Tyler Cowen (George Mason University Economics Professor and Mercatus Center Director) joins the podcast to discuss his career, various long-run economic and political trends, whether policy or culture matters most for economic growth, whether schools of economic thought are still relevant, the state of economics education, the success of Marginal Revolution University as well as finding entrepreneurial talent through Emergent Ventures.
Jon: “This is the Capitalism and Freedom in the 21st Century podcast, where we talk about economics, markets, and public policy. I'm John Hartley, your host. Today, I'm joined by Tyler Cowen, who's a professor of economics at George Mason University, the faculty director of the Mercatus Center, co-founder of the popular Marginal Revolution blog with Alex Tabarrok, a Bloomberg Opinion columnist, author of several books, including an economics textbook, co-founder of Marginal Revolution University, co-founder of Emergent Ventures, a fellowship and grant program at the Mercatus Center funded by the Thiel Foundation that seeks to fund zero-to-one ideas. Welcome.”
Tyler: Hello. Happy to be here. Thank you, Jon.”
Jon: “So, Tyler, I want to first get into how you first got interested in economics. You grew up in New Jersey. You did your undergrad at George Mason University. You got your PhD in economics from Harvard under the great Thomas Schelling. And then you came back to George Mason to join the economics faculty. How did all this interest in economics start?”
Tyler: “When I was 13 years old, I decided that I wanted to start to learn both philosophy and economics. So, I started taking trips to the Rivervale Public Library in northern New Jersey, and I took out the different books that I could. At the same time, my father had been a subscriber to something called the Freeman, which comes from Foundation for Economic Education, and that was about economics. I mean, even as a 13-year-old, I found that too boring. I wouldn't say I was attracted by the Freeman. It seemed too simple to me. But it nonetheless was a thing that showed me there was a world out there where people discussed economics. So, I started reading a lot of books, also, again, in philosophy at the same time. In philosophy, Plato made the strongest impression on me. In economics, Milton Friedman, Capitalism and Freedom, and also the Ayn Rand book Capitalism, the Unknown Ideal. Her fiction I was never that much into, and I don't really think she's very correct on matters of abstract philosophy. But her vision of capitalism as a system where people produce things and those people should have high status, that attracted me immensely.”
Jon: “Fascinating. It's interesting, because I think there's very few libertarians these days that sort of count Milton Friedman as a big influence. I feel like it's almost always Hayek or Mises that's fascinating, just in terms of the...”
Tyler: “I read Hayek when I was 14, Individualism and Economic Order, and that was a huge influence. But I did read Milton Friedman first.”
Jon: “But you were a bigger Friedman fan.”
Tyler: “Well, I don't know about bigger. Hayek to me did seem like the deeper thinker, but Friedman was more practical. And I had the sense always with Hayek there's some amount of BS in there, which maybe it's BS you might agree with, but it's a little too Germanic and metaphysical at times. And Friedman never made that mistake. And I just kept on reading. So, I read Adam Smith, probably I was 14. Read a lot of classical, early neoclassical economics. So, my own learning of economics, in a funny way, it sort of follows the path of history of thought a fair amount. And what most people learn in graduate school came to me really quite late. So, I rather intuitively can think like an earlier economist in a way that's extremely unusual today.”
Jon: “And so you had an early interest in free market economists, and that led you to George Mason as an undergrad. At what point did you know that you wanted to do an economics PhD?”
Tyler: “Oh, I think by 14, I was convinced I was going to be an economist. Philosophy seemed too impractical, and that there was not enough progress, maybe no real answers. So, I guess by 14, and the first textbook I read was Paul Hayne, The Economic Way of Thinking. Then I read Elshean and Allen, University Economics. Somehow, I got a copy of that, maybe from the same library. And that just put me on a pretty consistent track. And again, this is the 1970s. So, in the 1970s, it's very easy to grow up and think, well, all the free-market ideas are true. You know, the issues that were the issues then, there were very clear, simple cases for free market ideas. Like inflation was too high, marginal tax rates were too high, labor unions could screw up Great Britain. Go on down the list. Someone grows up today, well, there's climate change. Whatever you think of that, it's, like, very complicated, right? You don't just hear climate change and think, oh, I've got to be a free market economist. But the issues of the 70s were tailor-made for that kind of thinking. Communism was around and rampant and quite terrible. And you thought, well, you know, we want a future world where there's no more communism, of course, no more central economic planning.”
Jon: “Well, that's fascinating. I mean, it seems like, you know, trivial, I'm sure, to yourself at the time. But I guess, like, I think back to the 70s, I mean, there were even those in Richard Nixon's administration who were advocating for price controls. And I guess maybe it was obvious in certain corners. But I wonder, even then, like, I feel like it wasn't maybe until the Reagan revolution that sort of free market ideas became part of sort of the mainstream. Or I could be totally wrong here. I wasn't born until 1989, like, literally the day after the Berlin Wall fell.”
