EconTalk |
Branko Milanovic on the Big Questions of Economics
Dec 7 2020

risk-and-uncertainty.jpg Author and economist Branko Milanovic of CUNY talks about the big questions in economics with EconTalk host Russ Roberts. Milanovic argues that the Nobel Prize Committee is missing an opportunity to encourage more ambitious work by awarding the prize to economists tackling questions like the rise of China's economy and other challenging but crucial areas of scholarship. In the conversation, he lays out what those questions might be and discusses what we know and don't know in these areas.

RELATED EPISODE
Daniel Haybron on Happiness
Philosopher and author Daniel Haybron of St. Louis University talks about his book, Happiness, with EconTalk host Russ Roberts. Happiness turns out to be a little more complicated than it sounds. Haybron discusses the good life and different philosophical perspectives...
EXPLORE MORE
Related EPISODE
Klein on Truth, Bias, and Disagreement
Dan Klein, of George Mason University, talks with EconTalk host Russ Roberts on truth in economics, bias, and groupthink in academic life. Along the way they discuss the Food and Drug Administration (and the drug approval process), the culture of...
EXPLORE MORE
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.

READER COMMENTS

SaveyourSelf
Dec 7 2020 at 4:57pm

01:20:08 Russ Roberts said, “The younger economist that I used to be would say, ‘“This [a greater awareness of and inclusion of opportunity costs in everyday decision making] is all improvement because it [a greater awareness of and inclusion of opportunity costs in everyday decision making] means everything gets used more efficiently.’“

I think Russ has made an error of substitution in this summary model of Economists’ and his own past self’s thinking. The error goes like this, we first make a term to indicate something we care about in reality. Then we use that term in our models.  That’s all fine. But then, later, we begin to treat the term or variable or model as if it or they are the reality we care about. “Efficiency” is a vague description of how people make rationing decisions given scarce resources that carries with it a positive connotation. As in, the efficient choice is the better one or the efficient option is the largest available option, etc. Efficiency was not in and of itself anyone’s goal per say, just a single word to encapsulate the patterns people display when making choices. Thus greater efficiency, by definition, means free people are able to get more of what they want. Efficiency is not the goal. It never was. It is just a useful stand in, like currency. More currency is not a meaningful goal either, but to disparage a desire for currency as a desire that misses the true meaning of life is to miss almost entirely what currency is. The same is true of efficiency.

dwasch
Dec 8 2020 at 8:12am

I found it ironic that Dr. Roberts scoffed at attempts to research happiness during an episode dedicated to the lack of attempts to understand big questions. Seems to me that blanket disapprovals like that, especially from people with a big microphone, are one reason people are dissuaded from tackling big questions like what makes people happy.

Love the show. Keep up the good work.

Erik N.
Dec 8 2020 at 1:31pm

I found the discussion of the economics of the tourist in the restaurant or shook very interesting.  I recently moved from Manhattan to Morris County, NJ.  The barber down the street has been there since 1969, and when I asked him what restaurants are good here, he told me they are all good; better than Manhattan.  According to him, the restaurants have to be good because they don’t get any tourists.  They need to serve you well and have better ingredients or their supply of customers will dry up.

Jimmy
Dec 8 2020 at 2:08pm

Great topic conversation. Has anyone written something comparable in Political Science or Psychology? A similar critique and summary seems to me sorely needed in those fields.

A.G.McDowell
Dec 9 2020 at 4:30am

I felt that this year’s Nobel Prize was unusually convincing. The mathematical content showed irrefutable evidence of correctness and progress, while its practical applications showed that in real life it provided more efficient allocation of resources. I felt than in your following conversation you in fact established that a Nobel Prize for a good question could be viewed and interpreted in many different ways. I think that in practice the winning question would chosen and presented in a way which turned the Nobel Prize into a political platform for those controlling the award, and not a means of recognising important work.

You mentioned the impact of casualties in the First World War. This was indeed recognised shortly afterwards. From https://en.wikipedia.org/wiki/Lost_Generation see “In Great Britain, the term was originally used for those who died in the war,[18] and often implicitly referred to upper-class casualties who were perceived to have died disproportionately, robbing the country of a future elite.[19] Many felt that “the flower of youth and the best manhood of the peoples [had] been mowed down,”[20] for example such notable casualties as the poets Isaac Rosenberg, Rupert Brooke, Edward Thomas and Wilfred Owen,[21] composer George Butterworth and physicist Henry Moseley. ”

Successfull military traditions provided incentives for good soldiers to compete for leadership positions which exposed them to greater risks – “Leading from the front” – in modern terms perhaps accepting risk to gain greater situational awareness. At least as far back as the Roman Centurion such people might be respected. I am less certain of their standing in an age when an army is also a captive audience and test tube for political and social initiatives other than those directly related to increasing military effectiveness.

Richard W Fulmer
Dec 9 2020 at 9:06am

Roberts and Milanovic dealt with a straw man version of classical economists’ critique of slavery. The argument has never been that slavery is inefficient, but rather that it is less efficient than free labor.

To take just one example, most antebellum slave states outlawed teaching slaves to read for fear that literate slaves could forge passes, read abolitionist tracts, and coordinate rebellions. Illiterate workers tend to be less productive than literate ones.

In addition, classical economists have pointed out that individual slave owners were often able to socialize the costs of recapturing runaway slaves and of preventing and suppressing slave rebellions. Slave hunters could, for example, conscript “free” men to help them in their searches. If slave owners had had to pay the costs of controlling and disciplining their own slaves, slavery would have been far less profitable than it was.

SaveyourSelf
Dec 12 2020 at 5:31pm

“Roberts and Milanovic dealt with a straw man version of classical economists’ critique of slavery. The argument has never been that slavery is inefficient, but rather that it is less efficient than free labor.”

I don’t think these men were making a straw-man argument. “Inefficient” is a relative term. It automatically implies “less efficient” than some alternative. What’s more, I think their comments were directed at me, though perhaps not knowingly. Several times in the past on Econtalk I have written that slavery is the least efficient economic system ever designed. Here and here, for example. And no one has disputed that…till now. Milanovic’s position that, ‘if slavery is so inefficient, why has it existed through all of human history?’ is a strong one. I think the answer must be that there actually IS a worse economic system than slavery—war. Because a dead man is potentially less productive than a slave. So he is right, and I was wrong. I just never considered war an economic design. But it is, albeit a very brief, very bad one. “Economics” is the study of rationing. And killing the owner of property to take what is theirs qualifies as rationing. In that sense, the Holocaust was a centrally planned economic policy. What is more, I got the impression Milanovic was arguing that since slavery has always been present in human society, slavery must have some economic value worth studying. He’s right again, at least in part. Threatening to kill a person if they don’t turn over their property is obviously a better alternative than murder for everyone involved in almost every way imaginable. But I’m not sure that it warrants study. The difference is self-evident. Also self-evident is that the slave state is a starving wretch compared to the free nation. But that’s a new phenomenon. Heck, even nations are a new phenomenon in human history. Which is a strike against Milanovic’s suggestion that we plumb history for insight in modern economics. A lot of modern economics did not exist and could not exist until very recently. Thus there will be little to nothing in history to lend insight into some of today’s big economic questions.

An intellectual competitor of mine in the past, Greg G, has made a similar argument as Milanovic except on behalf of Socialism. Greg G argued something along the lines of, ‘If Capitalism is so great, why are even remotely Capitalist like countries so rare in history and Socialist societies so legion?” His is also a strong argument. The reason I bring it up is because Socialism is just fractional slavery, where people are left free to own only a percentage of what they produce and (1 – the percentage of property left private) is siphoned off and rationed by other people—rulers, politicians, committees, electorates, etc. So, logically, if slave societies are so poor and free societies so wealthy, relatively speaking, as I have claimed, why would any sane persons tolerate even fractional slavery when they could be so much richer by getting rid of the free rider that is slavery? The answer, I now think, is that people value violence for its own sake. We like full contact sports, for example. We pay a literal fortune for tickets and viewing rights to American style football, traditional futball, basketball, rugby, and the like. We also value no holds barred politics–something like 14 billion dollars was spent on the most recent American presidential race. We even enjoy war, so long as it is manageable and predictable. We the people clearly like and value controlled violence, especially when “we” control it. And we are willing to pay for it, both directly through ticket sales and viewing rights and (apparently) indirectly through lost productive potential. In fact, it is entirely possible that the losses in productivity from socialist policies are known, or at least suspected, by those who advocate, support, and employee them. To think otherwise would be a massive insult to the intelligence of the people who champion them.

Richard W Fulmer
Dec 9 2020 at 11:04am

In an earlier podcast, Mike Munger argued that the sharing economy would be a boon to the environment by reducing the number of cars that need to be manufactured and the number of houses and hotels that must be built.  In this podcast, the sharing economy is bad because it drives us to commercialize everything.  As John Milton wrote: “The mind is its own place and in itself, can make a Heaven of Hell, a Hell of Heaven.”

Mark
Dec 9 2020 at 11:28am

I thought the discussion on nonmonetary incentives nicely answered the question of how a system like slavery could have both rational actors and a negative impact on aggregate economic growth. Taking the labor of another person is economically inefficient in a similar way to taking their stuff (though they’re morally distinct problems).

Yet people still steal because they enjoy a personal benefit that allows them to shift costs onto another person. Indeed, being a slaveholder in the South once carried a status symbol in certain circles, increasing nonmonetary incentives – things you couldn’t calculate just from a GDP analysis.

