destruction. And one of the goals he has is to try to say, in this whole book, especially this middle part of the book, is to say that capitalism has been mis-portrayed. That it is the force in the world that makes ordinary people's lives better. And, he says that capitalism has--the key, the essential fact of capitalism--is creative destruction. Creative destruction is the process through which old ways of doing things are replaced by new things. The creative part is the car. The destructive part is that carriages go away. The creative part is the plow, the mechanized plow. The destructive part is the wooden part goes away. And you can go example after example. I use that phrase in my book, in the title of my book. It's not my favorite way of describing what he's talking about. And I don't know if this is the time to get into that. But, McCloskey, when she talked about writing--one of the points she made--is that you should always put at the end of a piece of writing what matters most. So, if you talk about a sentence, the last word is what should matter. If you are talking about a book, the last chapter of your book is what most matters. And so the phrase, creative destruction--what's last in that phrase is 'destruction.' And one of the things I learned as I was working on this project--and it was one of the things I found most exciting in the process of doing this book--was that the creative part of the process hasn't been emphasized enough. It's been underestimated. And the destructive part has been overestimated. What I found is people are afraid of losing jobs. And some jobs are lost. But not as much as people think. And the jobs that replace them are much better jobs. So, whereas people are afraid of the destructive part because they don't understand that, they should--if they saw a more realistic picture of what it is, I think they wouldn't be quite as afraid. I'm saying they shouldn't be quite as afraid. So, I say openness is important. And the 'openness' is in the title because I'm trying to make the case that, yes, there is some--things could go wrong for some people. But not as often or as bad as most people think. And that the benefits are huge; the costs aren't as great. And I think openness gives us great benefits in terms of the quality of the jobs we have, in terms of the goods we get, in terms of how long and comfortable life is. But also in terms of an area that I don't think has been sufficiently emphasized, which is, in terms of the quality of the work we are able to do. And I think work is an important part of life. So, that would be my first pass, I guess, at answering that question.


Russ Roberts: So, I want to say a couple of things about, first, I think--I disagree with Deirdre that it should be the last word and the last page and the last chapter. It should be the most important thing. Because a lot of people don't get to that last chapter in the modern era. So, I go the other way. It's the first paragraph that's the most important. But I take your point. And I think your observation about destruction as being over-emphasized is, I think, extremely unfortunate. I think there are two things about the process of creative destruction that are misunderstood; that are extremely--extremely important. One is: It's crucial to remind us that life is not a 0-sum game. And I think our natural intuition is often that it is. And so I think it's extremely valuable that that phrase conjures up some idea of churning or a vitality. So, that's the first thing. There is the risk, though, that I think people misunderstand it to mean, 'Oops. Some things come along, and some things go away.' And that's really a misunderstanding of the positive-sum aspect of the process that you are writing about. The other thing that I think that's important--and I don't know if you spent enough time on this book for my taste, and just personal taste of mine--is that, I don't think people understand easily the connection between the creative and the destruction, and that it's actually creative-destruction/creative. The creative, destruction, creative destruction, destruction. That it's not a cycle, but an ongoing process, by which, by allowing things to disappear, we free up the resources--both human and financial that allow new things to come along. And I think some people just sort of assume, 'Well, when some jobs go away, I guess, yeah, I guess it's good fortune that some jobs do come to replace them.' But the actual process by which the jobs are destroyed--the companies that died, research that is no longer devoted to their products--is exactly what allows the new jobs to come along. And I think that isn't fully appreciated.

Arthur Diamond: Well, I agree with that. Although, the creative process, by creating more stuff, means you don't have to do as much reallocation as you might think. You still have to reallocate as part of the process, so I agree with that. I do want to comment on what you said at the beginning, if I may, which is about, people think of the process as being a 0-sum game. And that is also something I talk about a little bit in the book, and maybe should have talked about more. One of the things I tried to do in the book and like about the parts where I succeeded is I tried to give a lot of examples and compelling stories that illustrate the points that I'm trying to make. And, on the point of the zero-sum game, my favorite--I think the favorite story--is about Brunelleschi [Filippo Brunelleschi] and Ghiberti [?Lorenzo Ghiberti]--the two greats of the Florentine Renaissance. Where they were competing to--there was a prize established to see who would get to design and make these brass panels for the doors of the new cathedral. And--

Russ Roberts: It's hard to correct you, Art. But, I think it was a tapestry. It's related to the cathedral--

Arthur Diamond: No, absolutely correct me! Because I--hugely better on those sorts of issues. So, I should have asked you rather than just say the wrong thing. I've seen them, but I don't know what to call them. But, so they had this competition. And a lot of people competed. But the judges thought both Ghiberti and Brunelleschi had done a wonderful job. And so, they said, 'We don't know what to do here. We're going to make you guys--you guys can each do half of the panels.' And Brunelleschi was appalled: 'So, if I'm not named the winner, I'm not going to do it.' So, it looks like, the way you first look at it, is, 'Okay, it's a zero-sum game. Ghiberti won; Brunelleschi lost.' But what Brunelleschi then did he thought, 'What other contribution can I make that will be worthwhile in the world?' He then did a little touring of some of the architectural greats in Rome and other places. And he came back, and he competed, and won the assignment to build the Duomo. And so, the way that I end that story is that, in the short run there are losers. But more often than not everyone can be winners in this process of creative destruction. And that's optimistic. But I think there's a lot of truth to it.


Russ Roberts: Yeah; I think--especially when you look across generations. In any one generation, there are people whose fates don't turn out well. The competitive process turns against them. Consumers turn against them. They might lose out on just a change in tastes that has nothing to do with justice, or their hard efforts. But allowing resources to flow to their most valued use, which is the ideal of a competitive market economy, allows the next generation and much of the current generation to thrive. Because there's more available.

Arthur Diamond: I've heard you make that argument. And I think it's a plausible argument. But I think you can make a stronger argument. I don't think you have to argue for openness to creative destruction based on, 'Yeah, we're going to put it to you but your children are going to be better.' I think we can say, 'Your children are going to be better, and most of the time you are going to be better, too.' I think if we have what I call a robustly redundant job market--and there's things we can do to make that more likely--then, people who lose their jobs will themselves find jobs that are as good or better in their lifetimes. And not just have to have the hope that their children will be better--which is a reasonable hope, a kind of reasonable point to make. But I think we can make the even stronger point that the odds are pretty good that they'll be better off. In this process.

Russ Roberts: Fair enough. I agree with that. I don't--I bring up the next generation for the case where--you have a certain--I always use the worker in the auto-assembly line in the United States who is put out of work by Americans buying Japanese cars. And wants the government to protect their jobs. Which is understandable. And their next best alternative after they have invested a long time at a particular skillset may not be very attractive. They may have a diminished standard of living. But: You are right. Many of them won't. Many people in the, spread out through the economy are going to do better, while they are alive. I don't mean to suggest it's all about sacrificing for their children. So I think--yeah, I totally actually agree with you.