Tyler: “I think the undercurrent before the Reagan revolution was extraordinarily strong. And it attracted a lot of talent. And when Reagan was elected, it all seemed to me like old news. In fact, I thought Reagan would fail. There was a good chance it would be a bad thing that Reagan was elected. I was quite skeptical of Reaganism. So, it wasn't just new thing, like, oh, here's Reagan. I'm all excited about this guy's ideas. I was a bit rolling my eyes. And let's just hope this doesn't go too badly.”
Jon: “I feel like, you know, it's basically what kind of happened to Liz Truss, in a sense. You know, it's amazing how, yeah, it's still strange to me how no one basically even gave her a shot. There was this pungent sort of crisis that, you know, arguably was or wasn't her fault. And it's amazing how short-lived the Truss revolution was in comparison to this.”
Tyler: “Yeah, she had, what, a month. Reagan had eight years.”
Jon: “Right.”
Tyler: “And the thing about Reagan, I did foresee at all, I mean you can debate how much credit he should or should not get, but communism did fall exposed that ratified the whole era. And that was a shock to me, if communism hadn’t fell, I think I would have looked back on the Reagan years as, well they two, three good things. But this actually didn’t really deliver. And in some sense, domestically, that probably is the correct perspective. But of course, communism falling, reforms in China, just changed everything. And Reagan is seen as the U.S. president who is the embodiment of all that.”
Jon: “Right, absolutely. And perhaps even less so the Reagan free market domestic policy, but more so the Reagan strong foreign policy and Star Wars and all that, that I think sort of spooked the U.S.S.R. and sort of partially caused its eventual downfall. I mean, obviously the U.S.S.R. had its own internal problems as well. But yeah, fascinating part of history to discuss. So, you got into Harvard. You're a Ph.D. student economics at Harvard. What was the department at Harvard like then, when you were a student there?”
Tayler: “Well, this is, I believe, 1984 we're talking about, just to norm things. Larry Summers had just started teaching. Martin Feldstein was an important person in the department. People like Barrow and Schleifer hadn't arrived yet. A whole bunch of macro and theory people had just left. Olivier Blanchard had just left. So, people with a super short-run focus thought Harvard was in decline. That turned out really not to be true. Half the classes I had, I learned nothing. The other half, like with Summers, with Joe Colt, were just fantastically good. I was in an especially talented class of grad students. So, Abhishek Banerjee, who later won a Nobel Prize, he was in my class. Alan Kruger, who would have won a Nobel Prize had he lived, he was in my class. So, I think possibly we had the most talented Harvard class in recent memory or maybe ever. So that was great. But, you know, I was an outsider mostly. The faculty, I found, were quite tolerant. I don't have any complaints there. The other grad students, not necessarily. A lot of them were very left-wing, kind of whiny, wanting a bit, you know, to cancel people who are not like they were, calling them fascists and so on. They thought Reagan was this terrible thing that meant the end of the world. So, I had, you know, mixed experience at Harvard, but I have no complaints about the faculty at all.”
Jon: “How did you find Thomas Shelley? I mean, he was sort of, I think, in the Kennedy School at that time? Yes, but he had still kept his appointment in economics. So, the three people I worked with were Joseph Kalt, who had been in economics but moved to the Kennedy School, Richard Zeckhauser, I think he had then still a joint appointment, and Schelling had a joint appointment. And they just seemed closest to me. They were all great. You know, Schelling I ended up spending the most time with and got to know the best. And I'd read Schelling, you know, quite a few years earlier. And I just thought when I was there, I should go seek him out.”
Jon: “What were your fields?”
Tyler: “Well, my formal fields were public finance and industrial organization. And my examiners were Joseph Kalt and Martin Feldstein. And then the third whom they chose was Richard Cooper, who did international. We had oral exams back then. And those three people quizzed me.”
Jon: “Wow, that's fantastic. What a legendary group of Harvard professors to learn under. Those of whom saved maybe Zeckhauser, that's all past. So, you then joined the faculty of George Mason.”
Tyler: “Well, UC Irvine was my first job.”
Jon: “Okay, UC Irvine first.”
Tyler: “And Schelling helped me get that job. He was really instrumental in that. He did me some very significant favors. And favors is not the right word, but he helped me in some very significant ways throughout my career. And that was really a big deal to go to Irvine. And I had wonderful colleagues there, most of all, Amahai Glazer. But David Lilley and Linda Cohen, I just learned so much in my few years at Irvine. That was a great time. And I was like already too much in the George Mason bubble. So, to get out into the so-called real world was very important.”