You could argue that slaveholders should have chosen to trade the leisure slavery afforded them for further production, but they don’t appear to have some this. Or you could argue that slavery enabled different kinds of production that subsistence labor precluded.

This is, interestingly, the same kind of argument UBI proponents give today. It is an interesting corollary that I hadn’t thought of before this discussion.

(Note that I’m not claiming UBI is the same as slavery. Though any government transfer is technically a forcible transfer of the benefits of one person’s labor to another person, this is obviously too simplistic a view of complex economic systems to derive a moral equivalence with slavery. Rather, I’m observing that we might overlay current projections about one economic idea with actual past experience with other economic ideas to gain insights, in line with the discussion on learning from economics pre-1977.)

Thanks for a great conversation, especially the part about learning more from historical systems.

Doug Iliff, MD
Dec 9 2020 at 11:35am

In the final exchange, not yet transcribed as I write, Russ and Branko discuss the non-material side of economics, and the relation of Adam Smith’s two great works. I’ve had experience with that relation.

Twenty years ago I bought 80 acres of virgin Kansas prairie and woods behind my house, thinking that I might use it as a “boot camp” for my overweight and underexercised patients. I did a number of weekend sessions, but the effort turned out to be futile.

They did not continue exercising, and they did not lose weight.

Having failed as a commercial venture, my wife and I made it charitable. We incorporated the land as a nonprofit foundation, and opened it to the public for walking, running, and riding– for free, as we cut trails through the woods, and restored the tallgrass prairie to something approximating its native state.

Two decades down the road, the Iliff Commons is the highest rated tourist destination in Kansas, according to Google Maps. And I find, although my purse is lighter by about $10,000 per year after tax benefits, I am considered lovely, instead of wealthy.

Who woulda thunk? It feels real good.

SaveyourSelf
Dec 11 2020 at 8:40am

“Two decades down the road, the Iliff Commons is the highest rated tourist destination in Kansas, according to Google Maps.”

Well met, Doug. Great work. Several things about your example are really interesting, First, you are describing private property that functions as a public good. The negative externalities of the use of that very public good are born (almost) exclusively by you, the private property owner, and they are considerable. Yet the product persists in spite of the apparent losses. And you are, evidently, happy to pay those costs. I don’t think I’ve ever heard of a more clear example of the power and value of unmeasurable, nonmonetary rewards. Still, measurable or not, they must exist, otherwise the math doesn’t add up. It is probably safe to say the unmeasurable benefits must be greater than $10,000, at least from your perspective. But, since you own the property, your perspective is the only one that matters! Which just feels paradoxical. Many people use the Iliff Commons [LOVE the name, BTW], but none but your opinion matters with regards to how it is managed. It’s hard to wrap my mind around that. But it’s beautiful. Lovely, even. Like a picture of the Taj Mahal viewed upside down as if hanging from the sky. Wrong, but also right somehow. Second, making an attractive place to try and encourage sedentary people to walk is, apparently, ineffective. But making a beautiful place with trails attracts people who like to walk and people who like to see beautiful places from all over. This is a great example of how poor we humans are–even the smartest among us—at social engineering, but also how amazing the market is at making productive use of unique and scarce resources. Unintended consequences. Positive externalities. I see Hayek through and through your tale. Especially in that the market is smarter than the individuals that make it up. Infinitely smarter. It’s just a great a story. Thanks for sharing.

Rodrigo
Dec 9 2020 at 4:40pm

I am very skeptical of people who are very skeptical of our ability to get things right. This conversation was very unconvincing and brings the same talk points of people from non scientific fields. “We can’t learn what make people do what they do! They are complex!”. Yet, behavioral genetics have immense power in predicting what people will do. Fine, maybe we don’t have the tools we need to answer the juicy questions in economics, but in the meantime we should try to know what we can know instead of crying about not knowing what we can’t still answer.

John Alcorn
Dec 10 2020 at 3:20pm

Thanks for the latest, fascinating conversation — and especially the refreshing appreciation of the cognitive value of great literature for the social sciences.

But the appraisal of economics is lopsided. (Full disclosure: I’m not an economist.)

The Nobel Prize in economics often goes to scholars who tackle big questions!

Dr. Milanovic invites economists to tackle questions like the rise of China’s economy. It happens that Ronald Coase, who received a Nobel Prize for his fundamental research about social cost and the firm, then wrote a groundbreaking study (with Ning Wang), How China Became Capitalist (2012).

Just look at the recipients of the Prize since EconTalk’s inception, from Schelling (strategy) thru Krugman (international trade) and Ostrom (development) and Roth (repugnant markets) and Deaton (poverty and health) and Nordhaus (climate) and Kremer (pandemics) to Milgrom (auctions). Big questions all!

I read widely in the social sciences.  During the Covid-19 pandemic, economists swiftly (a) have built models that deserve attention from epidemiologists, (b) have undertaken real-time data analysis, and (c) have made wise, effective policy recommendations for vaccine development. They have engaged in spirited, open debate about cost-benefit analysis of lockdown. Imperfect? Yes. But compared to what? Economics has little to envy other social-science disciplines in this time of crisis.

Adam Smith extolled specialization and the division of labor.  William Blake wrote, “He who would do good to another must do it in Minute Particulars: general Good is the plea of the scoundrel, hypocrite, and flatterer, for Art and Science Cannot Exist but in minutely organized Particulars.” Let’s recognize the value of the increase in specialization and in division of labor in everyday economics research. Happily, there still are also the amazingly talented few who manage to tie it all together around big questions.  And we can count on EconTalk and Thomas Sowell to help us keep the big picture in mind.

Student of Liberty
Dec 11 2020 at 1:52am

I was surprised to hear Russ Roberts think that colonialism might have been good for the colonising countries. For sure, increasing the market was beneficial but it is only because the mercantilists of the time could not think about a way of increasing the market without making it part of their own country…

It may be a stretch to extrapolate the situation of Algeria (French colony that ended up as a drama because of the number of French settlers there and oil discovered in the desert in the meantime) but Frédéric Bastiat would have none of the economic arguments in the favour of colonisation already back in the days in his “Seen and Unseen, number 10”:

https://oll.libertyfund.org/title/the-collected-works-of-frederic-bastiat-vol-3-economic-sophisms-and-what-is-seen-and-what-is-not-seen#lf1573-03_label_968

 

Ethan
Dec 12 2020 at 3:02pm

I am sad to hear a negative review of  War and Peace.

I recently read it and there are so many passages that jumped off the page to me regarding emergence and the futility of top down planning.  I remember thinking about Econtalk and Russ’s frequent comments that there is no knob we can turn to get behaviors we want.

I think the book is an exposition of the individual struggle against and within a larger ecosystem, and the futility of collective action.  It also strikes me as a refutation of the “great man” theory of history.  He speaks of Napoleon as one agent in the soup of war that sloshes about in the world.

Glad to hear great books discussed.  Hope Russ will take a peak at War and Peace.

DDI
Dec 29 2020 at 3:13pm

I have a couple of observations from  this interesting discussion.  I noticed that whenever Russ discusses whether people maximize or not, he focuses on money.  This seems a rather limited perspective to me because of trade offs and constraints.  I am always trying to maximize something subject to some constraints- my salary maximizing is constrained by my desire for time with family and time doing other desirable things.  This means I maximize salary within a small subset of my options and as a result I can maximize other things also within limited subsets.

The slavery and colonialism discussion seemed to confuse society and individuals.  There were individuals that benefitted to some degree from owning slaves or participating in colonialism, that doesn’t mean that other individuals in those societies benefitted from them.  Is there an example of a society where individuals were better off because of slavery when they weren’t slave holders or directly supporting them (soldiers, etc)?

Russ Roberts
Dec 29 2020 at 9:27pm

Perhaps you have misunderstood me or I was not clear. But I don’t think people maximize their incomes nor do I think they should. And I would be surprised if there are any examples in this episode or elsewhere where I said that was the case.

Comments are closed.


DELVE DEEPER

EconTalk Extra, conversation starters for this podcast episode:

Watch this podcast episode on YouTube:

This week's guest:

This week's focus:

Additional ideas and people mentioned in this podcast episode:

A few more readings and background resources:

A few more EconTalk podcast episodes:


* As an Amazon Associate, Econlib earns from qualifying purchases.


AUDIO TRANSCRIPT
TimePodcast Episode Highlights
0:33

Intro. [Recording date: October 26th, 2020.]

Russ Roberts: Today is October 26th, 2020, and my guest is economist and author Branko Milanovic. He is a visiting Presidential Professor at the Graduate Center of CUNY, the City University of New York, and a senior scholar at CUNY Stone Center on Socio-Economic Inequality.

I want to thank Plantronics for providing today's guest with the Blackwire 5220 Headset.

This is Branko's second appearance on EconTalk. He was last here in May of 2020--which seems like about 25 years ago--talking about his book, Capitalism, Alone. Branko, welcome back to EconTalk.

Branko Milanovic: Thank you very much, Russ. It's really a pleasure; and it was really a pleasure last May, which now seems like really a different world.

Russ Roberts: Yeah. It was a great conversation.

1:15

Russ Roberts: Our topic for today is what we might call the big questions of economics. You've argued recently on Twitter and in a PowerPoint presentation that the Nobel Prize should be awarded for those big questions. So, we're going to talk about what those big questions are, what they might be, what we know and don't know about them. And, I just want to start with the Nobel Prize in economics. What's your criticism of the decisions that are being made to award it?