Arthur Diamond: There is a book related to the example that I found compelling, called Janesville, by Amy Goldstein. And she embedded herself in the Janesville auto plant community when they all lost their jobs. And then she followed several examples of how people did. And there was a lot of suffering in that book. It was not an easy book to read. But, those people who were willing to move seemed to do better than those who stayed and took, quote--"what was the usual recommendation" of the authorities. Which is: 'Go to the local community college and sign up for one of the training classes.'

Russ Roberts: [?]

Arthur Diamond: Yeah. And there was a lot of government money put into that, too. They got a special grant, and such. And they were training--these people worked real hard to retrain themselves. But, the kind of classes they set up, they were like 30 people signing up for a job retreat[?] to teach you have to be a lineman for one of the utilities. Well, okay, so they go through the training and they get certified; and it turns out maybe there's maybe 2 jobs available for the 30 linemen, that all these people have put in the time, the money, the effort--

Russ Roberts: horrible--

Arthur Diamond: and they have nothing to show for it. The people who end up doing okay are the people who move. And one of the issues I know you've addressed in some of your other podcasts with others is the issue of: Why don't we have as much mobility?

Russ Roberts: Yup.

Arthur Diamond: And I think it could be people, the workers, who have lost their jobs are not willing. But I think there's also an element that there are policies in effect in some of the cities that might be natural magnets that discourage people from coming, to hire. And you've talked about that with--I can't pronounce French very well--'alab'--

Russ Roberts: Alain Bertaud. Yeah.

Arthur Diamond: Yeah. Some of what he said was relevant to that--the size of the apartments is regulated. So, people who are poor and displaced can't get a foothold. But there's other issues, like restrictions on vertical building, tall buildings, and the actual expansion of the city geographically over greater territory. If we had the kind of boom towns that we used to have--you know, the rate of growth of Chicago was enormous when it was a boom town. In a whole bunch of different dimensions. That would provide a way for people who were displaced, like the people in Janesville, to go to a place where more jobs were more readily available, and there wouldn't be as severe suffering, I believe, as there is--


Russ Roberts: I don't mean to correct you. Because I know you--what I'm going to say next, you agree with--

Arthur Diamond: Oh, go ahead, Russ--

Russ Roberts: But, when we say a phrase like, 'Go to Chicago where the jobs are more available,' obviously the "number of jobs" is not a fixed number available in Chicago. If a large number of people move to Chicago and were looking for work, in a successful, robust economy or job market--and we'll talk about that in a minute--there would be an encouragement of entrepreneurs to start businesses there, take advantage of that opportunity of a workforce that was looking for work eagerly. So, it's important to remember: It's not--I always use the example of Musical Chairs. I think people think in their mind that there's a fixed number of jobs and when a plant closes, there are just fewer jobs--chairs for people to sit in. That's not how the labor market works. And I think your point about how retraining versus moving is extremely important. There's all kinds of different ways that we cope with economic change. And I think both you and I agree that our ability to cope with that doesn't seem to have--it seems to have diminished in recent years. And let's turn to this question about the job market. You can comment on what I just said if you want. But, this issue that you--the United States job market--appears to be less mobile. Less dynamic. Less flexible. Do you think that's true? And why do you think that is? What has changed?

Arthur Diamond: The main problem, I think, is that we've increased the level of regulation of the labor market, and a secondary problem is we've increased regulations of those who are the main creators of new jobs. If you take this--and maybe I should--I think the second is probably as or more important so let me start with that one. The main--one of the points I make in my book that is known by some people but I don't think widely enough known--is that the main creator of new jobs is what are sometimes called the gazelles. And, it used to be thought, and what you still hear repeated over and over again is the main creators of new jobs are small firms so we've got to do things like subsidize and encourage small firms. Well, it turns out the vast majority of small firms are not job creators. They stay small. They don't last very long. It's the new firms that--the person who has done the most research, whose name is mostly associated with this line of research, is a fellow named Haltiwanger, and he has a variety of co-authors and has written a bunch of papers. But what he finds is, it's not small that matters: it's young and fast-growing; and hence the name 'gazelle.' And so, when there was a slowness in job creation, especially after the Crisis of 2008, one plausible speculation--I don't know how much of it--I didn't look into it further except to say that, 'Yeah, that's something somebody should look into'--but, yeah, one plausible speculation was that the gazelles were not being--there weren't as many gazelles being created as there had been in the past. So that the job creation was slowing, because these firms were not--there were fewer of them. There's evidence that that's the case. And so, if you want to encourage a robustly redundant labor market, one key thing you need to do is think about what's constraining these fast-growing entrepreneurial startups from doing their thing. And, I believe that one aspect of that is that we over-regulate innovative startups. But then there's also the fact of, okay, let's say, when you do have a gazelle, how many people are they going to hire to do whatever they are doing? And one issue that comes into effect is--this is a big issue today in policy debates: Are they going to put a robot in there? Are the going to put an algorithm? Or are they going to put a human being in? Well, if you have--the more you regulate the labor market, the more the incentive is, for what gazelles exist, to think about perhaps seeing, 'Can we automate this? Can we cut down on the expensive, inflexible labor, human labor, and have something that is not as regulated? Is not as expensive?' So, I think there's two factors. There's two things we could do. We could reduce the regulation of the labor market and we could reduce the regulations on the gazelles. And if we did both of those, we'd have a good shot at making the labor market closer to this ideal that I'm advocating.


Russ Roberts: I'm sympathetic to that, of course. As listeners would expect. But I think the challenge to make that viewpoint more convincing is to get into the trenches--which, I don't expect to get into every trench. You've gotten into some other trenches here, we'll talk about, which I think are great. But, you've got to get into the trenches and explain why it's gotten harder. What particular--it's easy to say 'This is more regulation.' I think there is. But, how much more? Is it really binding? Is it really make it that much harder? A counterview might be--and I thought about this a lot as I was reading your book; and I'm just--let me step back for a minute and talk about, you were mentioning before that you tell a lot of stories in this book. And I think they are fabulous. And, in particular, you honor a lot of great people who came up with brilliant things that made people's lives better. And, we don't know their names--most of us. And I think that's fascinating, that I know a lot more baseball players than I do entrepreneurs. I could name a lot more athletes and entertainers. And, they're fine. But it's interesting that they are not, outside of a handful of folks like Steve Jobs or Walt Disney or Henry Ford, we don't know many of the names of the people who changed our lives for the better. And I think--that's just a side-note--

Arthur Diamond: But it's a really, really important side-note.

Russ Roberts: Yeah. I don't think it's irrelevant.