Jon: “Fantastic. So, you wrote a bunch of papers on monetary economics with former Fed board member and Chicago Booth professor Rennie Krosner. You were in several papers on public choice and cultural economics, but now from what you've written you sort of describe yourself as more of consumer research than a producer. But you're very prolific in all your books, blogs, podcasts. Do you think that, I'm curious, do you think that economic research is declining in terms of its influence? Like if a bunch of, you know, Bloomberg journalists, for example, have the power to, you know, effectively launch, you know, sort of like a crazy macroeconomic theory like modern monetary theory and its advocates into the sort of the general public discourse or propel an idea like re-inflation, the idea that it's corporate greed that's driving inflation, not government spending or supply shocks, and hence we need like price controls to stop it. If journalists are that powerful to propel ideas into the mainstream or into the public discourse, it's like totally contrary to mainstream economic research. What does that say about the power of persuasion from mainstream academics? Has mainstream academia become too narrow in the questions that it's trying to answer with sort of the tidal wave of applied micro and empirical economics”
Tyler: “Well, it's a lot of different questions in there. I would respond to a few points. I think a certain kind of economics peaked in status in the 1990s when it seemed all neoliberalism was on the permanent rise. The world was simply globalizing. You know, reforms would work if you stuck to them enough. And those claims might still be true. That's, you know, one can debate that. But for a while after the 90s, they seemed less true than they seemed in the 90s. And everyone got confused. And then you have the financial crisis. I think today economic research is incredibly high quality in the sense that a very specific result, you should be more inclined to believe today than ever before. You look at even famous papers from the 1980s. I mean, so often they're just crap. You look at it and you're like, people believe that. Like, maybe it was the best estimate. I don't want to name names, but like very well-known people who were doing the best they could at the time, right? Like, it's not their fault. It's not that they were bad. Just that knowledge is cumulative. And now you read these papers, they're 97 pages long. The referee reports are 15 pages long. The responses to those create three new appendices and seven different extra robustness checks, but that's also overkill, and there's a definite loss of relevance in economics, much less than before. It has ceased to be a carrier of new ideas, is the way that I like to put it. So, in some regards, clearly higher quality, but less a carrier of good new ideas.”
Jon: “So, nothing is new under the sun. I guess, you know, we've had like a hundred, at least a hundred years of theory or so before empirical economics came along. I guess we're getting more precision in terms of these answers, but not many big new, sweeping, world-changing macro or micro theories, you know, maybe with the exception of sort of this idea of networks and like Matt Jackson's work or something like that. Like, I mean, could you even name like a theory like Akerlof and adverse election that's had as much impact in terms of, you know, theoretical contribution over the past like 20, 30 years? Like, I couldn't, I have issues finding an example.”
Tyler: “Like, I went to Harvard when theory was at its peak or a little bit past it. People still thought, well, we might figure out game theory and like what are the proper solution refinements for these games? But now you have empirics and even these pieces, while on average, I think they're very good. When they're bad, there's no way you can tell. They look so careful. You would have to redo all the research. And if there's mistakes in coding in there, which I'm not saying is the main case, but surely, it's going to be true reasonably often. You just never know. Like 1983, you could pick up someone's paper, read it, just kind of see how smart they were or what techniques they knew. And it was at a much lower level, but you could judge it almost immediately. Now you just have no idea where the bodies are buried. And that's another issue. Again, even though average quality is higher. So, I would say like Jeremy Stein heard behavior was the last significant new idea in theory. And that I think is 1990. That's a long time ago now.”
Jon: “Absolutely. But it's also meaning to a lot of these ideas are still somewhat timeless in the sense that you think about Thomas Schelling and the sort of stable equilibria and thinking about nuclear deterrence, we'll get into that much later. But it is interesting, this sort of trade-off now, we seem to be looking at smaller questions that have more precise answers, you know, deworming seems to make people better off in developing countries, a narrow question, but one that we can sort of answer more convincingly and with the ability to replicate them in, like, randomized control trials. But I'm curious, like, speaking sort of this topic of, like, growth, which is still sort of, I think, one of the biggest sorts of mystery questions of economics, you know, what causes growth. I recall, you know, in the past, you described yourself as a cultural economist. You like ranking cultures, places, and people. You do a lot of travel. You have all this interest in exotic food. Do you subscribe to the idea that culture shapes institutions, which then shapes economic growth? Or how do you go about studying cultures, and why do you think they matter?”
Tyler: “When it comes to economic growth, I think it's all mutually determined. But like many people I know, I would say over the decades, I have somewhat downgraded the importance I place on policy as mattering, and definitely upgraded the importance I place on culture. Just a simple example that popped up on Twitter, I think, yesterday. You look at Malaysia, which is a way above-average middle-income country, and I think ethnic Chinese in Malaysia, although they face some extra-legal penalties, they have per capita incomes, I think, of more than 2x higher than native Malays in Malaysia, living under the same laws, the same policies, with some disadvantages. So that has to be something like culture driving a more than 2x difference. I'm not saying every country's just like Malaysia, but the more you go to different places, you do see that, like, highly general theories, they don't quite work. You have places like New Zealand in the late 80s, early 1990s. They more or less did what economists told them they should do. In retrospect, I still think that was good advice. I'm glad they did it. I lived there at the time. I was involved. But in terms of per capita income, New Zealand hasn't caught up. They're at least 30 percent behind, depending, you know, what year you look at and how you convert exchange rates and so on. And they're not going to catch up, and they've repudiated a lot of those earlier policies. So, I now think there's some culture in New Zealand which is a particular way. It has its strengths and weaknesses. And my starting point for thinking about New Zealand is that culture, not the reforms they did.”
Jon: “That's fascinating. I mean, it's also super interesting to think about the interactions between culture and policy, too, in the sense that there are some places that just may not be able to have rule of law for certain cultural reasons.”
