Intro. [Recording date: September 5, 2017.]
Russ Roberts: Our topic for today is an article that you wrote recently at Medium.com, which of course we'll link to; and the title is "The Origin of Populist Surges Everywhere," which is a pretty bold title. And you start your essay with a very provocative set of maps--which could alarm listeners who can't see them. They welcome to go the essay, of course, but we're going to, I think, describe them pretty simply, as they're pretty clear. There are three maps. They are organized by county. They show the change in the intensity of Republican and Democrat voting in the 2012 Presidential election as compared with 2004--that is, how much more Republican or how much more Democrat a county voted in 2012 versus 2004. The second map shows overdose death rates, mostly from opioids. And the third is the rates of firearm suicide by counties. And they look pretty similar. Those three things seem to be geographically correlated. What do you conclude from those pictures?
Philip Auerswald: Well, so that was my way in to this particular post, was just this conjecture that maybe something about the rural/urban divide in this country was correlated with some other variables. And, really, it was just on that, on a guess that I pulled out these particular three. I actually didn't mine this intensively at all. But when I looked at them, it was pretty striking. You know, of course, this is all just correlations and just eyeballing when it comes to the way it's presented in the blog post. There are some links that I provide within the post; and of course there's a lot of related literature that I think substantiates these as being significant correlations. But, really, it really began as an exploration about the significance of the rural/urban divide in the United States in particular as really the--likely the decisive element in terms of the outcome of the 2016 election. But I should say: I posted this July 20, 2016. And so, of course, after the election there was a lot of writing on this topic. Before, there was some. July 20, 2016, there wasn't very much. So, um, I think that, you know, on that level it would have more prescience than if I published it today.
Russ Roberts: The thing that I noticed--it's interesting: I noticed something different from what you highlighted. What I noticed was that there was a band, a sort of Milky Way of darkness instead of brightness, that ran from maybe West Virginia down through Arkansas, where there were increases in Republican voting, increases in firearm suicides, and increases in opioid deaths. You, however, focus--which is the flip side of the same story, in your essay--you focus on what you call mega-cities. [Or, mega-regions--Econlib Ed.] So, talk about what a megacity is. Identify the ones that are relevant for this picture, or maybe more easily the ones that aren't. Most of them are relevant. And, why you want to talk about megacities.
Philip Auerswald: Well, yeah, I mean--that band should have--you know, West Virginia and over through, really eastern Missouri, it also reaches up into northern Wisconsin and Michigan, significantly for the outcomes. But that really is the sort of focal point when you just look at the maps. The significance of the megacities is simply that, Ed Glaeser wrote a magnificent book just a few years ago, the Triumph of the City. And the point that he is making in that book is an important one and I think one that is not heavily disputed. Which is, that the 21st century, certainly the 20th century going into the 21st, has been an era in which the largest cities have become even more dominant and have driven the advance of human society and human prosperity. And he really tells this as a positive story. But, in a way, when we think about the origins of populist surges--and I really want to point out that this isn't just the United States: that the point is this is a global phenomenon--that it is something that is really kind of the revenge of the country: You know, if we think about the triumph of the city as being the baseline. And, so, there really are not just the sort of dominance of the largest city, but increasing dominance of the largest city. And that's, that's really the kind of backdrop for the maps, I think, in the post.
Russ Roberts: And, by megacities--you don't just mean, like New York City. You don't just mean, say, Denver. You are talking about the whole--various corridors of population density.
Philip Auerswald: Yeah. I mean, to take a step back from the United States, which is sort of the next step I take in the post: That, if you didn't know anything about Republicans, Democrats; you didn't know anything about Brexit and Marine Le Pen; you didn't know anything about Vladimir Putin; you didn't know anything about any of that--and you were trying to sort out what is happening on this planet with these people at this particular point in time. And, let's say you had been watching human society, human civilization, for a number of centuries, if not millennia. There were three things, or let's say there are three things that I think would really stand out. One of them is what we've just been talking about, is urbanization. We are a social species. We have become increasingly densely interconnected within urban areas. And so we know that story. That's the Triumph of the City story. And if anything, the gap between the largest metros and the rest of the world is growing. The second is de-population--combined with population aging. And this is a phenomenon we have never experienced previously in human history. Now, when people think about depopulation at a global scale, the tendency is to think about it as sort of a 2050 phenomenon, because that's when the United Nations' population projections sort of plateau; and then you sort of go into either just sort of a steady level or population decline. But the reality is, that all of North America, all of Europe, and all of East Asia today are at below replacement-rate fertility. Which means, absent population aging and immigration, all of North America, all of Europe, and all of East Asia would be in population decline already. As well as the populist developing countries such as Iran, Brazil, and so forth.
Russ Roberts: When you say, "aging," you mean: If we live longer.
Philip Auerswald: Right. So--
Russ Roberts: Consisting--a growth in population, but it still would be probably a growth of non-working people. So, the working population almost certainly, if these trends continue, is going to get smaller in those areas. Correct?
Philip Auerswald: Exactly. Exactly. And so, there's a tendency to fixate on Japan in this story. And certainly Japan has been a leading edge; and we can talk about how Japan has been the world's leading creditor nation for the last quarter century. I don't know if they've just been overtaken by China. But it has been in that category for a long time. And this is just the same time that their working age population began to decline; and then their overall population began to decline. But it's far from Japan being the only one. It's a global phenomenon. And again, this has never happened in human history that we have this trajectory of population decline at the same time that we have aging. Usually when you have population decline, it's an indira[indicator?] of, you know, plagues, wars, so forth and so on. And, the third one is what I talk about in The Code Economy. And I think it's equally as significant as the first two, which is the advance of technology as code. And so, just all the gadgets--AI (Artificial Intelligence), automation, all these things that we talk about, the whole various, you know, set of categories we think about as the advance of the technological frontier--um, this is the third sort of major driver. And, when you intersect those three, then you get the origins of popular surges everywhere. But it's a global phenomenon. It's not a U.S. phenomenon. And it's something that's rooted in these just fundamental trends that are not going to be going away any time soon.
Russ Roberts: So, let me just review them: Urbanization. Slowing population growth or even negative population growth--that is, a decline in population. And, an advance in technology. So, why should those things lead to more populism? Or any of those things lead to more populism?
Philip Auerswald: Well, so, I mean it's important to--
Russ Roberts: Sorry. Before we go on: By "populism"--you should first talk a little about what you mean by populism. I have an idea of what you mean. But, for listeners, talk about what that term means to you.
Philip Auerswald: So, you know, that I think is really a semantic question. There is a group of people who are rural and feeling as though they have relatively diminished opportunities in the world that they are living in today, as opposed to a quarter of a century ago or even 10 years ago. And then there's a group of urban--it's touchy to use the word "cosmopolitan," but it is an appropriate word--urban, cosmopolitan, international-ly[?] mobile people who live in the world's largest cities. And the interest of these two cosmopolitan historically--I mean, if we read Jane Jacobs or, you know, we really think about how cities have always interacted deeply as being really the source of innovation, the source of increased productivity for rural places, that these aren't two groups that are inherently in conflict. But, what we're seeing is, that as a consequence of voting systems--again, not just in the United States but throughout the world, that are--even sort of moderately disproportionate by geography as opposed to population, that you get this, this, this tension emerging. So, I would say populism really is almost defined as the political insurgency of rural places against urban cores in the largest cities. And you can call it whatever you want; but that's what's happening, really, all over Europe, in the United States, and elsewhere in the world.