Branko Milanovic: It started actually relatively by accident because when the prize was awarded, I expressed my surprise, actually. I don't know the work of the author, so I'm actually not going obviously today to comment on that. I'm not even qualified to do that. But what actually I think is a deeper issue and I think it is something that is shared by many people, is that the sort of approach which is used and the type of work which is being rewarded, not only this year but generally speaking, is the work, which is from a methodological point of view, and from the view of economics as science is relatively narrow.

And, I will explain that not only in terms of big questions being left aside, but even in the view of the world, which essentially sees the last 100 years of a capitalist system as the only thing that economists should study.

So, these are my critiques. So, they're not really directed towards this year's winners, nor towards the last year's winners, nor anybody in particular. It's just I think a general criticism.

Russ Roberts: Yeah. I suggested in a recent interview I did was with Steven Levitt that has not aired yet, that--and will have aired by the time this episode is released--that the Nobel Prize goes to the best academic work. The person who does the best job as a professor, not the person who makes the biggest contribution to the truth or to our understanding. It's a little bit of: who's the best at playing the academic game.

And I see that as part of your criticism: that the academic system in the United States certainly, and perhaps elsewhere is structured in a way that discourages people from looking at big questions. That it's hard for people with views outside the mainstream to be heard, or to be honored, or recognized. Am I reading you correctly?

Branko Milanovic: No, you're absolutely--I think there are really two elements. There's the first element that they said, 'Really, what is economics methodologically and in terms of the topics that it tends to study?' For example, just to give an extreme example, I think actually, if somebody who is studying, let's suppose, Roman economic development or system should be really in sort of a purview of the Nobel Prize. But, that's very unlikely to happen, although we had, like, a couple of economic historians.

And, the second point is more of, this is called the sociology of science in the sense that basically there are gatekeepers, there are people who decide on that. They know each other, they of course give prizes to each other. And, actually not only that it's bad in the sense that they are bad guys who basically just give prizes to each other: they honestly don't know what exists outside of that. So, this is the second issue.

And, let me just say one more thing about the big topics; and we will talk about them in a minute. Paul Krugman actually in response to my Twitter agreed with some of my points, but he basically said, 'It's not really the big topics per se, that matter.' And, I agree with that. I cannot say that, 'Okay, I'm going to write, I don't know, history of humankind and economics with the title and I want to get a Nobel Prize because I just put a nice title.' It's not the big topic per se, it's the importance of the topic and the work on that topic.

So, if there is no work which is worthwhile, then obviously that's not the question. So, that's what they want to just to say, it's not really the big topic per se, it needs to be something more.

Russ Roberts: A contribution, yeah. Dan Klein somewhere in EconTalk, or at least in my private conversations with him--I think it was in an EconTalk episode--talks about the challenge of group-think in economics, making the argument, again, that it's in the water. When you're swimming in the water, it's hard to notice there's anything other than the fish that you can see. It's what your environment is.

And, I think for most economists, they've stopped thinking long ago--most of us have--in general, we don't like to think about what we might be missing, what might be important outside of our purview.

And, of course that's how we define what economics is: It's the stuff I think is important, or interesting, or I'm good at.

So, that's perhaps not so surprising. I think this question of contribution is important; but I would add and I would say this to all young, aspiring economists who are listening as well as non-economists, there's a lot to be said for a good question.

Good answers are often crucially important, but sometimes the best questions can't be answered. And, we learn something from our attempts to answer them or to narrow what possible answers there are, even if we don't come up with definitive answers.

And, I think in academic life today, to come back to this question of gatekeepers and groupthink, good questions that don't get answered precisely don't get much reward. You generally don't thrive in academic life right now if you raise a big question or a good question and struggle to answer it. You're more rewarded for asking a small question and answering it definitively. Maybe that's just my--I'm semi-outside of academic economics, maybe totally outside it. Maybe that's just my justification. But what do you think about that?

Branko Milanovic: No, I totally agree. You know, I'm also a little bit outside in the sense that basically by this age, you are--how should I say?--you are free to say whatever you want. For younger people, and I'd say most people who are trying to make their career, it's very difficult to actually not follow a given stream simply because otherwise you're not going to get the job or you will get really very inferior job and you will be left aside, and so on.

And, then what happens, I think, which is normal and natural in all our way of life is that once you actually get a job, and then you basically sort of absorb that point of view, you start believing that point of view. So, by the time you are 45 or 50, you are really a big believer in something that maybe you were somewhat doubtful when you were 25. So, I think this is what happens.

I also think that--just so that I don't forget that--I think there are also two other functions that are big prizes in economics, not only Nobel Prize but whatever other prize or other sciences, should actually have in mind. One is what they call the--and you mentioned it also--the signaling function. In other words, so it should really signal the issues, the topics that are important. As you said before, it's like the issues of--like, even raising the big questions and trying to answer them. Many big questions will come that in a minute, but you can not have the definite answer on that.

I mentioned before that the Industrial Revolution, we still don't have a definite answer to that, but it's nevertheless a big question. It's nevertheless one area that has been worked on a lot from Adam Smith onward.

And, the second function, which I think also is important is a didactic function, in some sense, which--for example, I think Nobel Prize in Literature often does. It picks up authors from smaller literatures and actually gives them prominence.

So, it does not mean necessarily that this year, the best author was somebody who is, let's suppose, someone small, like you take Svetlana Alexievich from Belarus. She may not have been the--I mean, she's probably a great author, actually, I read something of--but I'm just saying that you have also a function of promoting somebody who otherwise would not have been known. And, I think these two functions are really also important.

9:32

Russ Roberts: Yeah. That's a--we're not going to talk about the actual incentives facing the Nobel Prize Committee at the Bank of Sweden, but you're making the point that we could imagine a role that the prize does not play right now in honoring discordant voices, unorthodox voices, radical voices.

And the profession is not very good at that--as it's currently structured. It certainly tends to be focused on what we might call the 'mainstream.'

I just want to make a side-comment about the sociology of what--you said when you turned 45, you've forgotten it's even something that's on the table.

And, one of the challenges of being outside the mainstream as I am--both ideologically, methodologically, in many, many ways--is that when I see the people on the inside, I don't necessarily think, 'I'm right and they're wrong.' Well, I do sometimes.

But, what's often more striking is how I see that they haven't thought about that they could be wrong in so long that they don't even think it's a question. Their methodology, their techniques, their framework for looking at reality is so--the grooves are so deep that when you raise the possibility that they might be wrong, they're just, like, puzzled. They can't even begin to think of what would--they're so matter-of-fact about their worldview . And I think it's part of the human condition. It's certainly a question of how you might overcome that individually.

But you are raising the question of how you might overcome it institutionally. One way it's done of course, is to create programs in universities. George Mason [George Mason University] comes to mind. There are others that try to swim against the mainstream and do things a little bit differently. So, that's one way in which this hierarchy gets disrupted, I guess.

Branko Milanovic: You know, this is what I got--when I wrote my tweet, actually. First I wrote a small tweet, then I actually wrote a little bit longer, it was a thread. I thought a little bit when I wrote this thread. And generally I would say I got extremely good response. Even I was surprised at some people that I was not expecting that they would actually agree, they agreed and retreated and so on.

On the other hand, obviously you get also, and I got also some pushback, and that pushback was exactly like you said. I don't think that these people are--you know, how should I say--that they were going against me or they were simply expressing something that they didn't believe. They actually were expressing, I think, a disbelief that somebody may not be able to understand what is so obvious to them.

And, I think that's actually what happens here. The grooves are so, sort of, strong, you're so much into that way of thinking.

So, it's not really the question of a topic, it's the question of a way of thinking and what is important. And, they cannot understand, I think that there could be a different way of looking at issues and that there are different issues that are important.

That's why actually in order to preempt that, I said, 'Look, these are really the big issues that I think nobody can dispute that they are big issues and they have been totally left aside.' So, that was my argument about the big issues and, sort of, one single-mindedness of the prize.

13:14

Russ Roberts: And, the last thing I'll say on this is that, once you have a journal devoted to something and there's referees and there are things that get published, everybody just assumes it's real. I recently interviewed Daniel Haybron, a philosopher, on happiness research, and I have to confess, I have a lot of trouble understanding how this can be a serious area of research. The idea that you would go along and ask thousands of people to pick a number between, say, 1 in 7 or 1 in 10 as to their level of happiness--knowing for sure that what that means to someone is very different than it means to someone else; then we're going to add them up and take an average; and that number is going to have, 'Well, yes; I can run regressions with it, I can compare it in the past to the present, I can look across countries.' But, it's really hard for folks, I think, to step back and think, like, 'What are we actually doing here?' Because there's a journal and it is published. So, I hate to pick on happiness research--well, no, I don't hate to pick on it, I think it's bizarro. But, anyway, that's just an example I think where once you're in the field, it just becomes like, 'Yeah, I did a paper on that, so what's the question?'

Branko Milanovic: Yeah. I mean, people have been saying for ages that economics is extremely self-referential, but what is interesting: it's self-referential only within the current time. Actually, it was also said--and I had really some nice quotes about that--that it's the only social science that does not really relate in a sustained way with its origins. That's what of course--

Russ Roberts: For sure.

Branko Milanovic: with Ricardo, Marx--so, no relationship at all.

So, that's actually very unusual because people are saying, like jurisprudence, for example--political science--refers to its origin and the original creators of it is, but what is self-referential also is interesting. It is sort of more anecdotal, but I think it's still nevertheless relevant is that very often, actually I remember a person that I knew; and when there would be an issue, an ordinary issue in ordinary life, he or she is--I'm not going to reveal even their gender--would generally sort of refer to that as in the paper.