Arthur Diamond: I wouldn't mind--I know that's [?]--

Russ Roberts: Go ahead. Interrupt. Talk about that.

Arthur Diamond: Well, at some point--one of the things that I think is another kind of bum rap on entrepreneurial capitalism or what I call economic dynamism is the idea that people are debating now, more and more, about: Should we be in favor of socialism or should we be in favor of capitalism? And one of the things you hear is that socialism is where the idealists go. And the practical people go with capitalism. And there's a famous saying that gets repeated--I don't know who it's due to originally--you know, that 'Anyone who is not a socialist when they are young doesn't have a heart; anyone who is still a socialist when they are old doesn't have a brain.' Something like that. Well, I think that's selling the capitalist side short, because it implies that we can't be idealistic. That we're just kind of number-crunchers. And part of what I think people don't understand is that these people who are responsible for innovative dynamism--the inventors, the entrepreneurs, and some of the venturesome consumers that I think especially get short shrift--that these people are heroes in many ways. They are not perfect. They are flawed human beings. But, they--heroes are flawed. But they are people who do great things in spite of their flaws. And I think that one of the, some of the accounts we give, including economists, maybe we--well, not just 'including economists,' maybe mainly economists--is we've taken the entrepreneur out of our accounts of capitalism. You can read a lot of good textbooks of micro without too much emphasis on entrepreneurship. Maybe just a little aside in some box somewhere. But it's not part of the core message. And I want to make it part of my core message, is that, this system--that's why I have as a second chapter, I emphasize entrepreneurs, the innovative entrepreneur. And I want to say: This is not inevitable. This process is not inevitable. This is a process that is driven by human beings and their choices and their perseverance and their courage. And I think if that message got out more, it would be harder to make this case that one side has got a monopoly on idealism. Because I don't think that's true. I think that's a bum rap.

Russ Roberts: I totally agree with that. We need a lot more idealism. I've often said we need an anthem for free markets. My Keynes-Hayek rap videos with John Papola--the second one--is something of a defense of that kind.

Arthur Diamond: Though I want[?] you have Schumpeter and Keynes.

Russ Roberts: There you go. Yeah. Schumpeter would be a--that's not a bad idea, actually. Plus you could bring in a lot of other aspects about his personality. You know, supposedly he wanted to be the greatest economist, the greatest lover, and the greatest horseman; and he got two out of three. But, anyway--I don't know if that was his self-assessment or the assessment of others. Anyway--

Arthur Diamond: it's said that--the economist[?] once said that economists are boring people. That, the only two people which you could make a good movie about who were economists, were Keynes and Schumpeter.

Russ Roberts: Yeah. That could be true.

Arthur Diamond: But they left out the one that was actually done, the--Nash [John Nash]. Although I don't know if you economists account--

Russ Roberts: that's a good point--

Arthur Diamond: You were going to go in a different direction.


Russ Roberts: Yeah. I want to go back to my other point, which is that, we were talking about the dynamics of the labor market and how much did regulation--and as an aside, which derailed us, how I think, how we don't idolize or glorify great entrepreneurs and inventors. And I think that's a shame. But the other point I want to make is that, you could argue, besides the, I think, the need, to get in the trenches and show why in particular it's hard to create a gazelle--not just, say, there's more regulation or there's more pages in the Federal Register. I think you need to show something akin to Hernando de Soto's work: Are there more permits you need? Is it that once you reach 30 or 50 employees that a certain set of regulations kick in? There are people who have done that. I don't mean to suggest it hasn't been done. I think to make that case you have to go down that path to some extent. But the other point I want to make is that, in reading the narratives of many of the great innovators and entrepreneurs that you chronicle, one is struck by how little they had when they got to America, say--how low their station was when they started, and how through dint of hard work and creativity and drive and stamina and grit they managed to create a great product and great, successful enterprise that employed hundreds or thousands or hundreds of thousands of people. And, I wonder--that's harder to do today. I think you'd agree. And then the question is: Is that because the rules and regulations of running and starting a business have changed, or is it because the nature of what is going to be done today is going to be different? So, let me explain: I think right now there's tremendous innovation. Where I'm sitting--I'm sitting at Stanford, where I am for the summer, and within a 50-mile radius there's just an extraordinary profusion of funding and creativity and enterprise. And, it's an amazing time to be alive in this area, to come to this area and be part of this transformation. And it's been that way for a decade or two; and it might continue. But it's also clear that there's a set of hurdles that a person has to clear to get here--and I don't mean physically: I mean intellectually, creativity-wise. The skills that you have to have aren't the same skills that it took to create a great enterprise in 1880. It's much more technical. The number of people who are capable of doing it might be a lot smaller. It requires an educational background. It's true you don't have to go to college to get that educational background: you'd have to figure it out for yourself or learn it online. But it's not undemanding. And I just wonder if some of the slowing of the pace of innovation in the rest of the economy outside Silicon Valley is not unrelated to what's already been done, and what remains here that is dynamic is dependent on a certain small group of people who have the capability to use the tools that are quite demanding.

Arthur Diamond: Well, you know, this may be an example of something that I think we do naturally enough but that we should restrain ourselves from doing, which is to over-generalize from Silicon Valley of what might be true of entrepreneur in general. And it's natural to do that because in our time by far the most dramatic successes are in Silicon Valley. And so, when I was writing the book, a lot of my examples are Silicon Valley. That's what's available, and that's what is compelling. Again, I can't prove it and you're right: it would be better to drill down and be able to prove it rather than just say this is suggestively plausible. But that's all I've got at the moment. I think that part of the reason why we've got the spectacular success in Silicon Valley but not so much elsewhere is because there had been, and maybe still is but maybe won't be for long, less regulation of what's going on in Silicon Valley compared to other areas. And, that's why I try to find other examples of areas where there's dramatic entrepreneurship that's not Silicon Valley. I talk a little bit in the book about the fracking entrepreneurship. And these are people who are very different from the Silicon Valley and don't have to have some of the characteristics that you are sketching as being entry tickets to getting into Silicon Valley. And, I think you could have more people in more areas of entrepreneurship who wouldn't be required to have all the coding skills and the high education level of Silicon Valley needs, if we had less regulation. I mean, I give some examples in the book. What you, I think, would be looking for is if somehow the people who do the Regdata--George Mason or some group like that, if they could fine tune the stats to judge whether there was something that changed when we had the drop in entrepreneurship in the gazelles after 2008--

Russ Roberts: I'm willing to accept that--

Arthur Diamond: I think that would be neat, if they'd do that. I haven't tried to do that or asked Patrick McLaughlin and those guys whether they can do it or not. But that would be good. I do have a few examples where regulation has affected entrepreneurship. One of the ones I like a lot, because it's an example people like Tyler Cowen and Peter Thiel have made a big deal of and are quoted on, one of the things they say is, 'Where are the flying cars that we were promised when you and I were young--Jetsons and all of that?' And they say--they have their reasons for why they don't think we have all the flying cars. In the book, I have a brief vignette of somebody who actually had an entrepreneurial startup to make a flying car, and he complains about all the regulatory hurdles that have slowed him down so much in developing that. And, this other individual case is where you can see that there's been a lot in the papers and then there's also a nice kind of academic paper by John Chisholm where he's looked at drones, and how drones were originated here in the United States but a lot of the innovation now is being taken to other places, because of the regulatory obstacles we have here in the United States. One of my absolute favorite examples from my book is one of the regulations--I don't think they still have this; maybe they've taken it off--but one of the regulations they had is that there had to be an operations manual on board in every drone. Which raises a lot of questions.