Russ Roberts: And you get the phenomenon as a result of people, say, in London, where I have some friends who told me, 'I don't know anyone who voted for Brexit'--
Philip Auerswald: Well, yeah, exactly--
Russ Roberts: and yet a lot of them did. I don't know anyone who voted for Donald Trump. And yet, millions did. People will say that. And they tend to be in the same geographical location, those folks. And they can't understand it. I think in one sense, what populism--this is not an accurate definition, but I think it also gets at what you are trying to get at. You could think of populism as the sudden phenomenon that a lot of smart people have no idea what's going on. The inability to predict these changes. Certainly to understand them in advance and forecast them. Something's going on. And so the question is: Is it a cultural phenomenon? Is it an economic phenomenon? Is it a medical phenomenon? Is it a geographical phenomenon? And I think what's astounding about your essay--and I confess, I apologize, I didn't realize it was 2016--I'm now even more impressed by it: I thought it was written recently--is that, you really point out that a lot this is, appears to be geographic. For reasons that may be decisive. Obviously it could be correlated with other things that are correlated with geography. But the question is: What are those things? What is the fundamental change that's going on here? And you have a line in the essay where you say,
We are indeed in a world where the rich get richer. But it is the fact that rich cities are getting richer that matters most; that rich people are getting richer follows from that.
So, this argument is that it is that cities are very prosperous. Increasingly prosperous. Which of course is part of it. And that doesn't imply that rural areas are increasingly less prosperous. But, I think are, at some extent. And, talk about what you are getting at there with the prosperity of cities.
Philip Auerswald: Well, I mean--so, the richest cities in the United States make 34% more in terms of regional GDP [Gross Domestic Product] than America as a whole. The urbanites earn 30% more than rural residents. And, what's--you know--
Russ Roberts: That's on average.
Philip Auerswald: That's on average. Yeah. And then, just between 2010 and 2014, this has drawn--this particular summary is drawn from an Economist article, but Glaeser has a number of articles along the same lines, there are multiple sources. But, between 2010 and 2014, U.S. population grew by 3.1%; cities overall by 3.7%. But the 50 richest cities grew by 9.2%. Now, we haven't gotten to mobility. And that's part of the frustration of people in rural places, I would conjecture: Is that, as we all know, land values and home prices in those 50 largest major metros have gone up in the last 20, 30 years just to a dramatic extent. And again, this is a global phenomenon. You had Matt Rognlie's paper a couple of years ago sort of revisiting Piketty's results and finding that the sort of famed increased capital share relative to labor over the last 30 years was almost entirely accounted for by growth in real estate. So, this is nontrivial. On a macro scale, it's really the underlying determinant--again, if we believe that those numbers, you know, from Piketty, as I think analyzed very insightfully by Matt Rognlie, that, that, these really are the core drivers of inequality. And, also the core drivers of our restricted mobility. I mean, you simply, you cannot go to Midtown, to New York, even Brooklyn to live the dream of making it in New York, any way like my father did when he came from Northern Wisconsin to Columbia University in the 1950s. Or my mother, you know, differently coming from Tunisia[?] to New York City. I mean, this was an exceptional place where people like my mother and father could meet. And they could afford to be there as young people with really zero means from their family to sustain them otherwise. So, we are in a totally different world in terms of mobility. And, and, the divisions between the richest cities and the rest of the world are becoming increasingly acute. And those of us--and I readily confess includes me--spend almost all of their time in one of the world's, say, largest hundred cities. It's easy for us to be oblivious to these phenomena.
Russ Roberts: So, I just want to disagree with one piece of that, or at least clarify something. It reminds me a little bit--it's a very useful summary. Actually, I want to make two points. One is: Piketty's book was focused on this idea that the return to investment and the stock market was what gave the rich an edge. I thought that was silly on many counts. But the land point is not silly--the point you are raising. And it seems to me to be quite relevant. But it reminds me of the Yogi Berra expression: "It's so crowded, nobody goes there any more." Which is his line about a restaurant--
Philip Auerswald: Right--
Russ Roberts: that was suddenly popular.
Philip Auerswald: No, no, that's right--
Russ Roberts: It was a joke.
Philip Auerswald: No, no; I know the joke. And I like the joke.
Russ Roberts: But, what's going on in New York and in San Francisco, and in London, cities around the world, is that--and in China--is that lots of people are moving there. It's not that you can't move there any more. A lot of people are moving there. They are pushing up the land values, the rents that people can charge--partly because a lot of people want to live in these cities, because that is where economic prosperity is highest. It's where life is most interesting--for certain kinds of people, not everybody. And it's also places where land use is highly regulated and restricted. So, we're recording this in the middle of the aftermath of Hurricane Harvey--Houston, which has limited zoning--no zoning as far as I know-limited zoning--has not experienced the run-up in rents and housing prices that other cities experienced over the last couple of decades. But in the cities that have those restrictions, land use restrictions, building codes that are excessive to keep out competitors that have zoning that's excessive--all of--whether it's--I shouldn't say "excessive." Whether it's good or bad is a separate question. But it's harder to build a new apartment building in New York City today than it was a hundred years ago; and it's harder to do that in New York City than it is in Dayton, Ohio--be the claim. And as a result, the increase in people moving to these cities pushes up the price. Which means that those who have not chosen to move and considering it, are--first of all, it's not as appealing as it was before because it's expensive and hard to find a foothold there, as you point out, in comparison to your parents. But, it's also going to be the case--I think that a different set of people are left behind than the ones who move. And that's something we haven't confronted, I think, as a country, or talked about, even.
Philip Auerswald: Well, that's a great set of points. And I absolutely, you know, agree, and readily confess that I made two inconsistent points. I first described how the top 50 cities in the United States are capturing this disproportionate share of population growth, and then I made the point that nobody can move there.
Russ Roberts: But I knew what you were--
Philip Auerswald: So, so--
Russ Roberts: I just wanted to clarify--
Philip Auerswald: No, no, and so, so, that's exactly right. But it's simply the amount of value that is captured by landowners and, you know, rent-, you know, landlords in terms of what's created in the city. And by the way, I think the hero in all this, and I talk about this in The Code Economy, turns out to be Henry George. I mean, I think he really, you know, the 19th century U.S. economist--and he really anticipated these phenomena more clearly than anybody. And also, the role of regulation that you pointed out is very significant and certainly shouldn't be underestimated in terms of the differential. I mean, you get New York, with an average home price in 2015 of $375,000. Even Los Angeles, sprawling Los Angeles, you know, $500,000 for the Los Angeles, MSA[?], whereas Dallas and Houston are down sort of $129,000, $162,000. So, so, these--Houston is an incredibly diverse place because it's been a point of entry. It's affordable relative to the largest metros.
Russ Roberts: MSA--being a Metropolitan Statistical Area.