For example, you have an issue which happens today in the world and he or she would say, 'This was actually studied in such and such paper in 1977, Journal of Political Economy.' So, basically inability even to actually see real life: Real life can exist only if it is reflected in the article, which was published. And, that I thought because that person was working actually also in Behavioral Economics, I thought it was really weird because observing reality--and this is of course something that I mentioned before--observing reality in all cases of large developments, economics, was absolutely crucial.

Even more recently, I mentioned that, for example, does anybody not believe that without the Great Depression, there will be no General Theory? It's not The General Theory was written because Keynes went to Mars and decided to write The General Theory. It was written because he was faced with the real world problems, so he was observing the real world problem. And, that I find really quite extraordinary.

Russ Roberts: Yeah. I'm not going to name names either, but the number of economists who said, 'We don't need to learn anything new from the Great Recession and the financial complexity of it because it was all in our models already.' I find that strange because partly because I know that most of the people in our field, for example, don't know--they only know one of those things. They might know macroeconomics, but they don't know finance. So they may know finance, but they don't know macro.

And, the idea that therefore, I don't know--let's put that to the side.

But, I think the idea of the self-referential part is extremely interesting. It's certainly part of the norms of journal-writing, article-writing, that you don't have to reference anything before 1977 in general, and certainly nothing outside of published academic research.

17:17

Russ Roberts: But, anyway, let's go on. You write--the more interesting, perhaps, part, which, this is all prelude--the more interesting part of your observations are--excuse me, the most interesting part--is the question of what are the big questions? What have we learned or not learned about them?

And, you start off with China. Talk about China, what we failed, why we failed here.

Branko Milanovic: Russ, what I actually find extraordinary about China, and I mentioned that there is a really big absence of the, how I should say, the rewards or acknowledgement given to work on China, is because if you were to select one topic which has really transformed lives of so many people, one fourth practically of mankind. And, I believe after the Industrial Revolution and probably after maybe the U.S. rise to economic superpower status in the latter part of the 19th century, early 20th century, this is the third event whose size may be even dwarfing the other previous two events.

So, we are really happy--this is happening in real time. And, let me give you an example there of course that you would love because it goes back with Adam Smith. Adam Smith is serving the beginnings of the Industrial Revolution, the transformation into a commercial society. And, the entire work of all the Wealth of Nations, and actually as you, of course, highlighted, The Theory of Moral Sentiments, is based on observing these relations between individuals at home with each other and between themselves and the wider community.

And, we are now in, I think , in a very similar position. We are observing really a unique event of an incredibly huge size, and we are in--whether we criticize the Nobel Prize--we are not rewarding people who have actually said something.

Now, just to finish that, I'm not sure that we have a definitive answer on China. Probably we'll never have it. Chinese don't have it. Americans don't have it. Nobody has it. But there are certainly people who have worked on China, from the economics of China and who have come up with some interesting insights.

I remember for myself when I was actually teaching at some point, particularly that topic on transition in China, Martin Weitzman who wrote about township and village enterprises [TVEs] in China, for me, that was a regulatory article because it basically goes and discusses everything that these TVEs do, which is against neoclassical approach, starting with very non-transparent property rights, dual -price saves them; basically everything. And, that was for me, absolutely stunning.

I said, like, 'Why is this happening? What do we know about it?' And, this is just one example, because obviously this is not an area--I've written obviously on China, but I'm not going to pull names, this guy or that guy--but it is really something that is worthwhile highlighting.

Russ Roberts: I feel the same way about China . I think it's the central economic event of our lifetime. It's an extraordinary event historically, the transformation of standard of living. And, people on "my side," the free market-oriented people say, 'Well, we know why China got rich. They used markets.' And, I'm thinking, 'Well, yeah, they did use markets more than they did before, but they did a lot of other stuff that's not market-oriented'--immense, immense investment in infrastructure, immense transformation of property rights in complicated ways.

And, of course, if you're like me, prone to like free markets and neoclassical economics, you're going to say, ' Well, they let people keep more of what they created and that's why they grew.' And, that has something to do with it. I believe that. But, you can't just pretend they went from, say, a socialist authoritarian communist system to a free market system. They didn't do that.

So, how do you account for the significance of what was left? And, of course, it's easy to say, 'Well, they'd have grown even more if they'd been more free market-oriented.' Which could be true. But, where's the evidence? Other than a prior belief, which is what we all have.

So, I think it's kind of important. And, the question then becomes, what might a scholar, a seeker after truth, what might they use to get more information on that? What would be the approach?

The modern economics approach would be to get some data on China's growth rate, and then we'd need a measure of how free market China is, or proportion of enterprises owned by the state, or, name it--a dummy variable for when they liberalized this.

That's not probably going to be that effective given the complexity of all the changes and all the things we don't have data on.

So, one response to your claim is so we're never going to know; we can't know. And, what would you have us do? How might a young person interested in this question, oblivious to the fact that the Nobel Prize doesn't reward it very well--how might they proceed?

Branko Milanovic: I think actually we would--because that's the nature of economics. I don't believe that economics comes with [?] looks at historical events comes really with the answers that are absolutely unimpeachable. I said before that we still have an argument--this was one of my other big questions--about what propelled the Industrial Revolution in England? You have obviously several very strong hypotheses there.

So, we will never know exactly what happened in China, because it is in the nature of the problem that it is not the problem that is solvable per se.

We will never know why Roman Empire disintegrated and fell. There was somebody who did actually many years ago, I think 220 different explanations for that.

But, I think what is absolutely without a doubt true now: First, it is the biggest economic event of our lifetime. And, it's probably one of the biggest events in the history, economic history of mankind.

And, secondly, the way that it happened is not easily subsumed or understood by any very sort of narrow, confined theory. It's neither neoclassical, it's not classical, it's not Marxist. It's really a combination, which is very unique.

Now, whether it is unique to China or whether it is something which is actually a new way of doing things, or whether it actually follows up on Japan and South Korea, and whether it could be exported elsewhere--all of these different questions.

But, I think that actually I would not be at all averse to the idea of having two different people with somewhat different answers being actually singled out working on China, because we don't have a single answer. But, we all agree that it is something which really combined in a very creative and actually I think very often haphazard way of different elements.

Was it Ferguson, actually, whom you like, Adam Ferguson who talked about stumbling upon the solutions? And that's what I think China did, actually: it stumbled. When you look actually how it happened, it was really by sort of stumbling--going one way, then making experiments, then going further and so on.

But, that's how the Industrial Revolution in England happened. It didn't happen because somebody had a blueprint: 'We are going to have the Industrial Revolution today.' It happened by small details, by things which were changed and then worked and others didn't work. So, that's actually how it happens.

So, I think it's really, there is no doubt, this is the biggest event in our lifetimes. And, somehow this is actually left out because it was supposed to be this narrow view of economics, which is, like, problem-solving of small kind. It is left out because somehow it does not fit. This whole elephant, huge in the room, doesn't fit into that small niche that we are actually going to study. And, I think that's one of the problems.

Russ Roberts: For listeners, you are referencing Adam Ferguson, the Scottish philosopher, political economist, thinker, or whatever you want to label him, who was a contemporary of Adam Smith, a little before him.

26:02

Russ Roberts: I want to say something that might advance our understanding, and I'd like your take on it. See, for me, when I see these kind of challenging, multi-causal situations--which are very characteristic of history, generally. I use the example of what caused the Civil War? What was the cause of World War I? It's not an answerable question. History doesn't pretend it's an answerable question.

So, what we try to do is think about not just measuring the contribution of different factors, but trying to rule out certain factors as likely to be small, others likely to be large. We know it's foolish to pretend that we know the percentages that each one contributes.

And, that would be very powerful though, to get that a little bit closer on China.

And, one way I would suggest that we could get there--and the fact that I can't answer this question suggests to me how important it is--which is: what are the stylized facts? What is to be explained?

And, what might--and by stylized, we mean, sort of, they're inevitably somewhat imperfect in their precision of measurement.

So, I'll take an example. What proportion of the Chinese economy was generated privately versus publicly over this time period we're talking about over the last, say, 40 years? Now, that's a somewhat answerable question. We know some measure of how many people left the countryside and went to the city. We know something, presumably, or the Chinese do, about the change in agricultural output from that change. Of course, some of the output that was made in rural communities, that was created, wasn't measured. So, some of the gains are somewhat illusory.

So, creating this compendium of just what's happened--because the way that I think most economists look at it, this is, I think just an enormous problem--it's, just, like, 'Well, they got more market-oriented.' It's not so helpful, right? Given that it's not the only thing that happened.

So, we kind of need to start--to me, and maybe there are people who are doing this now imperfectly: you did somewhat in your book, Capitalism, Alone. Certainly you deserve a Nobel Prize, Branko. We know that, goes without saying.

Branko Milanovic: No doubt.

Russ Roberts: Yeah, no doubt. But, it seems to me, this idea of stylized facts is not unimportant.

And, I have to salute Robert Lucas, who was one of my teachers, who emphasized this when he was thinking about business cycles. You just start by figuring out what has to be explained and what is at hand for thinking about what might explain it.

Branko Milanovic: Yeah. Well, of course, for China, as you said, actually all the stylized facts--we know them, basically.

And, the issue is, I think--and I think it's some again unsolvable to some extent--because we have globalization, we have greater market orientation, which came originally with the double, dual track system in terms of pricing and with the state quota still existing in those days, up to 1990s. We had privatization of land, we have privatization of the industrial sector, largely.