Russ Roberts: Yeah, there's a lot there. That's a rich lode to mine.


Russ Roberts: But, I actually want to defend your book--make sure listeners don't misunderstand. I don't think your book is particularly Silicon Valley-happy at all. In fact, I was struck by how many interesting examples of innovation that came from the turn of the century--turn of the 20th century and the pre-high tech world: containers, Standard Oil, automobile production, the production process itself. I think there's a lot of wonderful examples that you give that I think are important to give people an appreciation of the dynamism that you're trying to talk about. And I want to now--this is even crazier though--I want to defend--I want to argue against my claim about regulation. I think some of the--if I think about the people I've talked to on the program--Eric Topol particularly comes to mind about, say, the health field--there are so many extraordinary things that could be done in health, that would be done in health if government's hand was not all wrapped around every single aspect of it. One of the things that drives me crazy is when people say, 'Well, we know markets won't work with health care. Look at how horrible the U.S. health care market is.' Well, the U.S. health care is--it's not anything remotely--to say it's not a free market is almost comic, [?] me that I have to say that. It's highly subsidized; the prices are distorted; they prices are often set by government. Except in the areas where they're not, like pharmaceuticals where they're just left to run free, and pharmaceutical companies make, have an easier time getting money from taxpayers without their consent. So, I just--I think when we think about the areas of the economy we care a lot about--the other one I would emphasize would be education--the opportunities to be innovative in these two areas, it's not like there's a regulation that got passed on April 7th and signed into law in 2017 or whatever, whenever. It's just hard to get anything started. It's so complex. There's so many difficulties in getting to the consumer, in that the consumer is not the patient. And the case of health care I think is really the ultimate problem.

Arthur Diamond: Well, I don't know if you noticed that I totally agree with you, because, what I placed at the end of the book is a discussion of an example from health care. Now, I was trying to save my biggest--according to your view of things I should have put it at the beginning. But, my agreeing with McCloskey has me putting it at the end. I hope people last to get to that part. And you've got me worried now that I may have made the wrong decision.

Russ Roberts: You have good stories at the beginning, too, Art. Don't worry about that.

Arthur Diamond: Well, yeah. I talk at the end about cancer and try to illustrate some of the messages in the earlier part of the book by looking at who were the sorts of people and what were the obstacles faced by the people who brought us some gains against cancer. And, the idea being that if we learn from that, we can reduce regulations and have a situation where we get more cures faster, and longer lives. I don't know if you want me to sketch any of that--