Philip Auerswald: Metropolitan Statistical Area. Exactly. Yeah. So, but I want to also just sort of point out how extreme this phenomenon is. So, I refer to UN [United Nations] global population estimates and you know, peaking at 2050 or whatever. Well, if you look at those maps, you find that there's really only one story there, in terms of one continued population growth, and that's the African continent. If you subtract the African continent--and I just simply mean subtract it analytically. What's happening, the dynamics of the African continent in the next 30, 40 years, are different from the rest of the world because a large number of countries in the African continent have not gone through the demographic transitions most other places in the world either have or are in the midst of it. This is a decisive factor when we look at development trajectories. So, let's remove the African continent from the analysis of global population trends. And, by the way: we wouldn't need to do that if we had open borders. But we are not going to have open borders in the next 30, 40 years. We're not moving in that direction. So, we can analytically sort of safely do that. If you do that, then it turns out that all of net population globally--subtracting the sub-Saharan, the African continent--all of population growth has occurred in cities over a million. And so, cities over a million comprise about 20% of world population. So, that means that there has net depopulation through the entirety of the surface of the planet Earth, excluding the sub-Saharan African continent and the top one-million cities. So, it's not--
Russ Roberts: Cities with one million in population.
Philip Auerswald: Excuse me. Definitely not the top one million cities. The top, the top--it's about roughly 300 cities that have over, in terms of, population ranking, that have over one million people. And so, so, you know, that leaves out cities like New Orleans. I mean, these are big cities. And they are really capturing--you know, all of the population growth, all of the net population growth, and a tremendous share of the value creation. And so this divergence between rural and urban is growing ever greater. And it's not a question of plateauing. There's something sort of impolite about talking about population decline, depopulation. If you Google depopulation you will find all sorts of black helicopter theories and, you know, of the most extravagant variety. I wrote a book, the [?] book that we're now turning into a sort of full-length book with Joon Yun, president of Palo Alto Investors, and it was titled Depopulation. That's when we kind of realized this taboo about talking about population decline. But, that's the reality for a lot of the middle of the country that we were talking about. Not all of it, of course--there's huge variation from town to town. But you drive even through the Northeast, much less cycling across country, as my middle daughter did last summer, the summer of the election; and you see towns where the elementary school has closed--well, that tells you something. And it probably tells you more than any other factory relating to that town: This was a place where there enough young people to sustain an elementary school and there are not any more. And, those places are not doing well.
Russ Roberts: Yeah, and I think there is a--I just want to remind listeners they can listen to episodes with Enrico Moretti, Chris Arnade, and Tyler Cowen--we'll put up links to all those on issues related to this conversation. But, I think when people think about the urban--when they write about it; I don't know how much they are thinking about it, but when they write about this urban-rural distinction, they tend to focus on hobby horses that they want--or axes that they want to grind, to mix a bunch of metaphors. So, they'll say, globalization--so, what's happened with globalization is supposedly the rural areas have been left behind; the urban areas are doing great. Manufacturing has been hollowed out, supposedly--which it has greatly in employment, not output but certainly employment in certain areas--rural areas and medium-sized towns in the United States. And so, it's hard to know--there's some truth to that. I don't think that's the whole story. And part of what you are suggesting is, is that it's inherently destructive to the economies of small-town America and rural America when people just leave and there are just fewer people. That's part of your claim. Correct?
Philip Auerswald: Yeah. Well, that's right. I mean, people like my father, who left [?] Wisconsin in the mid-1950s. But that happens over a sustained era. And he didn't go back. I'm not going back. There's a selection process that is--of course, people do move to rural places and they will move because that's the life and the sort of values, environment, where they feel like they are most comfortable. It's not just a one-way street. But, of course, the net is to the biggest cities. But, since you have Nassim Taleb on as a frequent guest, there's no danger of being even a tenth as provocative and volatile as he is--and by the way, I'm a big fan. Big fan. But I mean, you know, I will try to ratchet up my level to at least a tenth of a Taleb.
Russ Roberts: We need a term for that, by the way. "A tenth of a Taleb" is an interesting term. Maybe it's a T. 0.5T. p>
Philip Auerswald: That may be as far as I'm capable of getting. But it is sort of like, it's either just quaint or colloquial or just depressing to listen to what passes as 95% of a public discussion of political life in this country. There's this kind of intense navel-gazing: you'd think that this sort of world of punditry, you know, was just sort of, had its head buried in its midsection and we really just cannot see, at all, the fact that this is an evident global phenomenon driven by at least these core sort of centuries' long, if not millennia' long drivers that are hidden in plain sight; that are evident when we look at the data from not just the U.S. 2016 election, but when we look at Brexit, when we look at the voting in France, which turned a different way when it comes to the revolt of the country--and when I say revolt of the country, I mean of the countryside, rural places. But you look at Erdogan in Turkey, you look at what happens when you open up the vote, have more democratic processes in a place like Turkey--this is well-known and well-understood: that the urban cores, this sort of nascent, cosmopolitan, internationalist population, lost some control to the rest of the country. That was an advance for democracy. But it was a loss for, say liberal democracy in terms of liberal values, or, I mean classical liberal, sort of this notion of process and you know, of even a set of values that I don't really want to enumerate but it's basically the urban, you know, as opposed to the rural in conflict. And we can talk about why those are different, by the way. I mean, it's a lot different to be shooting a gun in the middle of a city than it is on your own property in Wyoming. So it's not surprising people have different attitudes about the use of guns. But it's a lot different, if you are living in a city and you are rubbing elbows--you've almost got your face planted in somebody else's every single day. And, you know, they could be wearing any kind of garb from any place in the world. You have to tolerate them. I mean, diversity, tolerance of so-called diversity along whatever--I say "so-called" because there are multiple dimensions. But, whatever it is, whatever you want to call diversity, tolerance of that in a city is a necessity. It's an urban value. It's not as necessary in a rural place. It's not required. So, it's not surprising that you would have different values. But, this is not just in the United States. This is everywhere in the world. And unless we understand that it wasn't the baby boom, it was a demographic transition; we are like other countries. And, as a consequence, we are vulnerable like other countries. I mean, this also gets into the fundamental dynamics of politics and how they play out.
Russ Roberts: So, I don't really understand that. I mean, I understand a part of it which I think is really interesting--I think your identification of this as a worldwide trend. You are not the first person to make that point, obviously--it's obvious to anybody that something is going on, again, that's not usual. The world is turned upside down in many, many dimensions in the last few years. And I love your idea that it's these three trends driving that. But I don't fully understand that--and here's why. And I also don't understand your diversity point. So, London, again being a good example--I'm going to move it out the United States' context for a minute. And let's talk about Brexit--the vote to leave the European Union, which the country voted for; but there was an incredible bi-modal distribution. People in London voted to stay. People outside of London voted to go. The urban people like, seem to like the ability to move in and out of foreign countries in Europe; they seem to like the presence of immigrants, the tolerance that you are talking about. But you'd think it would go the other way. You'd think it would be the people in London--which is a very cosmopolitan city, has a wide range of people of color from all over the world in it, has a bunch of languages being spoken that you can't miss, has service people who even though they speak English speak it with a non-British accent and non-American accent because they were born in Eastern Europe or somewhere around the Mediterranean or somewhere far away. And yet, it's the people in the countryside, who don't mingle with those people, who feel like 'We're "losing our country."' Or, 'Our country is not the same as it was before'; 'The character of Britain, of England is not being preserved.' They don't even interact much with those folks, with the people they're upset about--the immigration and the people moving across borders. You'd think it would be the people in London who would be dismayed at how the city has changed. Why are the people who aren't living there dismayed? That seems weird.