But, we still have a large part of, obviously the banking, steel production, large companies that are really still beholden to some extent to the state, or at least related to the state. These are the issues that, as you know, I write about in the third chapter of Capitalism, Alone. So, this is all--and globalization and openness.

So, these are all issues that are extremely--how should I say?--the combination, recombination is unique and very challenging for us to understand.

I actually read yesterday, for example, by Isabella Weber, who is now at Amherst, University of Massachusetts--she's actually a China scholar; I just happened to read because somehow that paper came to me--talking about the growth of Shenzhen, which is as you know, next to Hong Kong. And, before 1978, they had massive exodus of rural population from China going into Hong Kong. I don't know, this is political issue, because these were kind of illegal immigrants into Hong Kong. And, of course they were much better paid in [?] Hong Kong, were going there.

And, what is interesting now to understand--and actually, I think probably--there was something in the back of the mind of the Chinese leadership--is really the emphasis of Shenzhen, which is actually now growing much faster than Hong Kong, leaving aside whatever happened recently in Hong Kong. But, even before that, Shenzhen was actually growing faster. So, it's actually a remarkable change in fortunes that happened between these two cities.

So, these are really--I think there must be hundreds of examples of that kind, which are really quite spectacular and worthwhile research.

30:58

Russ Roberts: And of course, you know, we talked earlier about the incentives facing young scholars. We don't know, even know if the data are accurate. So, if I said to you, 'I want you to work on this problem,' say, about the relative growth of Shenzhen versus Hong Kong, you might start by saying, 'Well, I'm not even sure it's a true fact to explain.' So, that's a risky investment of my scholarly time.

So, we understand why , certainly, younger people might be uneasy about these areas. But, as you say, the return should be large. It should be a low probability and a high reward to motivate folks to at least try to explain it if it's true.

Branko Milanovic: You know, we--there are many things actually and I was mostly criticizing in the book the fact that, for example, from political surveys, we really have now less information than we had five years ago. There are many reasons for that; but basically because China has cracked down on release of information.

And, when you look at the Chinese numbers in many areas, there is always some doubt about the macro numbers.

But, I've been reading for the last year The Wall Street Journal.

Let me just make two observations, the first one about the present. Despite the fact that they do aim it from time to time, is industrial production really 6.5% up or not? They do accept when they start discussing sort of unambiguous changes, which are actually oftentimes sales of Western products, first-time companies' products, or what you observe in the streets, retail traders and so on. So, clearly what they observe by, sort of, visually, basically, and what they get from the individual companies dovetails with, agrees with these broad macro numbers.

And, the second observation, which actually struck me as somebody who has not read The Wall Street Journal, I mean, until now, is that if somebody had told me--I mentioned that on Twitter, in 1980, that really one half, I think literally, of the daily edition of The Wall Street Journal would be spent on economics of China, including individual companies, you know--this production, that production, sales, exports and imports. You would actually think that this guys is crazy, because--

And, actually that's an interesting topic, not maybe for economists, but writers [?], to look: What is the percentage of the newspaper, The Wall Street Journal that was sort of spent on China in 1980s? It probably was like 1%, because there was nothing really much to write about. And, now it is really after the economic developments in the United States, is by far number two in terms of simple space that is spent, like paper space.

So, that's an incredible transformation, which actually simply confirms what we were saying before. This is really an event of our--of the economic sphere and possibly in geopolitical--an event of our times.

33:55

Russ Roberts: Yeah, I agree. Let's shift gears. I'm going to pick one of my favorite big questions I don't think we've made much progress on, or people spend much time on, and get your reaction to it. And, then we'll come back to your list.

And that's competition. So, I spend a lot of my time thinking about the power of competition. I think it's undervalued and misunderstood by the general public. And, I think one of the great contributions of economics is to help people understand the role of competition. How it's not like athletic competition. It's not winner-take-all, generally--there are some exceptions. But in general, we all can benefit, most of us can benefit from competition. How it encourages the wiser use of resources. It pushes prices down, etc., etc.

So, that's my story in general. And, as a free market guy, that's at the heart of my worldview. It's what I believe protects consumers generally from bad behavior and exploitation. It's what protects workers. And so on.

On the other side are the people who see market power everywhere. 'The reason the wages are low here is because of market power.' And, if you say, 'What does that mean, exactly?' they don't have a good explanation. But then again, I don't have a good explanation for what competition is.

So, when you say to me--I gave this example again, talking to Steven Levitt the other day. That episode has probably been released by the time you hear this one: You know, real estate agents have to compete with one another. And, that reduces their ability to exploit their inside knowledge that they could use in theory to take advantage of sellers who maybe might want a higher price, but the real estate agent might want to lower price to sell the house more quickly.

And, my answer to that as a Chicago-trained economist is, 'Oh, but there's competition among real estate agents. They can't do that.'

And, then when he asked me, 'How do you know?' The answer is, 'Eeeh--my prior beliefs.'

Or, 'what protects a tourist?'

You're a tourist. You're in a new country, new city. And you go into the marketplace. Literally, the shuk--the market, the place where people are haggling. There aren't posted prices. I think most of us believe that tourists tend to pay too much. And, we have an answer for that. They don't have as much information about the existing prices and they don't know what a high price is that allows them to walk away.

But, why doesn't a seller say, 'Well, if I charge a high price, I'll lose potentially this customer to someone else?'

And, the answer, of course, is: maybe they don't know it's a high price. But, even as a tourist, I tend to look--I shop around. And I think if you shop around as a tourist, you get the same high price from almost everyone. So, why is it that that happens? There's lots of sellers--and it may not be true, of course; I'm picking this example as a stylized example.

And, similarly, there can be cases where there's two sellers, and it is very competitive. And we don't have much information about the nature of when competition serves customers and maybe when it doesn't serve customers so well. And, I find that strange that there's almost no, as far as I know, almost no research on how to think about that.

Branko Milanovic: That's true. That's not really a topic that I know much about, so will not add too much. But, when you mentioned the case of tourists and going somewhere, of course here to some extent, when you show up, for example, you go to Italy, you show up. You're obviously a beneficiary of the existence of the market in the sense that it is something, an institution which has already been formed.

So, you basically come there, you get to buy whatever you're haggling about at the price that in principle was already determined by the people who live there or people who came, and the tourist and others. Of course we have all seen that in some cases, which are very touristy, not necessarily the price may not be the same, but the behavior may be much worse towards you than you would expect because they have--we think from individual point of view, let's suppose somebody working like a waiter in a restaurant.

It's irrelevant for him, whether you're satisfied or not with your service, because the supply of tourists is going to be endless. So, actually, basically you are irrelevant. You can maybe never come back to that restaurant, but it doesn't matter. However, as we discussed in the previous conversation that we had, maybe there was some--now the advantages come from the ability of you to judge on the internet or to put your view about the service of the restaurant or whatever happened there.

So, it's actually interesting that there's a feedback now, which might not have existed in the past, and which might push that person to behave a little bit differently. But, this is something--competition indeed I think is obviously a public good actually in that sense. It is something that we benefit without our--our contribution is obviously infinitesimal and of course we take the benefit from everybody else doing the same thing.

39:07

Russ Roberts: The last thing I want to add on this is that: what I'm suggesting, I think partly--not the only thing, but part of what I'm suggesting is that we need something like case studies. We need something where someone delves deeply into the mechanics and in and out, and details, and logistics of these problems. An example, again, being the pandemic we're in now, where there are shortages, and according to economic theory that I used to teach and still talk about, shortages only exist because of price controls.

Now, we have price controls on some things. We have anti-gouging laws. But is that really the reason that some things are in short supply? And, people say, 'No, it's the supply chain.' Why is that supply chain so problematic? Why is it so hard to rearrange?

So, those kind of questions, I think require deep thorough study; and I think the Chinese issue also involves that kind of study.

And, it's not the nature of most economists to do that kind of work, and it generally doesn't get rewarded.

Branko Milanovic: Yeah. Actually, when you mention now the shortages, that leads me to one of my big topics and that is actually Socialist Economics. It was always, also, totally left untouched by the Nobel Prize. And, that existed actually for 20 odd years, since the foundation of the Nobel Prize in 1969. And, when you mentioned shortages, it comes obviously for obvious reasons, this comes to mind.

But, what was interesting, and I think again, for myself personally, until I read Kornai and the Economics of Shortage, all of that information--of course, I had it as well, and other people had it. And, many people wrote about socialist economics.

But, to me, that was little bit like what Keynes did with The General Theory, is that ability to sort of put it in a systemic framework and to understand the outcomes as a result of rational behavior of all the agents. And, shortage is indeed a rational behavior, so it is not--in the socialist economy, it was not some kind of strange outcome. It's a rational behavior when you had soft[?] budget constraint where each enterprise tries to hoard as much inputs, whether it is labor or raw materials and everything else.

So, you have--what was really, I think, great in Kornai was the simultaneous presence of a glut where you have actually too much stuff in your company, and you have a shortage outside, because everybody is bidding for the same thing.

And, you know, I found, for example, in the United States in a few cases--for example, I think that's actually, when my son was applying to the high school in Washington, this was exactly the same phenomenon. Because: because of a shortage of space, everybody applies to 10 different schools. And the schools actually incentivize you to apply for more because then each of them, the intake is lower--I mean, percentage-wise--so they look more exclusive.

So, you have a totally irrational behavior from all the agents, but the outcome is on one hand shortage and a glut.