Tyler: “That's right. And in some places, rule of law is overrated. China has had an incredible growth record, certainly no rule of law. They have a system of corruption. I wouldn't call it efficient. But you basically get bribes by getting things built, and they've done well enough with that. In the long run, it's super dangerous. They need to undo it. They probably can't. They're locked in in a bad way. But you can't say rule of law is essential for growth. I might have said that when I was 14, but I've since then had all these decades of watching China and going there. And they've managed their own way, which I really would not recommend to other countries. But clearly, it's gone pretty well.”
Jon: “Yeah, but I guess also, I mean, too, that they're only at, in terms of per capita terms, sort of maybe at only like an eighth or a seventh of what the U.S. is. And so, I guess the question is, like, how easy is catch-up growth versus being on the frontier of growth in all sorts of fashion?”
Tyler: “But most countries don't even do much catch-up, right? And I don't think they're going to do any more catch-up for that matter. And I think they've painted themselves into a terrible corner for every problem they rely on the state. And all that was baked into their earlier successes. So, I get all that. I'm just saying when I was much younger and you told me, well, the Chinese, they're not going to do shock therapy, they're going to keep all these things, the state-owned enterprises, and you made me give a forecast, I would not have predicted 5 percent growth, much less an average of 8 to 10 percent. So that's a case, like, clearly, I was wrong or I would have been wrong if I had made a prediction. And I've changed my views. But I still see, you know, how screwed up China is. And the statism is already coming back to haunt them.”
Jon: “Absolutely. And it's also interesting, too. I mean, we had the exception of maybe China for a long time. People didn't really believe in economic convergence. And, you know, there were these papers like Divergence Big Time by Long Pritchett that were written. And, you know, why weren't poorer countries growing or catching up? And interestingly, if you look at over the past couple decades since around the year 2000, it seems like some of these poor countries are finally starting to catch up.”
Tyler: “But then all these other places don't. You know, you can look at Ireland and Singapore and decide, oh, FDI is so important. And it is for those places. You look at Japan, Korea, and you might think, oh, FDI, it's not really actually that important. And both views in some ways are correct. And you need this bigger picture where you're willing to relax some generalizations and just realize the contingencies of a lot of things. And that, to me, is what makes travel important. Travel is how you learn the contingencies. And you're always forced to reexamine what you thought you knew.”
Jon: “Absolutely. So, I want to pivot into the Marginal Revolution blog. You started the Marginal Revolution blog in 2003 with Alex Tabarrok. Obviously, you were ahead of everyone else in terms of starting a central repository for economics news and information, well ahead of Twitter in what it's kind of used for today. What led you to create the Marginal Revolution blog, and what is the original story behind it?”
Tyler: “Well, the person who got me interested in blogging was Eugene Volokh, who for a brief while had me writing a Volokh conspiracy, which still exists. It was mainly a legal blog. And working with Eugene on that, I realized blogging was a kind of future. And I thought, well, there should be a pure economics blog that does for economics what Volokh conspiracy was doing for legal scholarship. So, I went to Alex Tabarrok. He and I were talking. Alex came into my office, and he said, Tyler, we should write a principles textbook. And I said, Alex, we should write a blog first and then write a principles textbook. And that's what we did. And that was 20 years ago, almost. Not to the day, but like one more month. It'll be 20 years, I think.”
Jon: “Wow. And it's just amazing in terms of the influence that it's had. It's certainly one of the blogs I read every day. One of the few blogs left. I guess there aren't so many blogs now around so much is pivoted to Twitter. But I feel like it's one of the few news sources that I read every day, which speaks to just how successful it's been. So, you recently told the Financial Times that your personal ambition as an economist is to be the individual who's done the most to teach the world economics broadly construed. And I'm curious to sort of get into Marginal Revolution University. What is it, and how is it different from other ways of teaching basic economic concepts? And how many people has it reached, if you have any sort of general sense of what the statistics are?”
Tyler: “Marginal Revolution University is a series of YouTube videos that teach economics. We have a complete micro and macro class up, but we have about 20 classes in total. Our micro and macro classes are generally at a pretty high technical level. And some of them we have actual movie makers come in and film us, like we're making a movie. So, we're the number one economics blog as far as I know. We get emails every day, most of all from India, but Middle East, all over the world, also America. We're now in 18% of U.S. high schools.”
Jon: “Oh, wow.”
Tyler” “And we aim to be in that 25%. So those can be varying degrees of use, like we would count just one video, but that's something. So, a lot of people learn best by video. And we were, you know, very early putting basic economics lessons on video. Unlike a lot of what I write, you know, it doesn't try to be too complicated. It really tries to make things simple. Like, here's why the demand curve floats downward. Here's the effects of attacks. Here's what elasticity is. And the world just needed that, so we thought we would do it. And we've now been working on it, I don't know, eight years? I'm not sure. And it's gone great. I don't know what our total number of unique views is. It's like many millions.”
Jon: “I mean, that's incredible.”
Tyler: “Yeah.”
Jon: “I mean, 18 to 25% of high schools. That's incredible.”
Tyler: “Well, we're not at 25%. That's the goal.”