Philip Auerswald: Yeah. Well, I spent one summer in Seward, Alaska. And, without getting into particulars, it doesn't seem strange to me. Proximity is not actually a factor that--and I don't[?] even want to talk about intolerance: it just habit. It's just routine. It's something that is driven by your daily life. I mean, in January, a couple of Gallup researchers, Jonathan Rothwell and Pablo Diego-Rosell published this study, and really the focal point of what they found--sorry, it was November, November of 2016. And they found exactly what you are describing: that it was, that Trump's support was sort of disproportionately in places that were, few college graduates, far from the Mexican border, within commuting zones that were sort of fairly homogenous. And so there is this inverse correlation between kind of exposure to others and, you know, this voting pattern. That's just the study, November, Gallup, cited in The New Yorker. It's not really a question of understanding why or what that is. It's just simply the fact of the division and the fact that it's repeated from country to country. I agree with you that it's not novel to say that the world is in transition. And at least some people--and I would say people like Ken Applebaum among others who have been writing about political trends in Europe for the last decade, have the right kind of lens on this, where they understand really the extent to which the political dynamic in the United States is not a unique one. But there is something, I think, that is not conventionally appreciated; and that's really what the drivers are. So, there's a lot of globalization blame in this story, a lot of sort of thinking about the hollowing out of manufacturing, in trade, and so forth. Brink Lindsey, who is my colleague at the Kauffman Foundation, some time ago, was the one who brought to my attention this nice factoid--well, fact--that from 1995 to 2005, roughly speaking--and this is when the U.S. balance of trade went through the floor; it was really the era where you really saw the resurgence or the emergence of China as a global manufacturing power--the United States lost roughly 2-3 million manufacturing jobs. China lost 10 million. And China's manufacturing employment peaked in the mid-1990s. It's been going down ever since. So, it's not like the jobs sort of fled to China. There's been a net decrease in manufacturing jobs and increased efficiency and productivity in factories and technology, you know, for decades. But that's not the core driver. The actual core driver is much more what Ricardo Hausmann and Cesar Hidalgo pointed out in their Atlas of economic geography in, you know, and an array of work around that, which is actually the stickiness of skills and capabilities in cities. And that's what I emphasize in The Code Economy. It is a total miscomprehension to think it was the opening of borders. It's the inherent boundary of skills. Now, you may say that then that that advantage is the places that connects for it[?]. But that's because we're forgetting the human and demographic dimension of mobility. And it's these, this, basically the possibility of getting near those places that have the skills, those dense, interconnected, you know, combinatorial, combinatorially sort of rich places that are the richest cities. That it's proximity to that which is really the enabler of personal betterment. And we just don't have a solution for the vast majority of the world, it's sort of surface of the world's planet, that isn't in those top 50 metros.
Russ Roberts: Explain on that point--I don't understand it, about--you started to make it about Hausmann and Hidalgo's Atlas and the city thing. Explain that again.
Philip Auerswald: Well, I mean, this is--since this is EconTalk, you know, I guess there's an opening to have just a minor digression on, you know, the economic theory piece of this. But, we have a way of thinking about production that of course then is translated into measures that are taken seriously as guides to policy and so forth and so on, like total factor productivity and the rest of it. And that's a way of thinking about production that links inputs to outputs. And the choice, basically the decision that a firm makes is the choice of inputs in order to yield sort of the maximum output given fixed inputs, or to reduce the cost of getting to a fixed level of output. So, that's the problem of production as it's been represented for about 80 years in the field of economics. Now, we know, and there has been much discussion going back to, about, Sid Winter, who wrote a tremendous article about this in 1968, going back to Harvard Simon[?], and going back to the middle of the 19th century, that there is an algorithm--there is a process, a recipe, that turns inputs to outputs. That, beneath this notion, implicit in the production function, is a recipe. Like, when you think about a literal, culinary recipe, you've got inputs, outputs, and then you've got what you do with the inputs. Now, in a world where really the processes were pretty well understood and easily copied, it was really about investment to get the capital to increase the marginal productivity of labor; that raised wages. And then you had this sort of capital-deepening story that happened around the world, where as long as you had--you know, if it was in China or the Soviet Union, forced savings due to the Socialist system, but elsewhere in the world market system that drove investment and capital--that's how you got long-term growth. Right? But, in the last 30 years, what's changed, and this is what we really need to be thinking about is what's different in the last 30 years? Not the last 4 or the last 15. But really something like the last 30--something fundamentally changed. And I believe is what that is, is the Code Algorithms took over. And we see that in terms of like the fraction of corporate value in the United States--
Russ Roberts: What's this have to do with people moving to cities?
Philip Auerswald: Well, what this has to do with people moving to cities is that--sorry, it's a long way around--is that, it's that stickiness of skills and the capabilities of production within cities that is the core of the Hausmann-Hidalgo argument. That really is as good an explanation we have of the inequality that came about in the last 30 years.
Russ Roberts: I don't understand it.
Philip Auerswald: That's the core driver.
Russ Roberts: So, what's that mean--stickiness? Stickiness of what? That it's hard to live there? That it's hard to--what?
Philip Auerswald: No, no. It's the skills and capabilities within a place. The know-how. The set of competencies to create subcomponents that are fitted into larger components. Ideas that emerge with other ideas. I mean, if you've got an aerospace industry, if you've got a biotech industry, you've got, you know, a place like Chicago that has, you know, long-standing food, agricultural--all of those sets of capabilities that mix and recombine. I mean, Martin Weitzman has a paper, a couple of papers on this in the late 1990s that were about combinatorial growth and basically how skills interact to create the possibilities for growth. I mean, in my mind, that's really the--the best paper out of the endogenous growth literature, because it really talks about how just simply the capacities within a firm. What makes Apple Computer what it is, isn't the mix of computers and human beings in their Cupertino offices or any others. It's not the capital they [?] mix. It hasn't been for decades. It's how they do what they do. And that's location-specific. And that's the dominant driver of the economy. And we have no way of representing it in economics, so we scramble around blindly looking at measures like TFP [? Total Factor Productivity?] that are, you know, built on, the constant returns production function, it comes out of the, you know, 1920s and Cobb-Douglas, and then, and brought into the literature by Solow in 1958. 1956 and 1957. And so you've got these, this sort of analytical apparatus that leaves out what is the core driver of everything on the technology side in economics. It's a big gap.