Russ Roberts: Yeah; go ahead--

Arthur Diamond: but it turns out that, yeah, they--I go through some of the sort of the stars of this process. And what they were doing--part of what I talk about early in the book without talking about so much the health example, but other examples, is I say, 'Okay, how are entrepreneurs thinking? How are they acting? What's the process of innovative entrepreneurship?' And I say[?]--I have a section called, kind of pompously, I suppose using a huge Latin word, 'The Epistemology of Entrepreneurship,' where I'm trying to say, 'Okay, how do they think?' And I focus on three aspects. One is, they often benefit from and make use of serendipitous occurrences. And they often have what Steven Johnson called, I think, well, slow hunches, where they have sort of a vague idea that they have to mull over and sharpen over a long period of time. And they also do nimble trial-and-error experiments where they're not sure where it's going to go or how long it will take till they reach their conclusion. And I give illustration of that in the second chapter. But then some of that is repeated again--some of those same characteristics are important to the big advances over cancer that I talk about at the end of the last chapter. For instance, in terms of the serendipity: In World War I, mustard gas was unfortunately used against some of the soldiers. And they suffered a lot. But there was a benefit that came to medicine from that, because when people investigated the effects of mustard gas, they saw that, some of them saw that there were effects on red blood cells. And then a later set of researchers thought about that, scratched their head, and said, 'But hey, if that happened through this horrible part of World War I, maybe there's some way we can harness that when we actually do have cells--in other words cancerous blood cells--that we want to get rid of.' And that started, that was one of the jump starts or inspirations for chemotherapy. So, then, one of the next big steps was a guy named Sidney Farber. And Farber was somebody who was looking for some kind of chemical that would cure the blood of children with leukemia. And he had noticed that for some diseases where people weren't making red blood cells, enough of them, they were able to be improved by being given folic acid. So, he tried that. And his peers were already skeptical of it. He tried that. And it turns out the children died faster--the leukemia was accelerated, not stopped. And he just about got shot down by his peers when that happened. And you can understand that, right? Instead of helping the children, the children were [?]. But, fortunately, he was able to hold on. I mean, they took away all of his support staff; he was doing all the steps in the research himself. They were giving him facilities underneath the stairs and right by the restrooms. But he was able to hold on. And, so then he scratched his head and said, 'Okay, if this accelerates it, maybe there's something that's the opposite of folic acid, that would stop it.' So, he had one of his friends, an introvert who hadn't gotten tenure at Harvard but who was really good at making chemicals to order--he said, 'Can you find something that is kind of the opposite of folic acid? That hooks on to the same places but doesn't have the same effects?' And he came up with this drug. And he gave that to the children--the next set of children, unfortunately--the next set. And it resulted in remissions. And that was wonderful. Except it was short. A few months. But they got a few months more. And it was proof of concept: It showed that this can work. What he was doing though, it wasn't easy. It was trial and error. It was taking use, making some use of this original serendipitous event. It was sticking with a hunch that this could be done. The next step was--there were other intermediate steps--but there was a guy named Freireich [Emil Freireich] and his team, decided: 'Let's take some of these chemicals, like the antagonist to folic acid that had been used by Farber--let's take some of these chemicals, put them together in a combination, and maybe the combination will have some effect.' And their colleagues--they were sometimes called cowboys. One cynic, when he was viewing the meetings--they used to have weekly meetings, the committee, to decide what chemicals to put in and what dosages to use--one person, one wag said, 'That's a society of jabbering idiots,' hearing them yell at each other and grab the chalk from each other. But what happened was, they actually started to cure childhood leukemia in some cases. Not just remission, but to cure it. The way they did it was by these weekly meetings making adjustments: seeing how things were going and trying nimble trial-and-error experiments. The same kind that I talk about in that second chapter. And, one of the young cynics, friend of the guy who said, 'society of jabbering idiots,' he was attending the meetings just for entertainment. He thought these guys were foolish. But after a while he kept going and he said, 'You know,' it suddenly occurred to him, 'I'm not going to these meetings because I'm being entertained any more. I'm going to these meetings because these people are curing cancer.' So, a guy named Vince DeVita, and DeVita started working on this program, and he shows another disease, Hodgkin's Lymphoma, and used the same trial-and-error techniques to come up with a chemical cocktail that had success in some cases with Hodgkin's Lymphoma, in curing it. Now, he's written a passionate, wonderful book that talks about a lot autobiographical, interesting stuff about his [?] life. But the last chapters he talks about policies to encourage faster, quicker, better cures of more people for more diseases, especially in the era of cancer, which he knows best. And, what he says is: The current policies of the Food and Drug Administration [FDA] are blocking the kind of process that succeeded in curing cancer in the past. So, what you have to do now is you have to have a protocol, that's approved by the FDA. The protocol, you have to say what you are going to do, and you have to stick with it throughout the trial. Well, that's not what Freireich was doing when he cured childhood leukemia. That's not DeVita himself was doing when he cured Hodgkin's Lymphoma. They were making the kind of nimble trial and error that in general, very often, is what entrepreneurs do. So, he, at the end, says--and he's somebody who has spent a good bit of his time working for the government. He's not somebody who, like a true-blue core libertarian who would never contemplate that. But he's saying this is one aspect where the government is really losing--causing--people to lose their lives unnecessarily. And, he makes a very strong case that they need to take account of how progress has been made in the past. And you might say: Okay, well this might have been a special case--the case of chemotherapy. We've now moved on to some other therapies that people think are going to have less side effects and have more promise. They are now, people are excited about immunotherapies. But you also look at some of the main people who have been doing the immunotherapy work, somebody like Steven Rosenberg, wrote a book several years ago called The Transformed Cell about his early work trying to get immunotherapy to work. And, he's got passages in that book where he talks about how much he was slowed down. And sometimes slowing down isn't just a matter of the time. He had certain cells he needed to inject in people, but he had to get approval from the FDA, and the FDA wasn't giving approval. And if you wait long enough then those cells are no longer usable to do what he wanted to do. And he talked about how much it slowed down his progress in immunotherapy. He's finally beginning to be able to get results after decades, just now, he's started to get some more positive results than he'd ever been able to get before. But he said, not only did it slow him down, but it was enormously demoralizing. Just the science of what he was trying to do was so hard, that's enough to tire a person out and to get him discouraged occasionally. But then in addition he had to go down and fight this bureaucracy. And, you wonder how many people--he stuck with it; and there are people who will stick with it no matter what. But you've also got to think how many people there are out there who would be curing things for us, who just give up at some point. And, so I think you are absolutely right. Part of the reason I emphasize health so much is that some of the benefits of creative destruction, the innovative dynamism that I emphasize, I think I make a really strong case--like for automobiles, for air conditioning, for video games. But reasonable people can disagree with those. I haven't found very many people who are in favor of cancer. And so, it seems to me like this is an extremely powerful, important case. And, I think it can be made very strongly that in this case the regulation has had huge harms on a lot of people.


Russ Roberts: I'm going to put a twist on that. Although I sort-of agree, I agree for probably a different reason, maybe, than you do. You and I both came to the U. of Chicago; we were both trained to believe that the FDA kills people because they make it harder to get stuff approved. And until recently that was sort of the end of the story for me. But the more I've thought about the way we've structured health care--and this is sort of a meta-argument about the cost of regulation, I guess. Or, I wouldn't call it regulation: I would call it the costs of the way government has structured the health care market. Basically, what we've done is, we've said, we're going to highly subsidize it through Medicare, Medicaid, and the employer--subsidized via tax breaks of insurance: we're going to highly subsidize it. We're going to create a legal environment where, if you do not pursue best care, you are vulnerable to suit. And, everybody expects to get the best treatment available. Without having to pay for it, of course. Because that's immoral, according to many. So, what that does is it creates a way, as I alluded to a way back, for players in the medical field to put their hands in taxpayers' pockets without the consent of taxpayers to benefit--sometimes, but not always; sometimes it doesn't benefit the consumers--the so-called consumer, which the patient doesn't have as much skin in the game as they normally would. And the entity with the most skin in the game, of course, is the taxpayer. But, we're busy. And we're not paying a lot of attention. But the people who are paying a lot of attention are deeply committed to paying attention, because they have skin in the game to make them money. So, those are the two people with skin in the game. We don't realize it as taxpayers. It's too complicated a process. But the other folks are deeply focused--the people who make the devices, who come up with the pharmaceuticals. They are wisely paying a lot of attention. In that world, you can't allow stuff to just be innovated the way it normally would in a normal market, because a tiny improvement is going to get approved by hospitals, which are not really competitive. And as a result, the world we live in now is the world where we spend too much, in my view, on health care with not enough return, because of the incentives that the players in the system have. And the FDA is kind of a mixed bag. It's a bit of a brake. It's a restrainer of unneeded, unnecessary, not sufficiently good interventions [?innovations? inventions?]. It's not very good at that. But it does do that a little bit. But, as a result, of course, the downside of that is that it kills off a lot of potential innovations that would normally take place.

Arthur Diamond: Well, I think you are giving too much credit to the FDA. I think that part of the reason we have so many not-very-good innovations is due to the--what some of the processes of the FDA. For instance, they mandate a very expensive kind of research as the only kind of research that will be accepted as knowledge of the effectiveness of drugs. They mandate the randomized, double-blind research. And, my view of that--

Russ Roberts: clinical trials--

Arthur Diamond: Clinical trials. Exactly. And these are extremely expensive to run. And they also, they favor the incumbents. And the incumbents, or so I argue in the rest of the book, are not as likely to do the breakthrough innovations, for a variety of reasons. So, if the only people who can make it through the screen of the FDA's methodology are the big incumbents, that's going to result in a lot of small, unimportant-in-general, innovations. I think that part of what you ought to do is say that venturesome consumers can be venturesome. If they--this is something that I saw an interview with Milton Friedman a couple of years before he passed away, and he was asked about the FDA. And he was not very enthused about it. I mean, back when he was at Wabash [Wabash College] and Rogge [Ben Rogge] brought Friedman down and asked him--if you press, 'If there was a button in front of you, Milton, and that button, if you push it the FDA would just disappear, would you push that button?' And Milton Friedman got this huge grin on his face. Huge grin. And he said, 'Yes!' with enthusiasm. But when I saw him interviewed decades later, a couple of years before he passed away, they were asking about it; and he was more restrained. You know, he said, 'We have to think about what's politically possible.' And what he thought was politically possible is that you have the FDA limit itself to evaluating safety, but not efficacy. And that would allow venturesome consumers to make more choices--

Russ Roberts: Yeah; I'm all for that. I'm all for consumers being able to take risks and take dangerous products. The problem is, is that when they are paying for that with my money instead of their own, it's a really destructive system. It encourages innovation that's not necessarily worthwhile relative to the cost, because other people are paying for it. That's the problem.