Jon: “Oh, that's the goal. OK.”
Tyler: “Yeah, but, you know, we're in the teens.”
Jon: “Being in the teens, I mean, having even just a couple percent is incredible. I mean, so, like, is it – I guess it's a free thing you can access. It's just like on YouTube.”
Tyler: “No ads. You can do it without losing any privacy. Like, you can sign up for updates, but you don't have to. You can just click and watch, and then you're anonymous to us. So, it's very school-friendly. Teachers don't feel they're, like, helping someone make money off the kids. And that's on purpose. And we try to make it as easy to use as possible. And it's not like eventually some other product we sell you. So, it's there. You know, that's it.”
Jon: “That's incredible. So, the teachers, they still come up, like, with their own tests and stuff like that?”
Tyler: “We have test banks, and we have problem sets and exercises and multiple choice. That's a very important part of teaching, not just the videos. Our core videos, when you use them, you can quiz yourself, which people really like. Not all of the videos have that, but micro and macro does. So, we've tried to make it as complete as possible. I teach online principles course every year. This year, I'll have over 400 students. And there's an online text, but most of the students actually use more video than text. They have the choice, or they can do both. And they use those same Marginal Revolution University videos. So, it's possible to teach the whole principles class online from start to finish, where no one has to talk into a Zoom camera or show up in a classroom. And there's massive access demand for that class.”
Jon: “That's incredible. How do you think economics education is changing? Like, obviously, you're a big part of that change that I think is underway. And do you think that, like, in the future, you know, classic textbooks, like, of the sort of Samuelson and Mankiw's principles of economics will matter less? And, you know, will fewer people acquire capital through, you know, traditional universities versus, like, online options like YouTube or Coursera or, I guess, you know, Marginal Revolution University? I mean, again, like, it seems like, you know, actually having coursework and tests and some sort of learning enforcement mechanism is sort of really important for actual retention. Like, I don't think I can learn something as well if I'm listening to YouTube videos versus, you know, watching videos or taking sort of instruction and being forced to remember something and write something down, like on a test or in an essay. But, I mean, how do you see the Internet and sort of educational instruction online disrupting how economics has been taught?”
Tyler: “People have different learning styles, so I think we're going to have a lot of different options forever. But I think the modal option in equilibrium will be a mix of YouTube videos, an AI bot that you quiz and quizzes you all the time, and then an instructor who comes by periodically to encourage you and pat you on the head. Most of your learning you do from the video and the bot. Okay, clearly there are people who want something other than that and they'll be able to get it.”
Jon: “Yeah, I wonder too whether...”
Tyler: “I don't think that's 80% of the market, but I think it's at least 30 to 40 percent, and it will be done more than any other single option. I mean, do you think somebody could use ChatGPT to cheat on a microevolution exam? I mean, I guess there's got to be some enforcement mechanisms to making sure people are actually learning rather than just copying or outright cheating. I always wondered, like, maybe actually people actually do written tests as opposed to anything using a computer. I mean, at this point, if you have access to ChatGPT, I'm sure that, which I'm sure obviously students do, there's almost no way to prevent or even maybe even detecting. I know there's, like, DetectGPT and things like that, but I feel like as long as chatbots stay one step ahead, they can probably figure out how to outsmart the detection algorithms.”
Tylor: “People also use it to cheat in class, but I think basically, as of now, we will need to enforce all exams to be in the classroom and ban all smartphones. This is not what we are doing. I think we should do this for all methods of evaluation, including for my classes, but that's not up to me. So, I think it will rapidly be a crisis and we'll need to act, but nonprofit institutions of higher ed, maybe you've noticed this, they're not always the quickest to respond to a crisis.”
Jon: “Yeah, absolutely. I mean, it's fascinating to think that, you know, going back to, you know, pen and paper, you know, interesting how an old-school technology is maybe the best solution to this. I'm curious, would you support, you know, mandatory economics education in schools and do you think that would be sort of like broadly impactful to society?”
Tyler: “Well, if you mean in high schools, we face this issue with Marginal Revolution University. One reason we're so popular is a lot of state legislatures have mandated such education, but there's no one in the school who can teach it, especially smaller schools, rural areas. So, they turn to us, which I'm very happy about. In principle, I like the idea of mandatory economics education, but if you're doing it in states and school districts where there are no teachers, or maybe the teachers have negative value, then of course that's a problem. So, we're kind of in between right now, and we can't quite deliver on the mandatory side of the promise. So, we should be a little skeptical.”
Jon: “That’s fascinating. Which states have some sort of mandatory economics component to it?”
Tyler: “It's really quite a few. More common in Republican-run states, I think North Carolina is one of them. I think Virginia is one of them. I once knew the list, and states get added to that list, but not very much taken off, because more laws are passed than ever revealed, as we know. So it's a lot of the country. And again, it can go very well. I think high schools should teach you personal finance, like buy and hold, diversify. Here's compound interest, here's borrowing money, what it means. And many do a good job, many don't. We have a lot of videos on personal finance also, just trying to teach people those basic truths. Like, don't just think you can beat the market. Trading a lot doesn't have to be a good thing. Diversification is a very high value for your own portfolio.”