Russ Roberts: So, listeners who have heard me talk about these issues before will remember that I have a healthy skepticism about this. Healthy, in the sense that I don't have an axe to grind here. I don't have a horse in the race. I don't--I just don't--I literally don't understand the argument that says that if you'd moved Apple to other places, it couldn't have been Apple. Now, I understand that there's some sort--I'll say it differently. There's a water-cooler effect within Apple. I understand that. If you have a firm, it's great to have your employees interacting and thinking of new things. The claim of Hidalgo, and Moretti, and Tyler Cowen, the recent conversation that we had, and assume Martin Weitzman although I haven't read his papers, is that there is a water-cooler effect in the whole area. That, the mingling of ideas and interaction between workers and firms somehow has this complementarity. And I'm open to the possibility. It's just not obvious to me that it's true. I know--it seems to be true, because we look at these prosperous areas. That there's an alternative explanation I think has to be taken seriously. Which is: All of this stuff about--it just--all these critiques of the standard model of production you are talking about, capital--they falter--and many people have pointed this out for a long time. They falter because one of the types of capital that's the most important is embodied in human beings. We call it human capital. We call it education. We have terrible proxies for it, like years of education. It's silly. It's really about know-how, and as you point out, recipes. It's about understanding how things work and how to make things work better. How to improve the recipe, how to make the people more productive than they were before, besides just adding a machine. It's the way the machines interact with the people; it's the way that people come to the machines with knowledge that they already have. Etc., etc. So, I just--I'm not saying it's wrong. I'm saying it's just not obvious to me the mechanism other than the fact that it appears to be an empirical reality that there's certain areas that seem to do well. I don't know that it's obvious--let me say it a different way. It's true that cities are more prosperous than rural populations. But that can be just because the people who are in the cities are not the same as the people who live in the rural areas. It's because they have more knowledge, and because you--not just you but the people who are making these claims--are overstating the benefits of city when in fact it's just the fact that the people who live their have the highest skills.
Philip Auerswald: Right. So, presumably, you are not skeptical of the literature on firm-level learning curves.
Russ Roberts: No, that's probably true. You mean that firms learn how to do things; they can get better and better through experience.
Philip Auerswald: Exactly. We have a phenomenon, organizational learning. Not just individual learning; but there are organizations that learn better over time. And this is robust to turnover within the organization. It's not just the people, but there's something in the aggregate--
Russ Roberts: It's the culture--
Philip Auerswald: about--the culture; and there are cultural practices: we have anecdotal stories of entire industries, like for example the German chemical industry that was destroyed twice; and lock, stock, and barrel moved to England; and it came back. Right? Because it was in the practices and the people in those organizations. Those organizations had a resilience that was beyond the physical infrastructure. And it really was beyond just the people. Right? So, we believe the firm with the learning curve literature because it is the dominant regularity on the production side. It is to the production side what the demand curve is to the demand side. So, we believe the learning curve because we have no choice but to believe the learning curve because we've been documenting it for 80 years and it's still--we find it across industries, across firms. We also believe the work that Nick Bloom and John Van Reenen have been doing, mostly ignored for about 10 years and now celebrated rightly, about the dispersion of productivity levels within--firms within industries, across industries, and across countries that, simply, firms have not figured out how to do even easy things well. This is a confusing fact. But Nick Bloom, John Van Reenen--this is the most robust literature today in terms of understanding firm-level productivity. It's profoundly important. Then we have, you know, Katz and others at Brookings who have documented similar productivity differentials across cities. And so we see that it's not just the level of the firm: that there are similar productivity levels at the level, across cities. Then we have, Glaeser and others in multiple papers who find that in fact the correlation between population and productivity differentials actually doesn't hold for the bottom third. That it only holds for the top of the distribution. So, in fact, it is this kind of rich cities get richer that drives the fundamental disparities that all is anchored in divergence of capacities and capabilities at the firm level, and then at the region level.
Russ Roberts: I just--I'm just skeptical--
Philip Auerswald: So, it's not something that can be doubted.
Russ Roberts: Well, no, no. What I'm saying is--
Philip Auerswald: It's not something that can be doubted based on the facts--
Russ Roberts: Well, it can be doubted. Trust me. I can doubt it--
Philip Auerswald: No, I mean--
Russ Roberts: The part I'm doubting is not the empirical reality that some cities are "richer." I'll take the quotes out. What is not doubted is that some cities have higher levels of average income than others. That's a fact--
Philip Auerswald: Point Number One.
Russ Roberts: The question is: Is that because those cities are, say, denser? Which is part of the claim. Is it because those cities have pulled in all the people like the people that need to interact? Or is it just because they attract really smart people? That's what's not clear. That's all. And I want to--
Philip Auerswald: Well, [?]--
Russ Roberts: And I'll let you get the last word, but then I want to move on, because--enough on this. But, react.
Philip Auerswald: Well, fair enough. I mean, obviously, the whole point of the scientific method is to be skeptical, and so if we don't have skepticism, we don't have science. So, it absolutely can be doubted. What I'm saying is that we have a body of learning about divergence of productivity levels among places, that just the technology side of these three causes that we talked about in the beginning. It interacts with urbanization; and those demographics are a third, equally important. So, but my insistence on this point--and obviously I'm insistence[?]-inspired and wrote an entire book about it--is that really, without understanding this notion of the recipe of who can run a better restaurant than somebody else, and why, and how that endures, and how we have celebrity chefs, and how even in something like cooking which has been going on for as long as we have been human beings, you have this tremendous divergence. This is not something that can be explained by human capital alone. And that will--that's my conjecture that I believe is pretty robust. When we look at the way in which the similar type of phenomena are replicated across scales. And I think it takes a rather extreme theory to say that it only goes up to the firm scale, but it doesn't go to a regional scale.
Russ Roberts: But a reason it wouldn't go to a regional scale is there's no water-cooler--it's not obvious there's a water cooler to mingle and interact with. I mean, is it the bar? Is it the local nightclub? Is it--the claim, now, I'm willing to admit, there is a--all I'm really objecting to, here, is that the people who make these claims never seem to specify the mechanism. They observe an empirical reality--excuse me--an empirical regularity. And they don't really have a mechanism for how this takes place. There are such possible mechanisms. It could be, for example, that the venture capitalists in Silicon Valley are driving a lot of the inter-firm movement and efficiencies of human capital being allocated better, there, perhaps. Or the fact that people get stimulated by working at one company and can quickly move to another--which they might not be able to do if they were in Poughkeepsie [NY] or somewhere else far away. By the way: There is a certain irony about all of this, which is that the technology digital revolution is what let me work from my bedroom, which I'm doing right now--I'm working in my office downstairs. I'm not sitting at the Hoover Institution. I'm not mingling with you here in the D.C. area even though I used to be at George Mason. And somehow we are having this conversation across distance. And we're stimulating[?] our ideas against each other. And yet, these arguments are that you have to be physically near people. Now, physical matters. Obviously there are costs of moving. There's costs of adapting. There's cultural differences across areas that are difficult to change. So, all those things are possible. I just think this, so-called complementarity theory or nonlinearity theory or whatever you want to call it, hasn't really gotten to the bottom of it, of what's going on.
Philip Auerswald: Well, I know you want to just close this off, but I want to give you one mechanism.
Russ Roberts: Yeah, go ahead.
Philip Auerswald: Right? And it's the coffee house. Okay? I spend a lot of my time in coffee houses. And, so there's this great article in the New York Times about three years ago, four years ago, and it was about the 17th century coffee houses. I mean, Adam Smith wrote The Wealth of Nations in a coffee house. Right? And coffee houses have, for centuries been the mixing and mingling gaps[?]. Now, the mixing and mingling graphs[?]. We also have on top of that now co-working spaces. And we have, you know, exercises [?] effect. I would say that the physical workplace--there is not--there is no water cooler. I mean, I don't get water at a water cooler. I don't even know what the water cooler is. But I know what coffee is. And I spend a lot of time in coffee shops. And it's a place that is a very dynamic center of interchange. Right? And people pay for access to those environments. And they pay a lot. And you can think about how people, you know, just in terms of rent differentials, what people are willing to pay to be in a Brooklyn as opposed to a Dayton. And they are getting something for that. So, I think the market is revealing something there, when we see the differentials between what people are willing to pay in different places.