Arthur Diamond: Why are the other people actually paying for it? If you didn't--

Russ Roberts: So, let's change that. Let's change that, and then we can decide whether the FDA is worth having.

Arthur Diamond: Yeah. Well, I mean, I think people are scared, because of how expensive it currently is. They don't want to take the government out of it, to go toward the kind of system that you're talking about. And, part of the problem is that it doesn't have to be so expensive; but people are scared of, 'Okay, we take that on faith from you guys.'

Russ Roberts: Yeah. Correct.

Arthur Diamond: If you had a free system, there would be more competition to provide less expensive ways to do some of the things that we're now doing expensively. There's work by a--there's probably a bunch of people, but the one I'm familiar with is Clayton Christensen, couple of other people, have made some plausible suggestions about how many of the costs could come down and you'd actually get better treatment. If you had, let's say, nurse practitioners doing the parts of medicine that have become routine, they would actually be better at those parts they do over and over again, and it would be less expensive, to boot. So you'd have the best of both worlds there. And, we have now--we have credentialing issues that keep that from happening and keep innovation of that sort from happening. But, I think you'd also have more drugs that would also be more effective. What we've got coming in now is we've got these drugs that extend life, and not a very pleasant life, for maybe three months.

Russ Roberts: Yeah. Horrifying.

Arthur Diamond: And that costs all of us a huge amount to develop those drugs; and it's not clear how much the patients are better off. There was a neat article that I saw in the paper just in the last few weeks, where they were talking about--some new head of one of the drug research efforts was going to try to focus their research on early-stage drugs for cancer. And then in the article, they said something that for me was an epiphany, because I hadn't thought about it; it makes sense to me: is that the current set-up strongly encourages development of new drugs for later stage. And, the reason is that it's a lot cheaper to do that, given how hard it is to do these double-blind clinical randomized trials. Because people will sign up. If they've tried everything else at the end, they'll sign up for a trial for the final stage new drug. Why not? What have they got to lose? Whereas at the early stages, it's harder to get people--if they might get it, and they might not get it, and they haven't tried some of the other drugs. So, it's much--plus, one of the big costs is the number of years before you get the drug approved. If you try at an early stage, these people just in the normal course of things are going to last longer. So you won't know the results of the new drug until much later, which means it's going to be much more costly to do it under the current procedures. And, so the conclusion of this article was: people wonder, and sometimes people think, 'Well, the reason why we're getting all these little innovations is because we've picked all the low hanging fruit,' or whatever. And I think that's not the reason, here. It seems like the incentives are set up so that that's what we are developing. But that doesn't mean that there aren't something approximating magic bullets out there to be found. It's just that we've set up the incentive structure so that that's not where it makes sense for them to invest their resources.


Russ Roberts: Yeah. I totally agree with that. And I think the other obvious piece of this is it's just a lot harder to do an early-stage solution. It's much riskier. And given the costs of getting approval, you are going to push your resources toward a tweak rather than a transformation. Let me use that to go back to your book, which is our subject. I know you like your book, so I'm going to go back to it. It reminds me--one of the themes of the book we haven't talked about which I really love is this idea that some of the great innovations in history come from outsiders: people who aren't formally trained, people who are skeptical of the received wisdom. And you quote Lord Kelvin, that, apart from balloons, he did not have "the smallest particle of faith in aerial navigation." It reminded me of this wonderful quote from Gordon MacKenzie. He wrote a book, which I recommend, called Orbiting the Giant Hairball, which is a book on corporate culture and creativity. It's a fabulous book. And he has a chapter in there--and this is the only--I don't know if I've ever quoted this; one of my favorite things--it's the only line of the chapter. It's a one-page, one-sentence chapter. Here it is: "Orville Wright didn't have a pilot's license." The idea that you can change the world without being an expert, without going the way everyone knows is the right way is just extraordinarily important. And, there are examples in my conversation with David Epstein and his book, Range, about this phenomenon. It's an incredibly important phenomenon that in actual life that problems are often solved by non-experts. The challenge is, is that non-experts have really goofy answers that will not solve the problem. So, I think we have a natural skepticism about non-experts--people who go against the received wisdom of the day. Those people are often the ones who transform a field. And, you talk about that a lot; and I think it's really important.

Arthur Diamond: Yeah. It's important partly for the regulatory issue, but also on the issue of: How do you fund science? With a regulatory issue, if you think about, if you were going to set up a regulatory agency of human flight, who would be your perfect person to put on the Board? Well, you couldn't pick anybody better, could you, than the most distinguished physicist of that century, which was Lord Kelvin. And yet you had the quote, there, about him saying the only flight we'd have about being balloons. So, the most distinguished scientist of the age was saying it was impossible. Who, who is going to allow Wilbur and Orville to go and risk their lives doing something that the best authorities say can't be done? And so that, I think, is a strong argument for not regulating people who have these new ideas that seem crazy to us, that go against the accepted theories of the day. Marconi, what he did, was against the theories of the day. It wasn't as dangerous for him personally as it was for Orville and Wilbur. But he went against the physics when he tried to send the telegraph waves against the ocean. But, the self-funding issue is important, too. Because, it's really hard for people--the more unusual, the more break-through the breakthrough is, the harder it's going to be for any entrepreneur to have any expert or a possible funder understand that it's a plausible, possible thing. There is a wonderful scene in a play by Aaron Sorkin--I think I've got his name right--called the The Farnsworth Invention--where Farnsworth is one of the people for inventing television. And he is appearing before the Community Chest[?]. And he's telling them--'Well, what is it you want money for?' And he says, 'Well, I've got this idea for sending video signals through the air.' And then these two people, the Community Chest, their mouths are open; their eyes are bulging. Like, 'Do we call somebody to come and take this person out and lock him up?' And then he says, 'And if it would help any, I've thought of a way to synchronize it with sound.' And so, the guy says, 'Oh, you have?' And you see that--you know, we're used to television. It's [?] everything. But when you think about how it felt before it existed to hear about somebody thinking they could do it, that's a crazy person. Right? And there were centuries--there were thousands of years when there was a crazy person who thought they could fly. And so, it's a--the point that you are making is a strong argument for allowing people to accumulate the funds to self-fund, because they are the only ones who are going to see that there is a plausible case to be made for pursuing this innovation. They are going to have the knowledge, and they are going to have the skin in the game. It's a combination: knowledge and skin in the game, both, to pursue some of these things that, if they work, are so spectacularly beneficial to us. So, it's partly that, but it's also partly the regulations. The regulators are never going to know what's possible, even if you get the best people you could, like Lord Kelvin.