Just one more example, I worked on Poland when I started working in the World Bank. And, why you always had, in socialist countries, you had export controls? Because many of the products were subsidized.

So, if you subsidize your products--you don't want Germans to come and buy sugar, and oil, and gasoline in your country. So, what you have to do then, you have, of course, to stop the outflow of subsidies.

So, you see then immediately how an economy will tend to become autarkic simply because of a huge subsidization of things. Subsidies were 15% of GDP [Gross Domestic Product] in Poland in the 1980s.

It is obviously rational behavior on all sides, but it shows you how certain outcomes that would seem from external point of view, like, really strange are the result of actions that are fully understandable within economics--our view of the world and economic behavior of individual agents or people. These are also the issues that I think actually have been left out.

Russ Roberts: Yeah; so, I'm actually an expert on socialist economics. It doesn't work well, so I'm done. That's my analysis.

Branko Milanovic: Yeah, yeah, that's right. Yeah--

Russ Roberts: It's not a bad starting place.

Branko Milanovic: No, no, that's actually--basically that's the view: is basically, 'Okay, this is something which we don't care about because it didn't work out well. We will not study it.'

But, that's wrong, because this is a huge economic and political system that existed, that worked; and then we have to understand it. And, it's economic system--like, if you look at medieval economic systems, it's also another economic system that we need to understand. And, if you go to Rome, or if you go to slavery, it's yet another economic system.

So, we cannot just take whatever has happened in the last 30 or 40 years and say, 'Well, this is the only economic system that actually interests me.' And, 'The definition of economics is what works in whatever 10 countries in the world that cover about 8% of the world's population, and this is what I'm going to study, and that's what going to be the definition of economics.' That's what in fact has happened.

44:48

Russ Roberts: Yeah. So, the person you mentioned is Kornai, K-O-R-N-A-I. I've never heard of him, which is a strike against me, it seems. But, your comment about understanding things that are alien to us or in the past--just to bring maybe a strange example: I'm thinking about the power of literature to help us understand consequences.

So, I want to give you two examples which come to mind in this conversation. One is the book that EconTalk listeners know I've talked about in great depth, which is In the First Circle, by Aleksandr Solzhenitsyn. It's a story of what happened to intellectuals, scientists, mathematicians, and engineers who were put to work in the name of improving the tyrannical and authoritarian powers of Stalin.

And, if I said to you, 'It was really hard to live in the Soviet Union under Stalin,' you'd say, 'Yeah. Yeah, he was a dictator.' But, until you've read a book like that or a book like Forever Flowing, by Vasily Grossman, you don't really--unless you have friends who live there who've told you about it, just to say, 'Yeah, it was horrible,' or, 'People were afraid,' or, 'It was kind of corrupt because rewards weren't handed out in decentralized way,'--I think until you've actually heard at least a story about it of that level of quality of literature, you can't really get any idea of how horrifying it really was.

And, similarly, and maybe I'm being unfair here, and maybe this is a stretch, but to me, when you talk about socialism--or capitalism--and you say, 'Yeah, this is how it works.' And, we give it a tweet version of how it works, I think we're missing so much of the richness of it that--I mean, the example you just gave about hoarding, it's just a small example of how an enterprise in the Soviet Union would hoard material.

And, we understand how often it would sometimes make bad allocation decisions because they were rewarded say, on, say, the weight of their output rather than on, say, profitability. We all know that. We put that in the back of our mind.

But, I think the day-to-day texture of how decisions were made teaches you something you can't really appreciate without that fuller picture. And, I think that's incredibly important.

Branko Milanovic: You know, it's actually interesting, Russ, that you mentioned the power of literature. I was recently in a conversation that was also like this one, online conversation with Daniel Shaviro from NYU [New York University], who is one of the famous stock specialists, but then his free-time interest is, he reads a lot, literature, and actually he had a book called Literature and Inequality. And, it's a story of nine books--it starts with Jane Austen and ends with the American Literature with Mark Twain and Theodore Dreiser--showing how social inequality and how relations between classes, individuals, and so on were really captured in these big novels, mostly European and American novelists of the 19th and the early 20th century.

And, it's actually quite extraordinary. I love the book; I've read four out of nine books that he has there. He has Stand Out, for example, and so on.

And, I use the same thing in my The Haves and the Have-Nots, where I used the Jane Austen, the Pride and Prejudice, and also Anna Karenina to actually situate--for example, Mr. Darcy is in the top 1%--we don't even know exactly, but the top one-10th or even less of top 1% in terms of income and wealth.

And, of course Elizabeth Bennett is the top 1%. So, what we see in the book, we see really a sliver of the English income distribution. And we see a big gap between them--which of course it's true. There's a big gap between me and Bill Gates, but we're all in the top of the U.S. income distribution. So that's what we see.

And, of course we see in Jane Austen that if Elizabeth doesn't marry, as you know that actually then entails[?] kick in, and actually she would go back to something which would be the median wage at that time, which was like one twentieth, one fortieth--I don't remember--of what she had with the family.

So, she would really lose a lot by not marrying Mr. Darcy.

With Anna Karenina, the story is somewhat similar. And, then I recently read, unrelatedly, and I mentioned that in this conversation with the Shaviro's book: John Lukacs[?] who was one of the big American historians, especially of the World War II, mentions in one of his books that--he has a small book on, basically on the role of history. And, then there was an essay of learning exactly what you were saying about Solzhenitsyn, and he actually uses Solzhenitsyn as an example, of learning about historical events from the great literature.

So, John Lukacs is a very interesting guy because he has really very negative views on some authors and very positive views on others. For example, he doesn't like to Tolstoy. He says Tolstoy's War and Peace really does not reflect well the War of 1812. He loves Solzhenitsyn.

Anyway, whatever he loves doesn't matter, but really learning history or using big-time, I mean, great literature to learn about history, and using the great literature to learn about social relations and equality: there are these two themes that actually came suddenly to get us simply because as I said, I read John Lukacs's book. So, really, we have here lots of way to learn.

Russ Roberts: So, I'm reading--trying to read; it's slow-going because of other obligations--I'm trying to read Crime and Punishment, having read--I read it a long time ago, I read it when I was 20 years old. But then I went back--I had never read Brothers Karamazov, and I read that about two years ago and it took the top of my head off. It's such an extraordinary book. Crime and Punishment isn't as good, I don't think. I'm three-fifths of the way through it.

But, one thing that struck me about it is that it is such a vivid look at the lower class of Russian life. People who were in debt, people living day-to-day, people who are failing just terribly and tragically and just getting by. And, that must have been an amazing--I don't know how he did it. It may be inaccurate. It's reasonable to worry in these--you can't do real social science from these things. The knowledge that you gain is inherently subjective and may be false. But, I think it's fascinating because the part that's not false is that we know there are people who struggle in life, and it's easy not to think about them if you live a certain lifestyle that you and I both have. And, I think it's easy not to see them. And reading literature can help you remember to see them. I think it's not unimportant.

Branko Milanovic: You know, my argument in The Haves and the Have-Nots, why actually I think the literature of that kind is trustworthy is the following. I was actually looking for numbers. I was looking for incomes, wages, salaries, prices. If you really don't know your topic well, you will be revealed, because you're writing at--you mentioned Dostoevsky, he was writing actually both of these books as feuilletons [French for serialized--Econlib Ed.] in, like, production, monthly production. So, actually he--

Russ Roberts: They were serialized, you're saying?

Branko Milanovic: Yes, serialized. So, he had actually--he had to make money, so he was writing sort of serialized stuff. And, if he was really totally wrong on some numbers, well, of course people would notice and they would laugh at it. So, I think actually the very fact that we can believe that Jane Austen is giving us reasonable numbers, because otherwise people at that time would have found that quite extraordinary--very wrong. So, that was my argument and I was actually into the numbers.

And, I then started talking to my students and other people I know for other literatures. I said, 'Okay, can you find really in other languages similar things?' Because really the French and English literature is full--much more even than Russian--full of data. And, of course, Balzac is a prime example of that. You can actually really write the economic history of that time simply from Balzac's novels.

But, then it's more difficult to find--apparently in many other literatures, there was not that much--so many, basically, numbers on income and other economic categories. Which then of course leads to the following conclusion: that the level of commercialization and the fact with capitalism has been much greater in, obviously, 19th century Europe than it was in more agricultural societies like Russia, or Africa, or Asia, and so on.

So, this is--by the way, I'm not reading much fiction these days. But, I took a book that I read before, which is also very revealing. It's called The Makioka Sisters, by Tanizaki, a Japanese writer. That's what I'm reading now. And it's the upper class family in the late 1930s in Osaka. And, again, it is extremely informative and revealing of the relationship. For example, gender issues are extremely well reflected or discussed in the book.

And, also money, because that's the family that was really at the top, and then it's slowly declining. And, what is the role of different family members? And all of that. I would say it's a fairly sizable book and one learns a lot. I actually never knew many of these details, including, like, for example, competition between Osaka and Tokyo in terms of even language and people disliking from Osaka going to Tokyo. I had no idea about that.

55:22

Russ Roberts: Well, I'm going to take us on a different digression and then we'll come back to the big questions. I never thought about this question of serialization. I mean, I've thought about it. I've always thought, 'You know, it's a negative.' It encourages cliffhangers, and drawing things out, and turning things into a soap opera. And it raised the question of--one of my favorite writers is Dickens, and Dickens was a serialist. He had to write all of his--I think most, if not all of his novels were written as magazine installments.