Jon: “It's fascinating how, I think, despite all the attempts to teach these things, which I think are all good and true, how difficult it seems to actually get those things to stick with the broader public. Speaking of Virginia, you're – and you get back to George Mason University, where you currently are a professor. You are described as sort of being in the public choice wing of George Mason University. I sort of want to get into sort of schools of economic thought here, because I do think that it's kind of relevant to how we teach economics. And it's one of the things that people tend to think about first, I think. Certainly, those that have only taken maybe one or two classes in economics. On your blog at Marginal Revolution, you often post about, like, Austrian business cycle theory. You describe yourself as a state-capacity libertarian. You're one of the leading thought leaders in the sort of state-capacity libertarian school of thought, which I think, to paraphrase, means something like the broad-strip belief in incentives, markets, and capitalism are very powerful, but sort of work in conjunction with political realities and political governments. Correct me if I'm wrong there. I mean, how would you describe your views in general about the role of government in economic well-being? I mean, do you think civilization policy makes sense from both sort of monetary and fiscal policy sense? Do you think there's some role for redistribution? And do you think that policy and perhaps institutions depend on how one defines it sort of matters for both? And I know you mentioned earlier that you sort of backed off a little bit from policy and shifted more toward culture. But I'm curious. Like, I feel like these are sort of like bedrock things. You know, like are you a Keynesian versus a Chicago school or Austrian economist? I feel like that's one of the first things that when you talk to people about economics and they've only had that one class, those are one of the first things they talk about. And where do you put yourself in that? Assuming you think it's relevant, too.”
Tyler: “Yes, there's a lot of, again, different questions in there. Certainly, my biggest early influence was the Austrians, and I would not discount that as an enduring influence. But unlike a lot of Austrians at the policy level, I do think we need a social welfare state. It's only to keep democratic capitalism stable. It might be overrated; how much welfare actually helps the poor and other people. But I think it's essential. And you don't end up with a freer society if you try to get rid of that. And none of the major reforms in Western countries have succeeded in getting rid of that, which I take seriously. Now, monetary and fiscal policy, I tend to think monetary policy is more powerful, as Friedman did. But fiscal policy, there's a very simple rule that I see very under stressed, and that's just spend on projects that have a greater-than-one benefit-to-cost ratio. And if you want to use this project for a cyclical policy, okay. But if you screw that up, you're still spending money on something worthwhile. Somehow that gets lost in the scuffle, and everyone's talking about canes and digging ditches. I mean, you say that stuff to the public, you're not doing fiscal policy any favors at that talk. Oh, it's going to be great, it's a free lunch, we can waste the money, aggregate demand goes up. The best way to get aggregate demand up sustainably is to produce things that are valuable and generate enduring real incomes, and that pushes you back to this cost-benefit rule. You want projects where the benefit exceeds the cost. That, to me, is so simple. It doesn't make you anti-fiscal policy per se. I just think it's a very, very, very good rule of discipline. So that makes me, I don't know what you want to call it, you could say fiscal conservative. But again, if the project is good, I'm very willing to spend.”
Jon: “I guess there's a question of how many government projects are there out there that have such positive benefits. When we're talking about fiscal projects now, you think about the so-called Inflation Reduction Act, all these, you know, EV subsidies and things like that. You know, it totally just depends on, like, what your forecasts are in terms of, you know, the social cost of carbon and things like that. Like, I've always sort of seen fiscal policy as sort of, like, there's, like, sort of two different styles or two different types. You know, there's the actual government spending, you know, the big G, which is, you know, tanks, you know, equipment, things like that. And then there's sort of the fiscal transfer side of things. And obviously, like, if you go back to 2008 stimulus, that was very focused on those sorts of physical sort of capital and big G projects. And those things tend to have sort of smaller fiscal multipliers, fiscal multipliers in general, whereas you look at things like transfers, like stimulus checks, things like that, seem to have much higher, seem to have much higher fiscal multipliers, but then also sort of, I think, have a greater tendency to spur inflation, and they've become much more popular in the sort of COVID response. And do you think that, like, how would you think about, for example, transfers in this?”
Tyler: “Well, just a few points. I think the data shows that transfers from 2008, 2009, they were not very effective. People didn't spend much of the money, assuming you wanted it spent. So that's one reason why we so overreacted when we did, basically, the $4 trillion of, like, combined monetary fiscal policy transfers. It was way too much. The people had this immediate background experience, were way underperformed. So, I think one cautionary lesson there is just how much policies can be context dependent, and don't assume, you know, you're fighting yesterday's war. Now, the 2008 fiscal stimulus, on my sense, and Mercatus commissioned some research on this, is it didn't put that many people back to work. It mainly chased after the laborers who already had jobs, and the problem workers were lower skilled than who typically might be useful on a lot of these government projects. So, if the employment effects are not that positive, well, you'd better hope they're good projects, right? It's back to my earlier point. Now, there's so many projects they did, most of which I've never looked at, or I'm not even aware of. I would just say, you know, you want to look at them and just try to do the good ones. That was not the emphasis at the time. I'm sure a whole bunch of them were quite good, and I'm pretty sure a whole bunch of them were not quite good. But we're approaching it too much with a macroeconomic lens, and not enough microeconomic discipline, I would say.”