Russ Roberts: Well, I think they are getting a lot of things at those different places that have nothing to do with productivity. They are getting more cultural life; they are getting better restaurants. They are getting better weather. They are getting access to the mountains; they are getting access to the beach-- Whatever it is--
Philip Auerswald: Right--
Russ Roberts: A view of Mount Rainier on a clear day in Seattle. I want to propose--let me propose--you can come back and answer it any time you want.
Philip Auerswald: Yeah.
Russ Roberts: But, let me propose a different explanation for the populist phenomenon that is related to your drivers but in a different way than usually suggested, and maybe explains some of it. I would argue that the world is changing at an increasingly quick pace. That economic change is changing at an increasingly quick pace. I've pointed out many times; I don't think our data are very good at identifying this, particularly in measuring, say, Consumer Prices, because we don't control for quality; and quality is getting increasingly better at a faster and faster rate. Say, on how much my phone can do, or my television, and so on. So, I think a lot of our measurement is totally off. And, I would argue that there are differences in how well people can cope with these changes. I'm lucky. I happen to have the idea to get into podcasting at a time when podcasting is growing. If I'd gotten into this idea in 1920, I'd have tried to get my own radio show, and I probably would have failed. None of this, whatever talent I have at this business, would have led to anything. So, I'm not suggesting that some of these abilities that deal with change are unique to certain people and not to others. But certainly change helps some people and hurts others. And some people are comfortable with it. Some people are uncomfortable with it. So, if you've been living in a, say, rural environment, one of the obvious things about a rural environment--it's pretty static. What changed in the 20th century that was not static was the farm. So, the farm changed dramatically over the first half of the 20th century: they all got a lot bigger and that meant that a lot of people who were living in rural areas couldn't make a living any more--couldn't make a good living--and they moved to cities because that was where they could do better. I think what's going on now is that, partly for what you are identifying, I'm open to the possibility that the decreasing density of non-urban areas--not just rural areas, but non-urban areas, small towns--that's hurt them economically. There are gains from increased density. So, those areas that have lost density, they are just less--fewer things going on. And so, their lives are less appealing, less fun. Now, in the old days they'd move to the city. But as we've been talking--it's gotten more expensive to move there. And a lot of people do move. But, the ones who are left behind are in an economic landscape that's less pleasant than it used to be. And this is happening all over the world. I don't think it's just globalization. I think some of it is the urbanization, as you point out. Some of it is the application of technology to economic processes, which has sped it up. So, instead of just, as you get older, things are a little more difficult, they are a lot more difficult. People are frustrated that things they used to rely on socially, culturally, economically have disappeared. And I think that's a big part of what's driving the populace movement around the world. And I don't think it's inconsistent with what you are saying. It's just a variation on it.
Philip Auerswald: No--I mean--so, there appears to be, from just this slogan for the election of our current President, a sense of something that was lost that you want to re-capture.
Russ Roberts: Yup.
Philip Auerswald: And you see that in [?]. You see it in France. As I said, my mother is from Tunisia; my relatives all live in France now. So, I follow the French political dynamic, at least to some extent. It's not that different. And so, there was a sense of something lost. But, if you look at--you know, the French post-War restrictions--there's [? Un Eglise glorieux ?]--in the sort of sense of like there was a kind of--or the mid-1960s in the United States. I mean, there's nothing more corrosive to public debate in this country, or in France for that matter, or in England. The focal point may change. In England it may be the 1920s or the 1930s, or earlier. But here, there's nothing more corrosive than focusing on the 1960s as the point of reference. And unfortunately that's what an outsized share of political discussion does. And that's what, at least for people who are in their 60s, 70s, 80s--who, you know, is a natural focal point in terms of their own recollections: that there was a better time that they've lost. Right? Now, in the United States we only got the prosperities of the 1950s, 1960s to the extent that we did as a consequence of a world war that destroyed--that killed 60 million people and destroyed every production center in the world except for the United States. And that gave us this wave of immigration, including so many of the world's most talented people. And anybody who could get to the United States did, for an interval. And then we also had, you know, world markets that were sort of available to U.S. exporters without any kind of significant competition for decades. And so this was this incredible boost. And sort of, it framed the notion of what the norm is for a generation. And the entire baby-boom generation is crippled by this historical accident that holds up the aftermath of a world war that kills 60 million people as some sort of like wonderful norm that we--
Russ Roberts: golden age--
Philip Auerswald: will return to. It's the golden age. Yeah. I mean, it is the most, it is the most--so, anything--if you use the metrics of the 20th century and you compare now to the 1960s, we will lose on every dimension. And you can be depressed for as long as you want to be. Right? And if you think about places where population is growing and there's dynamism and there's the frontier, are different from places where population is shrinking, people are in pain, you've got the farm industry pushing oxycontin down their throats like they did in West Virginia and elsewhere, and the entire story you had with Sam Quinones on your show, which was terrific. So, I mean: Yeah, there is real misery, and there's a real sense of loss. But, it simply doesn't hold up if we think, again, not only in 30-, 40-year intervals and not only in terms of the United States. For most of the world, of course, the last 30 years has been fantastic. It has been probably the best era in human history. It's just the Rich Six that has been--and really, rural places in the Rich Six that have been punished. And they've been punished severely for doing nothing but staying put.
Russ Roberts: Yeah; it's a great observation. I just want to reiterate that. China and India have undergone one of the most--there's no parallel to it in human history, right, to have hundreds of millions of people improve their lives dramatically is a glorious thing. And I think that's to be celebrated. And your point is, that at the same time, they have not [?] to the richest countries. The richest countries are overall doing still phenomenally well. It's a subset of the people in those rich countries who feel left out. And are left out.
Russ Roberts: And, I think--let's move on to what might be done to make that better. For me, the obvious thing is to reduce the restrictive nature of land use in American cities. But that's politically--that's kind of a non-starter. The people who are already there have the political power to keep it the way it is. They want to keep it the way it is. It's in their self-interest to keep it the way it is. So, it's not obvious that's going to change. You know, what's happening in the Bay Area, which is so weird and nonfunctional--I summer in Palo Alto, which is unimaginably expensive to spend any time there. And, what's happened is that people are living farther and farther away to come work in those cities that are thriving. They are commuting from Gilroy, which is, you know, 40 minutes from Palo Alto, an hour or something south of San Francisco. But that's where young people are moving to try to start their life. And facing these very long commutes. Of course, one argument would be the autonomous vehicle might make those longer commutes a little more pleasant, which just means that it will push the places you can commute from even farther away. But, let's talk about--
Philip Auerswald: Have you[?]--I saw that letter from a--Kate Downing, who is the Housing Commission in Palo Alto?
Russ Roberts: No. [?] or I may have forgotten [?]
Philip Auerswald: Anyway, it was all about this.
Russ Roberts: Oh, yeah, yeah. I did see it. Complaining, upset about it.
Philip Auerswald: But for years, home values have gone from $1.25 million, one and a quarter million, to $2.5 million in 3 years. It is, I mean, these are real phenomena. But you talked about, like, what are the solutions?