And, of course, that changes how you write. What would those books be like if they were paid the way modern authors of fiction are paid for producing a final product?

But, your insight about the reliability based on the fact that they were getting a beta version all the way through is fantastic.

And, I don't even know the answer to this--and, any English literature people out there, let me know: When they publish the book versions of these novels, did they merely connect and reprint each weekly, or monthly, or by-weekly version? Or did they do any editing of the whole thing when it was done? I don't know the answer to that.

Branko Milanovic: I don't know. I actually--I really would believe that in the case of Dostoevsky because he had really kind of a difficult life, although--I was in his apartment, for example in St. Petersburg, which is actually quite nice and large and so on. But, I think that he probably--that was probably just put together, the way it was serialized. That's what I would guess.

But, for Tolstoy, I know that actually Tolstoy made the various--like, in War and Peace, he made lots of additional changes. So, the version that we have now is not exactly the same as the first published book.

Russ Roberts: Fascinating.

Branko Milanovic: But, his life was very different. He had no need to make money, like, every fortnight as Dostoevsky had.

Russ Roberts: Fascinating. I encourage our listeners to read , certainly, The Brothers Karamazov. It's only about 950 pages--

Branko Milanovic: Yes. A short one--

Russ Roberts: Interesting that --I read the Constance Garnett translation, because that's what I have; and I still think it's a pretty good translation. And, I say that without any knowledge of Russian, but I say it based on some other translations I've read that struck me as--I don't know, didn't care for him so much. But anyway.

Branko Milanovic: I also read her translation. I know that was actually--there is a new translation: there are issues with hers, but I found it very good.

Russ Roberts: Yeah. I was just going to say that. It's cheap, you can find it out there.

57:55

Russ Roberts: I want to make sure--we're hitting the hour mark here. I want to make sure we talk about one of the issues you raised, which fascinates me and it's particularly timely, which is slavery. So, if you talk, I think, to most neoclassical economists, they will say that slavery was "a mistake"--economically, not just morally.

They'll all say it was a mistake morally, ethically. But they'll add and say it was a mistake economically because, well, mostly they'd say I think incentives: that slavery is a very inefficient way to work, say, the land. That's not a case closer. That doesn't end the discussion.

Branko Milanovic: No.

Russ Roberts: It's an interesting point. It's relevant.

But, I think neoclassical economists that I know would dismiss the importance of slavery as the determinant of America's economic success from colonial times to the present. They would say it's irrelevant. If anything, it's a negative: it was a harmful.

And, yet I think it's widely believed in--and I know it's widely believed in the black community and it's widely believed, I think, by many others outside of the black community, that slavery was actually essential to the success.

And, of course it's ethically important; it ties into the question of reparation, and it most importantly ties into our understanding of history that you're talking about. What do you think--when you invoke slavery, what did you have in mind in your big questions?

Branko Milanovic: No, I had exactly in mind what you said. I have not studied it and I have no view to give one way or another. It does strike me as a little bit odd when I do hear this general dismissal of slavery--'that was a mistake,'--because it's strange. Why would people, thousands or actually millions of them, make the same mistake all the time? Why would they go and enslave people if it was really bad for themselves?

Russ Roberts: Yeah, for themselves.

Branko Milanovic: That they were losing money. So, why would they do keep on doing that?

And, it's not only the American problem, it's the problem of Brazil, it's the problem of slavery, which of course existed in England, and it was even encouraged; in France, it was slavery in Haiti, and it was Arab slavery before that of Africans. And, it was slavery, for example, in Byzantine Empire, which slaves came in those days from Russia.

So, it just cannot be that millions of people all over 2,000 years--at least, there actually more than 4,000 years or 8,000--kept on making a mistake.

Now you can say, 'Actually with higher development, it was inefficient way.' But, it lasted a very long time. And it was stopped really through wars and legal action, which very difficult.

So, if it was so bad, how did you have to have a war to take away the slaves from those guys who were making a mistake of not having them as legally free labor? So, I think our priority just doesn't make sense.

Now, I have not studied it and I don't know it, but I see that it has played a big role; and leaving even the U.S. case aside, take the U.K. case, which obviously it has played a big role in the U.K. expansion ability to extract surplus from many places, including big plantations and so on. So, it seems to me a priority position without having studied empirically.

Russ Roberts: Well, I'm glad to see you have a neoclassical side, Branko--which is your observation, that something that persisted for so long must've made some kind of sense.

1:01:41

Russ Roberts: But, you raised, I think, the deeper point--and I think it's a very tragically relevant point today--which is the role of colonialism. We all understand that colonialism was probably good for the colonialists and not so good for the people who they took from. But how big? How important? Was it decisive? Was it just a side show?

People can argue about this. I think they argue about it in a fairly ineffective way. They argue about it in sort of a--I don't know, ideological social, emotional way, rather than a more analytical way. And, I think we would profit greatly from having a better understanding.

And, just to bring your point home about history and its importance: Anybody who says history doesn't matter is not paying attention, because it's all we're talking about right now in America. We're talking about the last 250--

Branko Milanovic: Absolutely--

Russ Roberts: years; and in Europe, and in Africa, and in South America where colonial imperialism was so devastating. And, yet some countries did well afterwards, some did badly afterwards. We desperately need to understand this to be able to talk intelligently about the world today.

Branko Milanovic: This is, again, one of these big topics on which I don't think there would be ever a unanimity of views. But, learning more or actually having better-substantiated hypotheses is a big plus. And, I think. actually, I'm somewhat encouraged because we do study that much more now. We study the linkages between imperialism and capitalism. This is all so obvious in some sense: it just happened at the same time. Which is not an argument that there is a causality, but I think there is a certain causality as well, because there was a surplus that was made from colonial exploitations or colonial invasions. And, that history is present all the time.

Now, very often, going back to the China example, you have Chinese, either scholars or other people , raise this issue, which is really true: is that the China, of course, as you know sent this huge fleet, which was much larger than Columbus's fleet in terms of people and number of ships and all of that, but with entirely different objective. They were neither trying to convert anybody nor were trying actually to plunder.

They were basically showcasing their own power: picked up, as you know, weird animals. They did some trading. And, then went back to China. And then for internal political reasons, then the Emperor later, the next one actually, burned the fleet and so on--which was of course a huge mistake.

But, the approach was entirely different.

So, that's of course--nowadays we're dealing with these two different approaches and of course, people would tell you, 'Look, this is what the Chinese approach was, and this was the Western approach.' So, it's still today relevant for us.

So, history is always with us, it's actually--again, if we go back to what was said before, is that if we just study the last 40 years or whatever, 50 years of history in the most part of the world, that's not really sufficient.

1:04:58

Russ Roberts: I'm going to give two more examples related to this question of oppression, and thinking about its effect on economic outcomes.

In the middle of World War II, the Nazis continued to kill Jews even as their fortunes declined in the war. They continued to protect the railroads; they continued to build railroads. They continued to devote trains to transporting Jews when they were losing the war. Was that a tiny impact on the final outcome for the Nazis? Or was that just a small thing? I have no idea. I'd love to know.

And, similarly in the Gulag, when Stalin's imprisoning millions of people--many of them maybe the most creative and talented--what did that do to Russian Soviet economic output?

And, I'm going to add one more. World War I: England and France and the West in general drafted in a very egalitarian way. So, some of the most talented people, in the economic sense of the word, served in the armed forces in ways that in the past before democracy, they would have avoided service. Great poets were killed, other people were killed who normally would have escaped that.

Did that matter? How much did that contribute to the decline of England as a world power? Or, was it the loss of their colonial empire?

Those are questions, would be good to know, and I'm very interested in them.

Now to be clear--I think we have to be fair--those questions are not fully answerable, as we've both admitted a number of times. But, we live in a world right now, an academic world where people who try answer those questions are discouraged. And, I think--I hear what you're saying is saying we ought to encourage them.

Branko Milanovic: Yeah, absolutely. When you mention for example, the Gulag, it was obviously a work camp, which is not very different from slavery because--

Russ Roberts: Yes, correct--

Branko Milanovic: you actually had people who were working there and were not even paid. They were actually just paid in--

Russ Roberts: Food--

Branko Milanovic: food--

Russ Roberts: A little bit of food. Not much food.

Branko Milanovic: And, actually it was a huge, incredible waste of human talent and human labor, and with also very little concern about whether they would survive or not survive. And, as you know, of course depended also where you were--if you were in the Arctic Circle or Shalamov for example, Varlam Shalamov of whom I read was actually there. It was Kolyma, one of the worst camps. So, then you were really basically toast.

Russ Roberts: It's a death sentence.

Branko Milanovic: And, if you were somewhere else, and actually many people were. If you look at people who, for example were sent in Kazakhstan and so on, the situation was not as bad, and actually the omnipresence of the state was not as great.

So, there were a variety of conditions, but nevertheless, the waste of human potential, I think was incredible. I think the same is true with the--if you calculate human potential of Jews in Germany, that's an incredible loss for Germany. It's basically you are destroying a significant part of your intelligentsia, educated labor force, and so on.

So, there are really such wasteful from the point of view of the interested country, wasteful distraction. Gender, of course, is another issue like countries that leave half of their labor force totally unutilized because they don't want to employ women. So, there are all these incredible inefficiencies that they do exist and we don't study them.

1:08:54

Russ Roberts: So, I'll let you close on a point we haven't talked about yet--there are other things you mention in your PowerPoint, in your Tweetstorm, we can refer our interested listeners to. But, I want to use that last point as a stepping off point to a deeper issue that you raised.