Russ Roberts: I don't want to leave without chatting a little bit about Mariana Mazzucato as a guest on the program. And she's become associated with this idea that government, and government funding, is a crucial, plays a crucial role in innovation. I was skeptical of that argument, for a variety of reasons. But, I'm curious on your take.

Arthur Diamond: Well, in general, I think that government has had a, not a great track record, at picking the winners. And, I think there's a few cases where the government, by pouring a lot of funding, has achieved a particular goal, particularly when people had a strong sense of mission-orientedness, like with the Manhattan Project. Especially that's true when the fundamental science and the fundamental knowledge that way has already been worked out, and you don't have to make huge gains that way. But, in general, I think that what it does is it takes a lot of resources. There's opportunity cost. If you take tax money and you put it into the projects that the government anoints, that's money that's not left for the Wilbur Wrights or the Marconis, or those people who are working in their garage and have a great idea. Because the tax--the money to fund these things--doesn't just come out of thin air. And if I'm right that it's these outsiders, these people with these passionate ideas, these people who have experienced the serendipitous that gives them an advantage--if they are the real sources of most innovation, then taking resources from them is exactly the opposite of what you should be doing. Now, in the book--I had to cut out a lot out of the first version of the book. And I had more on this in the penultimate version. But, in this version, I have a little that's related to your question. I look at two of the most prominent examples, briefly, for people who advocate the government should be more involved. I look at MITI [Ministry of International Trade and Industry]--Ministry, International Ministry for Trade and something in Japan. And also I look at DARPA [Defense Advanced Research Projects Agency] a little bit, which was an example in the United States. And I think in both those cases, the benefits, the successes, have been exaggerated. In the case of MITI, the two big projects that they pushed during their heyday, one was a system of high-definition TV [television] that turned out to be inferior to the system that eventually was used. They also were putting a bunch of money into supercomputers. And, what they missed--what did they miss when they were doing that? Well, what they missed was personal computers. So, they were putting their bets on these other two things, when the thing that really mattered was something that they had ignored. George Guilder thinks they weren't a total loss, because he thinks at one key point, they did advocate lower taxes for innovators. And that, when they did that, they did something positive; so, you've got to give them credit where credit is due. In the case of DARPA, that's a routine case, where what's routinely said is that they are responsible for the Internet. Well, one of the key people who was responsible for the Internet was a guy named Bob Taylor. Bob Taylor was at DARPA. And he was involved in the networking they did. The networking they did, which is what people think of when they are thinking of this, is they connected together some very large mainframes at some major research universities. But, in terms of Internet--what Internet means is connecting all the little local area networks around. That's what we think of when we think of what the Internet has been. And, it--according to what I've been able to find out on that--they weren't very interested in doing that. And they weren't doing it--it was not high on their agenda to do that. They wanted to connect the scientists--you know, Carnegie Mellon wanted to connect with the scientists at Stanford. That, they weren't interested in connecting with all these little local area networks; so they weren't developing that. To develop that, that had to come out of Xerox PARC [Palo Alto Research Center;]. Bob Taylor got so frustrated, for a variety of reasons, with DARPA, he went to the private sector. And he was the key person behind what had been done in networking with DARPA. And he had it with DARPA, and he went to Xerox PARC. And he was legendary in pulling in a lot of good people who made a lot of discoveries--things like the mouse, the person who came up with Ethernet, which was a key component to the Internet, was done at Xerox PARC with the private money that [?] provided. And, he wrote a memo, a famous memo, because he was so annoyed with people saying that DARPA is responsible for the Internet. And he said, 'No. You are misunderstanding what the Internet is. And you are misunderstanding what was key.' And I might mention one other example that she made in the podcast with you, which was that she took credit--gave the government credit--for fracking. And I looked into that, because that really puzzled me. When I heard that, I thought, 'That's a real surprise.' Because I'd read this wonderful, wonderful book called The Frackers, by Gregory Zuckerman--

Russ Roberts: Yep. Guest on EconTalk.

Arthur Diamond: In that you don't see--I don't remember having read any key roles for the government. You had--he did focus in different chapters on particular entrepreneurs, people like George Mitchell in Texas and people like Harold Hamm in Enid, Oklahoma. People like that. But these were roughhewn rednecks who worked their way up through the oilfields and were doing trial and error experiments.

Russ Roberts: I think you mean 'roughnecks.' I think not 'rednecks.' But, yeah, go ahead.

Arthur Diamond: Okay. Yeah. That's right. Although--yeah. And so, I looked into what was the source of the claim that the government was important to this. There was somebody--I don't remember being in The Frackers too much, but somebody who had work for Mitchell's group in Texas, and who had in some interview had said that the government had done some preliminary research that had been useful. And apparently they had sent some foam[?] down into some of the oil wells somewhere in a study, and then published the results, and it had had a positive effects. He said, though--the way that his quote had been used--and he was annoyed when Obama used it in his State of the Union Address saying the government was responsible for fracking. When he heard that, he was annoyed. He said, 'Yeah; some of what they did was useful.' But, at the end, what he said, 'At the end of the day, George Mitchell would have developed fracking without the government.' The government would not have developed fracking without George Mitchell. And, I mean, what entrepreneurs do is--entrepreneurs, unless they are pure free marketers on principle, they will take resources where they can get them to pursue their dream. So, Elon Musk--I think he's willing to take subsidies to get his electric car going. But the question is: What's the key? What are the key people in getting this process going? What would happen is the government of a--was it necessary or was it just along for the ride and getting some credit for something that would have happened anyway? And I think that in the case of fracking, for sure--and I still don't know if it's going to happen with Elon Musk--but with the case of fracking, and the case, certainly, of the Internet, certainly personal computers, many of the major innovations of our time, the keys were private entrepreneurs and inventors, not the government.