Russ Roberts: Yeah, let's start there. And you--
Philip Auerswald: I completely agree with you on land use restrictions. In fact, there's a very simple one. And it could happen in the next 6 months; and we have the right political configuration to make it happens--which is to lift height restrictions in the District of Columbia. It's just one city. But it does kind of, you know, create some sort of entry point for the mid-Atlantic. And, the city of Washington, D.C. is really unique in the world in that it has banked billions of dollars of assets in these sort of falsely-conceived, you know, height restrictions. From another era. And I'm not--I always--I was born in D.C., I lived in D.C. a lot of my life, I like Washington, D.C., I like the way it looks and feels. But, it is--it is terrible from an equity standpoint. It's terrible from a standpoint of long-term prospects of the city. And, it's because this is the nation's capital, it's terrible from the standpoint of the long-term prospects of the United States. So, that's just one case in point. You are talking about land-use regulations broadly speaking. I mean, defeating NIMBY-ism [NIMBY=Not In My Back Yard], town by town, block by block--yeah, I agree with you. Good luck. Because we're not moving in that direction. We're moving in the opposite direction--
Russ Roberts: But even the Washington, D.C. point--if you were a significant developer, owner of real estate in Washington, D.C., you are going to fight that repeal of that height restriction with everything, every atom of your body.
Philip Auerswald: Well, I personally would lose, too. I mean, I'm--I own a home in Washington, or at least some fraction of the home that the bank doesn't own. And, so I would be hurt. It could wipe out all the equity that I have. But, just from a policy standpoint, I agree with you. There's an irony, though--and Richard Florida has pointed this out: there's an irony to major metro land restrictions which is that it pushes people to, say, the Portland, Maines. Right? Which is a great town. And, yeah, it's a couple of hours from Boston. But, if you can make that work, it's much more accessible. And it helps that, you know, southern, southeastern part of Maine thrive and prosper. Which it's doing, arguably, at least around Portland. So, actually, there's this irony that the largest-city NIMBYism is actually favorable to the second-tier cities, which are the ones that actually really need to thrive, if rural is going to be pulled along. Now, anybody who I listen to who says that they have a solution for how you uplift rural places--you know, 'Bring back the coal industry'--No. Bringing back manufacturing--Yes. Manufacturing won't come back, but it's going to come back in the form of 21st century manufacturing, which is not going to create the jobs that it used to. But we're certainly going to see manufacturing come back to the United States because this is a good place to do manufacturing. Twenty-first century intensive, algorithm-intensive manufacturing is great to do in the United States. It's not going to create jobs for huge numbers of people. I would say that number one is health care to the home. Changing reimbursements, Medicare and other reimbursements schemes to create a middle tier of sort of health-concierge--I mean, Walmart could take the lead in this. Walmart sees themselves as being on the frontier of 21st century health services. Health care to the home, distributed health services. I wrote a piece for Cato on this a little while ago, "Home (Healthcare) Economics"--
Russ Roberts: Explain what you mean. So, one of the things you say in another essay, which we'll put a link up to it, which I also really liked, was, in the so-called war between humans and machines, people are going to end up doing things that are more human. So, how does that work in this case?
Philip Auerswald: I mean, this to me is another point that I feel is inadequately articulated. John Hagel is terrific on this, from Deloitte. He writes about this very well. But I--and Nilofer Merchant actually has a new book coming out, Onlyness, that I think makes this point in a different way. But, we know that when there is the introduction, when there is a discontinuity in the advance of code or the advance of technology, you think about, you know, the introduction of CDs [Compact Discs] and you know, there's kind of like a lower cost or, say, VHS [Video Home System], let's say, or DVDs [Digital Video Disc]--there's a lower-cost alternative to movies. And that doesn't eliminate movie theaters. It makes the movie theaters that continue to exist sort of a higher-value experience that then sort of bifurcates the market to a higher- and lower-value use. Well, we're going to see that with the inevitable increase in AI; in, you know, sort of algorithmically-driven intelligence of all varieties and all parts of work. And I do think it's going to mean that people's human skills--those things that people, and people everywhere, including rural places but also in cities, that simply are, you know, at least a hundred years off in terms of AI capabilities--I mean, literally, eye contact. I mean, I have a TED Talk that focuses--it's called 'Eye Contact Can't Be Automated.' But, eye contact can't be automated. And, I'm at least, not for a very long time. And health care--I mean, post-recession, out of the 10 job categories that experienced--the 10 middle wage job categories that experienced the greatest growth--four of them were some version of health care to the home, distributed health services. Not just health care generally speaking, but new models of health care. And that's without the technology--you know, quantified self[?] and AI-empowered diagnostics, the iPad--you know, all these frontier technologies that are going to allow, you know, a 22-year-old with 3 months of training to be as effective, in the home setting, as your average doctor was in 1973. At least. Maybe 1985. So, this capability, combined with eye contact, of cultivation of a sense of empathy, really caring for people--whether people like it or not, whether this is the job they want, this is the job that's going to exist. And so, and they are going to exist in the millions. And they are going to exist not just in the millions in the United States, but in Europe and in China. It is the largest growth category of jobs anywhere in the world. And it's most obstructed by regulation. And I would say between--this is a domain where regulatory reform could really make a difference for the possibilities of millions of people all over the country. And we've just got to get the framework in place to make it happen.
Russ Roberts: So--you see this--can you give me a specific or two about what this person is doing? Are they just a companion to help deal with the health issues that an elderly person would have? Or an ill person?
Philip Auerswald: So, the VA--Veteran's Administration--has actually been a leader in Distributed Health Services, which combines mobility--it inclines--so, you know, sort of computer-based health care and medical house calls. And they found that just through going to a home and counseling about, you know, making sure to maintain, you know, prescription use on a regular basis, behavioral adaptations, just looking around the home and seeing what kind of clues the home setting gives, you know, to behavior and to sort of determinants of morbidity--that actually focusing on wellness, also--sort of engaging on issues of sort of diet and habit. But, on an informational person-to-person level. And you see consistently, whether it's health care to the home models--you know, 20% cost reduction. Whether it's mobile-enabled health services--20% cost reduction. Mostly through hospital avoidances. I mean, the last place you want to be when you are sick is in the hospital. We all know that. And so, what mobility in health care to the home allows us to do is to avoid that. So, yeah--it's information-providing. It could be simplified diagnostics. It could be, you know, some sort of engaged, AI-informed discussion that would begin to look at causes. But that could be further on. It's like a health care concierge that's focused on hospital avoidance. And increased enrollments. And there's a gap. There's a gap. Below nurse-practitioner and above what we think of today as a home health care worker, there's a gap there that can be filled by, sort of, millions of jobs. Literally millions.
Russ Roberts: Great idea.
Russ Roberts: Well, we're getting late here. I want to give you a chance to talk about the closing of your essay, going back to this issue of populism. And maybe this can bring a bunch of things together. I'm going to read your last paragraph which is very eloquent and, I think, well said. You say the following:
Cities are humanity's greatest invention. They are platforms on which we share, create, exchange. They benefit from density. Returns accrue disproportionately to owners of land. This causes inequality and invites a backlash. Yet the fundamentals of value creation in human society are not going to change any time soon. Achieving inclusive prosperity requires working with, not against, those fundamentals.
So, expand on that, or comment on that, given what we've been talking about.