You argue in your writing on this that economics should go back to its roots--its roots being that Smith, Marx, Marshall, Ricardo, they were interested in understanding how people thrive materially, and that should be what we remember: We should remember that as our heritage and what we ought to be focused on because it's often what people care about.

I just want to add one caveat to that and I'll let you make a case for your view, which is--I don't think we want to--I'm a big fan of liberating women to choose the life that they want to choose, but I don't think the goal should be to maximize, say, the size of the labor force. So, the fact that women--and men--choose to take leisure, say, and make the economy smaller is mostly a good thing, not a bad thing because the goal of life isn't to make the economy as big as possible.

So, I'm curious how--I suspect you agree with me. So, I'm curious how you reconcile your Smithian, Marxist, Ricardian, Marshallian urge with the fact that material life is only part of what we care about. And, if we're not careful, we're going to spend too much time thinking as economists about that and ignoring the things that, say, can't be measured, that we've been talking about a lot through this conversation--which I've enjoyed immensely. But, I'm curious how you reconcile that your encouragement of looking at that side of the big picture, which I only think is part of the big picture. So, take it away. [More to come, 1:10:47]

Branko Milanovic: Okay, I understand your question. Let me break it into two--you already did. I think that, of course we should go back to the roots and the roots are very clear. It is actually economics is a social science whose objective is to study the evolution of economic systems. When I say systems, that's not only capitalism, that's all the others that I mentioned before. So that's the one point.

The second goes to back to Marshall, is to improve science of ordinary life. So, it's actually improvement and betterment--actually, to use Adam Smith--betterment of human condition. So, these are two things: study of the economic/socio-economic systems and improvement of material human condition.

Now, go to your second question: How do I reconcile the two? I actually reconcile it in my own mind a little bit following what you actually mentioned when you discuss Adam Smith and the dichotomy between The Theory of Moral Sentiments and the Wealth of Nations. The Wealth of Nations says--you argue and I think it's a very reasonable position--really deals with our relationship with the wider world and our relationship as economic agents. The Theory of Moral Sentiments deals with our relationship with family, friends, relatives, tribe, clan, and the past, and so forth.

And, what I actually find, and that goes back to the discussion that we had about Capitalism, Alone, Chapter Five, is that: first, the Wealth of Nations-type of interaction is gradually encroaching more and more--or commercial society or capitalist society--is really making inroads in that first part. And, I totally agree with you that we should not put a big objective, just maximize GDP [Gross Domestic Product] per capita.

But, what really happens is with encroachment of that part of the Wealth of Nations up on to The Theory of Moral Sentiments, we are de facto doing that because each individual is trying to maximize more and more his or her income. And, to do that, he's really taking the interactions from, then, that external world and bringing them more and more in our own internal world.

So, that's where my pessimistic side about commercialization comes from. It's not that actually there will be some kind of a claim on our time. It's basically that we're doing it ourselves; and we're actually changing these two proportions.

And, I would be totally in agreement with you that, of course, we should pay more attention to leisure; maybe we should actually do many other activities that are not commercialized at all.

But, I think the society that we live in does push us in the direction of doing that, unfortunately, less and less.

So, that's the pessimistic view, and that's how I reconcile--I'm not sure if I've convinced you, but this is how I reconciled it two. Honestly, I think that Adam Smith saw that the same way, but he might have believed that--I don't think he would have believed that actually this external relations or relations of commercialization would go as far as they did.

1:14:11

Russ Roberts: I just want to let you expand on that just for a minute before we close, because for listeners who are lazy and don't want to go back to your previous conversation on EconTalk on Chapter Five. Just give us a minute or two on how commercialization impinges on our relationships in our family and friends. And, I ask that, and I'll make the same point I made, I think, when we talked before, which is that, oh, I hear people say, 'Oh, capitalism is bad because it objectifies everything, makes everything a transaction.' And, I'm thinking, 'No, it doesn't really. That's just when I go to the store.'

But, you actually have some, I think, insights into this that very few other--I've never read before--about this concern you have. So, I want you to just lay that out in a minute or two.

Branko Milanovic: Yes, exactly; it goes back to as I said, Chapter Five and what my argument there was that many of the activities and things that we used in the past to do for free have now become commercialized. Obviously, I had Airbnb as a case in point. I had our use of cards to--basically our own cards--to do all kinds of, like taxi-ing, Uber, and others.

In other words, what I see as commonality in those things is that personal goods, which were not object of commercialization, now have become what Marx calls capital, because they're no longer personal good that you use for your own needs. They become something that is actually being used to make money, to make profit.

And, while we might be reluctant to do that--and I think I mentioned that in the previous conversation--I have not rented; I'm sitting in my own apartment. I have a house, I've not rented it. But, once it has a scheduled price--and it does now have, because I can see what I can make--gradually I start thinking about this. And there is a point at which I'm going to join that commercialized society. So, it's just a point where I will do it.

And, then of course, likewise, our leisure activities, many of our activities that used to be--like we have influencer now and others--that started as a leisure activity, but then gradually became commercialized.

And, now, when we think of the things, we think of them in a sort of a commercial sense. I'm not again saying that every interaction that we have on the internet is driven by a commercial objective. But, once that commercial objective of commercial value becomes known, it actually influences your behavior.

That's where I--and of course, as we discussed before, I see it also in a legal sense that legal issues are also impinging or being introduced into family life.

A number of these non-disclosure statements, for example, which is quite extraordinary because essentially what you're saying there is that you're basically giving up the right to free speech for an amount of money. It's quite also extraordinary. It's actually basically selling the right of free speech. When I say I will sign a nondisclosure agreement, that's what I'm doing actually: I'm just selling it.

Russ Roberts: So, the neoclassical economist in me, the Chicago-trained economist says, 'Well, if it makes you better off, what's the cost? It's all improvement.'

But, I think your point, which I find--I think about it more and more lately--is that there's a texture-of-life issue there in terms of how the day-to-day life goes on, if you're constantly thinking about opportunity cost. So, you want to borrow my car and I'm thinking, 'Oh, that's going to cost me so many dollars because I could have put it up on Uber or some kind of rideshare device.' Right?

You gave the example of walking a dog. I've got some leisure; or I could walk a dog for somebody and make some money.

Branko Milanovic: Yeah. People do.

Russ Roberts: And, the fact that you and I don't do that isn't the point. It's that we haven't hit that price yet. When the price gets high enough, then we all become--I think part of it really for me is we're all--I don't think we want to live in a world where we're all maximizing all the time. And, economic man is--and woman--are a little bit in that framework; but it's maybe not so healthy.

Branko Milanovic: No, I would agree, but I would actually--I'm not--how should I say? In the last exchange, I was more of a Chicago guy than you because I see this as inevitable. And, I'm not passing a judgment on that: I just see it as inevitable.

And, I see not only inevitability, but I see our own behavior as essentially feeding that. So, I was more of a maximizing guy. You rather saw greater advantages of us enjoying more free time and being nicer as people and not thinking of these things. But, you know, you agree with me that if the price, for example, of Uber becomes extremely high--I mean, value that you can get. Now, the fact that I come and ask you, 'Give me your car--can I borrow it for nothing for two hours?' You will do it because you're a generous person. But, in my mind, I would think, 'Look, I took this car from Russ for two hours. He could have made $100 bucks, so I should give him a small present for that.' But, in the past--

Russ Roberts: Or a big one--

Branko Milanovic: Or a big one. But, in the past, I would never think of this because there was no value on that. And, I would not actually give you any present. I would say, 'Thank you very much.' I would put gas back that I used, but there'll be nothing else.

But, once there's a price, a shadow price that I know, I start--even if you don't--but, I would start thinking about this; and I would think that you do think as well. That's how we get commercialized.

Russ Roberts: Yeah, but the younger economist that I used to be would say, 'This is all improvement--because it means everything gets used more efficiently.' And, I've become as I've gotten older to believe that that's not the goal of life. It's not even close to the goal of life. And, sometimes--I'm not paying you for this, Branko. We did send you that headset. But I enjoy our conversations; I don't know who got more out of it.

Branko Milanovic: Can I keep it?

Russ Roberts: Yeah, you can keep it. Enjoy.

Branko Milanovic: Good. So, I get paid.

Russ Roberts: Yeah. Although Plantronics provides it. We cover the shipping, which is not trivial, so we got it to you quickly and promptly. EconTalk does: I don't provide it personally. But I used to--I have in the past because I wanted guests to be here.

But, anyway, my point is that I don't think it's healthy for us always to be thinking of--I'll close with this point and let you react to it, and then we'll end.

But, I like to say that in a good marriage, you don't keep score.

And, I think part of what this commercialization and putting a shadow price on things does, is that everything is in the scorecard now. And, I don't think that's so healthy maybe. But we'll see.

Branko Milanovic: As I said, I'm really not passing much of a judgment. I just think it is inevitable. That's how commercial society works; and I think it would really move further and further.

Whether there will be a point where actually we would fight back, it could happen. It could actually maybe go too far, and that would make our lives, not miserable, but actually maybe economically better, but maybe in a social sense worse. So, we'll see.

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

Branko Milanovic: Thank you very much, Russ. It's always a pleasure to have, to talk with you. And, even if we don't know exactly which way the conversation goes, it somehow flows like a river and [inaudible 01:22:01].

Russ Roberts: That's the goal. Talk to you soon.

Branko Milanovic: Thank you very much. Talk to you soon.


More EconTalk Episodes