Russ Roberts: Yeah, if you are going to make a case for government involvement and contribution--I don't think we talked about this with Mariana Mazzucato but I think the, you could argue that some of the university systems, the agricultural colleges, played an important role in innovations in agriculture. Certainly, I don't think we'd have an atomic bomb without the government. Whether we'd have gone to the moon--we wouldn't have gone as soon. Those are the ones that come to my mind. But, I think your earlier point is extremely important here. Which is that a lot of times, the biggest innovations, the biggest changes, the biggest transformations come from outsiders--people who are skeptical of the received wisdom. And, the government structure of research from my understanding of it at NIH [National Institutes of Health], in the NSF [National Science Foundation] as well, National Science Foundation--it tends to have a groupthink issue. It tends to be, as you pointed out with Lord Kelvin--a board of people who represent what we know now. They are very good. They are extraordinary, great scientists. Often. But their natural impulse is to fund their friends. Not literally their friends, maybe, but their intellectual friends--people who think the way they do. And they're not going to be as open to the innovator who is outside the mainstream. And, a lot of the money is going through those organizations. So, non-mainstream approaches are going to struggle to make it. And, of course, you know, independent, private entrepreneurs have started to fund some of those transformations, because they understand that. And, I think that's really important.


Russ Roberts: This is something I have to ask you about, because you open the book this way, and it's something I've thought about as well, which is the way we talk about innovation and entrepreneurship, when we teach economics. And, you start off talking personally about that in the book: that it was something that you left out, and you regret that. I do, too. Part of it is there is just not enough time to cover everything you want to talk about. And I found ways to get some types of innovation into some of the ways that I talked about supply and demand in my micro classes. But, it is extraordinary that you could get an undergraduate degree in economics and never learn a single thing about entrepreneurship, about what you call leapfrogging--the way that a firm suddenly changes radically the way a consumer desire is satisfied, not just tweaking or improving or lowering the cost of an existing product, but, you know, the way the calculator leapfrogged the slide rule. These are extraordinary things; and yet, what we pound into our students' heads are things like, 'So, let's, the firm knows what product line it's in; and now we just have to figure out how much to produce.' We've stripped away all the interesting things in the name of giving good exam questions. And, the things that we can't put into a graph or an equation, we're just going to ignore. And I think it's a terrible disservice to our kids. And to our students. And to our adults--that we don't have a culture of understanding what your book's about. And your book's about an attempt to remedy that. And I salute it, tremendously, for that. I think that's--we need a lot more of this. So, just talk about what you think people should be doing in their classes. What are we missing that we ought to be doing when we teach economics related to entrepreneurship?

Arthur Diamond: Well, it's hard for individual faculty to unilaterally change this too much, because there's these mandated, committee-decided curriculum that they have to maintain. And I sometimes say to my classes, 'I'm teaching you what is required and every once in a while I'm going to sneak in a little bit of what I think really matters.' And I don't--I'm not sure I should do that, because I may be undermining what I'm doing most of the time, which is teaching the usual stuff. And then I say, 'Well, should I have said that? Why should we pay attention when he does the supply and demand curves?' But, I do that. And I think, without saying what I just said, people could sneak a half an hour here or there and talk to them about, 'Here are some alternative ways of viewing market structure.' And, 'Here's an alternative viewing what competition is.' One of the points--when I start the chapter on competition--perfect competition, pure competition--I say, 'Now, what I'm going to talk about here is the model that the Communists put of the paradigm of how capitalism should work when it's working well. And I think it's useful. But I think that if you are going to use this as your way to judge capitalism, you should think more broadly later in your lives when you are citizens deciding on policies. And you should think about some of the other characteristics of capitalism that are not captured by this.' And then I show them two or three little video clips. I show them a clip from the World's Fair in Omaha, where they, for the first time people were seeing electric lights. And I say, 'innovation matters.' And then I show them a clip of an old ad from e-Bay, where there was this little boy on the beach with his toy boat--

Russ Roberts: I love that ad.

Arthur Diamond: I know you do. The source, my source for first finding out about that ad was you, in a speech you gave at the APEE [Association of Private Enterprise Education] meetings, one of the Plenary Sessions. I dug it out, and ever since then, every Principles class that I teach has been shown your toy boat ad. But just for the viewers--or listeners--who haven't--let me just say, this ad is wonderful because the boy loses his boat; it floats out to sea when his mother calls him in--

Russ Roberts: And he's 5 years old.

Arthur Diamond: He's 5 years old. And then, what you see is the boat going out to see, this little tiny boat; and it's sunk by this huge liner that runs into it. It goes to the bottom of the ocean. Then it flashes to later. A fishing trawling boat pulls up its nets, and there is the boat. This guy looks at it and ponders. Then, the next screen, you see a computer. And you see on it, on e-Bay, this boat is being offered for sale. And then it flashes back to the person looking at the screen, who is the 20-year-old version of the kid who had been at the beach; and then the camera goes behind him to a picture of the kid holding his toy boat. And then the voice intones: 'What if nothing was ever lost or forgotten? E-bay: the power of us all.' Fade to black. And, what I say then is: Variety matters. And innovations that allow us to have a match between what we want and what's available matters. And those are things that are not talked about in the models we talk about in class. But, if you are evaluating the system of free market capitalism, those are characteristics that I hope you become voters in your life. So, I make that kind of point. I don't know how you've made--that's what individual people can do . That sort of thing: you can sneak things like that in there. You can be--there's a book that was written, Practical Wisdom, where he said: To do what you should do in many professions, especially health and education, you need to be a canny outlaw. Isn't that terrible? You have to be a canny outlaw to do what you should be doing? But, how you change these institutions more fundamentally: We talked a lot about health. But, some time, education could use some changes, too. But, I don't know what--I've been teaching some seminars when they let me where I can talk almost exclusively about the things that mattered, and that's a wonderful things when you can do that. In the core courses. Part of it--I don't know why this was, but even the best people--Gary Becker and George Stigler, in their Price Theory texts, when they are talking about what matters in understanding the world, in other contexts they would mention creative destruction. There's a wonderful passage in the autobiography, George Stigler's autobiography, The Memoirs of an Unregulated Economist, where he talks about how his views changed completely about antitrust. And he says part of that had to do with the McGee paper on Standard Oil.

Russ Roberts: John McGee.

Arthur Diamond: Yeah. John McGee showing that Standard Oil had not been predatory, and so on. But he then also says--and this is the part that's most interesting to me--is, he says, 'But also some of us read Joseph Schumpeter's Capitalism, Socialism, and Democracy. And although it was complete heresy, it had its effects on us.' So, this is heresy, right? And we don't put that in the textbooks: you don't put creative destruction in the textbooks, or entrepreneurs, but it was something that mattered. Back there[?] in his wonderful little textbook that we used in that Price Theory class that we took, it doesn't mention creative destruction. But when he wrote his columns about practical issues, on at least a couple of occasions he found himself needing to use creative destruction to make a case for what made sense to happen in policy. So, there was a disconnect. We are preserving--there isn't much change in the Price Theory texts we've used over the decades, even though what we realize when we have to grapple with real world policy issues, those aren't all the tools we need. We need other concepts and tools. And, I don't know what to do about it in the broader sense. I know, sneak it in there as an individual professor--sneak in the truth when you can.