Philip Auerswald: Well, yeah. Just to excuse my earlier vehemence about, um, you know, algorithms and their importance at that, you know, regional level. But, in some ways there has to be like a causal element. There has to be reason that cities are special. And cities bring something together. I mean, Jane Jacobs is oft cited; but she's brilliant on this. And she really led a generation of people in thinking about these questions. And understanding what vitality is within a city. And it's almost--I actually think it's almost mystical, because, it's almost like the arrogance of a single neuron. You know, a single neuron is like computing all day long and thinks it's very important; it's got messages coming in, messages coming out. And the idea that there's a scale above the neuron that might be of significance--that's just like--that's just impossible to conceive. We sort of feel that there's something out there, but we don't know what it is. Well, cities are that. Right? And E. O. Wilson, when he talks about the Social Conquest of Earth--a brilliant book, you know, focused on group selection and so forth. But, there's a dynamic there of human societies, when we work together and solve problems together. And we do best in cities. The advance of human society, I do believe, is the story of the advance of cities. And it continues to be the story. But we are at a cusp event. We've just had 200 years of population growth, dramatic population growth, driven by the advance in technology, advance in code. And now, we're at a point of inflection. And we are, we are now moving towards population decline. So that means everything that we assume about net positive real rates of return, everything we assume about asset prices, whether, you know, it's real estate or anything else, for most places going up, leave aside the top 50 metros: All of that is called into question. So, this is an enormous challenge, not just for public policy. It's an enormous human challenge. And, I think we've got to start by understanding what its drivers are. And they are not anything specific to the United States. And they are not only anything that has only happened in the last 30 years. That's for sure.
Russ Roberts: After recording this piece, Philip and I had some things you wanted to add. So, here we go. Philip, why don't you start us off?
Philip Auerswald: Yeah. Well, Russ, I think in the middle of our discussion you asked this question about what it really was about the Hausmann-Hidalgo work that--about combinatorial innovation and capacities within reach in this really, sort of the differentiator between the highest-performing regions and others. And, I think that there was an element of what you were saying in terms of what really drives that, that I think it's worth exploring further. We did get into it to some extent, but this question of, 'Is it human capital that drives it? Is it learning? Is it the speed of learning in cities? Or is it just the mere fact of being sort of closer to the technology frontier?' And we sort of went around it. But I actually think these are really interesting and open questions. So, I was kind of interested in revisiting that.
Russ Roberts: So, what are your thoughts? I have my own--I felt, having finished the conversation, that I had been just a little too skeptical. I want to add my own--
Philip Auerswald: No, you go ahead. Yeah. I'm interested in what you have to say on that.
Russ Roberts: So, you know, I'm basically--what I had said earlier was that I was skeptical about the idea that if you increase the population of a city, somehow that makes people more productive--in and of itself. And I would call that the naive version of the claim. It appears in the data that cities that are denser--have more people--are more productive. And the question that I asked earlier was: What's the mechanism? And, I don't want to deny--I mean, one of the obvious mechanisms is reduced transaction costs. And, there's no doubt that there are some advantages to being close to people, physically close to people who have interesting ideas. And, you know, you talked about the coffee shop. I think in Palo Alto, it's the breakfast place--which is often a coffee shop. And, I live there in the summer, and I've had morning coffee with a lot of interesting people and had great conversations. And I've thought about, if I were in that high-tech world, that being that close to that many interesting people would definitely stimulate my thinking about lots of different things. And even on just a practical matter, if you wanted to start a high-tech business, talking face to face with smart people about who to hire and what the needs of that company might be, is probably a lot better than sending an email from some place at a distance and saying, 'You know any good engineers?' So, I do think there are some complementarities, synergies, whatever you want to call it--from physical proximity. But I also just want to clarify what my claim was. My claim, before--my skeptical claim--was more along the lines of--attractive places attract smart, talented people. And we don't want to confuse that phenomenon with the fact that there's something intrinsically valuable about living in high-density proximity with other people. I think a lot of things come along with that. Like, culture and food and entertainment, and the things that we mentioned earlier. So, that's my footnote or caveat to what I said before. Do you want to add anything?
Philip Auerswald: Well, yeah. And I think that, you know, my understanding of the literature is that this is actively debated and researched. And I cited a number of papers that, first of all, substantiate the notion of firm-specific learning, and that learning about economically relevant, economically important things, is not a costly activity at all. And the sort of Marshallian notion that information, knowledge relative to production, is sort of somehow in the air, is really not true. Like you're saying--there's sort of a mechanism that needs to be at work. And, then, secondly, the research about the dispersion between places in terms of their productivity levels, and how that's linked to wages. And so, so, what's driving that is that we are drawing the best people, as [?] learning--I think these are actively debated and discussed questions. As I understand the literature, I think it's pretty conclusive that we so far aren't able to fully explain it with human capital measures; but human capital measures certainly plan an important role. So, I do think, like, my understanding of the literature is there is something unexplained there. But, again, that's--these are really empirical questions.
Russ Roberts: Of course, the other thing you'd want to think about is that, as you pointed out at the beginning of the conversation, as you increase the demand for living in these places, you push up land values, making it more expensive to live there. So, to attract talented people to those locations where a lot of people want to live, you have to pay higher wages. So, wages are a lot higher in Palo Alto, California than they are in Dayton, Ohio. Some of that's due to what's going on in Palo Alto versus Dayton. That's the productivity part we're talking about. Some of it is the fact that a lot of people want to live in Palo Alto because it's got good weather and it's near attractive things to do. And that, in the same, is true for New York City and other great cities. Not to put Dayton down. It's a fine place. I'm sure there's a lot of nice things about it. But, land is more expensive in San Francisco and New York because more people want to live there than want to live in Dayton. That pushes up wages. Real wages are not as different between San Francisco and Dayton as they appear to be, because they don't, you don't normally correct for the high cost of living in those places. So, we tend to look at just nominal wages in a city, correct for inflation; but at a point in time you don't have to do that. The CPI [Consumer Price Index] in Dayton--the national CPI--is the same at a point in time. And so we, naively perhaps, deflate wages in Dayton and wages in San Francisco with the CPI. But, of course, the CPI you face in Dayton is very different than the CPI you face in San Francisco.
Philip Auerswald: Well, exactly. No, actually, I'm glad you brought that up, because that was the other element that I think we, that I think is really worth bringing back in here. Is, this issue of mobility in land values as they relate to all these questions. And so, the decrease in mobility in the United States actually has been a long-term trend. It hasn't been discontinuous. It's sort peaked in about 1985, and you have sort of diminished mobility, within-country mobility, ever since then. But, but, it's obviously related to land values. And I think it's also related to learning. Because, one of the significant factors [?vectors?] of learning, maybe more significant than the coffee shop, is being able to move from one job to the other. And so, in every job, then you have access to the firm-specific knowledge within that job. And in the city, of course, you have a much--sorry, a large, sort of dominant metro. You have a lot more job opportunities within the city, and a lot of opportunities to move within the city. Or, to be consulting or otherwise sort of interact with different firms. So, I think that's really an important vector[?factor?]. And it's really limiting if you can't get access to that. Or, if you can't leave your second-, third-tier city, maybe because your house is underwater in terms of its mortgage or literally under water. And, you know, so you are stuck where you are. And that will also affect your access to these learning opportunities.
Russ Roberts: My guest today has been Philip Auerswald. Philip, thanks for being part of EconTalk.
Philip Auerswald: Well, this has been terrific. Thanks so much.