Jon: “Absolutely. I mean, it's interesting, too, you know, you think about the American Recovery and Reinvestment Act, and how sort of, yeah, I think unprepared we were for that, in the sense that Congress can't pass a bill that, you know, is at the tune of hundreds of billions of dollars and you don't even necessarily know where to spend it. Like, I think there have been some good sort of initiatives in recent years of trying to, like, come up with, like, lists of sort of, like, you know, ready-to-go projects or ideas, you know, really sort of an infrastructure space. Here's a list of bridges that actually need to get rebuilt. And now they can be sort of finally done. And I think in part that did to some degree come into fruition in sort of the 2020 aftermath and infrastructure bill that actually got passed recently and so forth. But I guess I'm just curious, like, in terms of getting back to sort of teaching and just the state of economics as an academic discipline. I mean, schools of thought have traditionally had a lot to do with economic theory, particularly macro. I mean, do you think that schools of economic thought will matter less in the future with the rise of empirics and bioeconomic? Like, traditionally, you know, teaching history of economic thought in schools of thought has been, I think, you know, a big part of how we teach introductory economics. Keynesianism versus Chicago School of Monetarism versus, you know, Austrian School or something else. I mean, a lot of people who don't have much economic education, I mentioned before, still seem to know a lot about history of economic thought, but don't actually know a ton of economics in detail or a ton of sort of microeconomics. Do you think, you know, how we should teach schools of thought, how we teach schools of thought, is that outdated? Will they matter less in the future? Like, if you go back to, you know, the 70s and 80s, it was a big deal when somebody said they were a Keynesian or a Monetarist. Then this was certainly Milton Friedman versus others, Milton Friedman versus Samuelson. They had, you know, dueling these columns. Even more recently, like I remember when it was a big deal, when Richard Posner in Chicago sort of traditionally associated part of the law and economics wing of Chicago School sort of, after 2008, sort of declared he was a Keynesian and, you know, we need to rethink that. At that time, that seemed like a really big deal. But now with sort of the applied micro takeover of economics, like schools of thought, apart from sort of these things in the media, like modern monetary theory or people that pride themselves on being Austrian, GMU I think is a bit of an exception, I just don't hear about schools of economic thought as much anymore.”
Tyler: “Yeah, we're not supposed to talk about them. It's fallen into ill repute. But I would say if you don't talk about schools of thought, you will end up as a prisoner of at least one of them and not even know it. But people do approach questions with presuppositions, and when they pretend, they don't, typically that's when the presuppositions are the strongest. So, I would like to see more schools and graduate schools teach history of economic thought. My next book will be on history of economic thought and the great economists. So, I'm doing my bit, toward this end. But I don't see us as overturning what is the current trend of all these super-long, super-capital, empirical papers that pretend there aren't so many presuppositions behind it all.”
Jon: “Well, I mean, it is fascinating, because I do think that some of these applied micro-papers can sort of answer or shed a lot of light on some of these schools-of-thought questions. Like, I'm a big Milton Friedman fan, but one thing that he kind of wrote about in Capital and Freedom was this idea that fiscal policy just—almost as if the fiscal multiplier was zero, or these, like, balance-the-wheel sorts of approaches that he labeled, that they wouldn't have any effect on economic activity. But we have a lot of great data now, and we have tons of natural experiments, and I think it's pretty clear that, like, the marginal propensity to consume is something, and fiscal multipliers per product is something. And certainly, like, there's an associated cost with each of these things. And sure, maybe if you're doing it in a micro sense, you're not accounting for general equilibrium effects that may make the multipliers actually much lower, and there's some evidence of that out there, too. But I guess, like, at some level, I feel like there's maybe a new sort of synthesis that's occurred in this applied micro world where, you know, at some level, every school was sort of right in some sort of level, but maybe not as much as some of its sort of biggest proponents once claimed. You know, the monetary policy isn't as impactful, or certainly monetary aggregates don't seem to be as predictive of inflation at a smaller scale or over shorter periods of time. But clearly, you know, they matter over longer periods of time, and, you know, every big inflation is associated with a big increase in supply of money. And similarly, you know, same thing with sort of fiscal policy. It's like, yes, you know, there's fiscal multipliers that are greater than zero, but it's not like projects are often at all self-financing. Like, I'm curious what your take is on, like, are we in a sort of new neoclassical synthesis, or I guess what some people name these things. Like, if the average economist, applied economist, he's part of a school, what school would that be, I guess, even if they didn't know what school they're part of?”
Tyler: “I think I strongly agree to just about everything you said. I'm a little cautious to label it a new synthesis. I think there are macro truths that actually change over time, and this makes me nervous. So, when Milton Friedman wrote and made those claims about the money supply, I thought at the time they were pretty well justified. You can go back and reread those papers. He was not crazy wrong. But that said, after some date, M2, say, does really seem far less predictive than it had been in Friedman's time. So, I think most of all we need to keep an open mind about, like, our current synthesis, whatever we call it. Well, that's maybe going to change, too. There might become more Friedman-ized, if possible. I don't really have a prediction, but just to keep an open mind, McCain, Friedman, Hayek, I mean, they're all great macroeconomists. It's easy to pick out cases where they're clearly wrong and dump on them, but the real skill is seeing just how much talent and insight they had and trying to carry that with you while realizing on a given case it might not be a case where their ideas really apply either.”
Jon: “Absolutely. I mean, it's asking how, I think you wrote a column recently about how maybe monetary aggregates are kind of relevant again. You know, M2 shot up until it was inflation. It's fascinating how sort of over 30 years or so after inflation became totally stable and it seemed like we couldn't really target monetary aggregates when the Fed was trying to in the late 80s. That sort of failed and money demand was unpredictable. I guess, yeah, to your point, it totally depends on maybe the macroeconomic regime and maybe in very good, very stable times it becomes much more difficult to correct things versus when, you know, money supply is growing super rapidly then becomes relevant all of a sudden. So maybe speaks to just we don't necessarily realize how good we had it, you know, that great moderation through, you know, up until COVID sort of period where we had low inflation. Just to sort of pivot to sort of this topic of growth again and innovation. You are, you know, very active in actually funding innovators. Can you explain what Emerging Ventures is all about? It's backed by the Thiel Foundation. What's your philosophy around finding talent? You've written a book titled Talent. I'm curious, what spurred you to sort of jump into this game of backing people and how did that come together? I think that's something very rare for an economist to be getting into and all the more interested.”
Tyler: “Yeah, it's a little more than four years old and, you know, I have long-standing experience in the world of philanthropy and I often found it frustrating. So just how long it can take to apply, how long the application has to be, how many different committees or layers of approval it has to go through. Maybe fine for some purposes, but it's become far too bureaucratic and this is America's private sector, right? Not the governments that make foundations do this. So, I tried to reimagine philanthropy as if I were designing a system from scratch and the key components of what we do is two percent overhead. So, if someone gives us a dollar, we'll spend 98 cents of that dollar. That's remarkably low overhead, as you may know. A university could charge a minimum of 20%, sometimes 50%. So, we're doing two percent overhead, one layer of no. So, there's one person who can give the green light or red light. For many grants, that's myself. So, I now have separate individuals. One does India and the other does Africa, but I do the rest of the world. And then most people get an answer within two weeks. Very often you get an answer within two days and things are very quick and if you are awarded something, we just send you the money and your reporting requirement... Your report cannot exceed one page in length, and we don't want it formatted. And that was just my view of one ideal way of doing philanthropy. And I'm not paid to do this, and there's no staff that's being carried. No, like, buddies I've got to keep on payroll. So, it's not my incentive to be risk-averse, keep the money coming in, do a lot of safe grants, hand out everywhere to please everyone. My incentive is just to pick what I think is good. And the people who do India and Africa, you know, Shruti and Rashid, they face the same conditions. So, for me, it's been a great experiment. I'm very happy with it. I'm going to do more. You mentioned Teal Foundation. They were our opening grant, and that was incredibly important. It would not have existed without them. But in terms of total funds, they would not be at 2%, so it's not mainly money from them or any single place.”
Jon: “I mean, it's incredible. Like, at some level, I feel like this is totally turning the existing system of grant-making on the part of, you know, governments, universities, you know, I think the National Institutes of Health or I think National Science Foundation. I feel like it's totally turning that on its head because I feel like that's become such a bureaucratic process. Like, how do you have the time to even – I mean, you're managing a blog, which you're posting several times a day. You've got podcasts. You're writing books. I mean, like, how do you have the time to review, like, ideas? I mean, you're just – you just answer them as soon as they come in. Is that sort of your process?”
Tyler: “A lot of the no's are immediate. But look, you've got to work hard, right? You can't waste time. But I also view the different activities as supporting each other, feeding into each other. So, when I read all these applications, typically from younger people or emerging ventures, I feel I just really have my finger on the pulse of where innovation is happening or maybe will be happening. And that makes me much better at all the other things I do. So, it is a lot of time. But in this regard, they're not totally separate activities. You know, I have my own views where I'm bullish, bearish. And it's not that I'm technical experts in these fields. I just look at the levels of talent being attracted. And if a lot of smart young people are doing something, I become way more bullish on it. So, I think it's not a bad metric.”
Jon: “That's fascinating. And I guess, like, do you find that some of the best ideas come from within the U.S. or outside the U.S.?”
Tyler: “Well, I know you're from Toronto or you're there now. I've been amazed of the quality of applications from Ontario. And it's typically children of immigrants living right outside of Toronto but not in Toronto. They're one of the strongest groups I end up seeing. And I didn't really grasp that before doing Emerging Ventures. So, of course, I'm way more bullish on Ontario than I used to be. And I know a lot of them end up in the U.S. But still, Ontario is this incredible talent pool. I don't even know if Canadians fully appreciate it.”
Jon: “Well, it's fascinating, and I know there's a new initiative that's been brought forth by the Trudeau government tech transfer program, and the idea is, you know, that those H1Bs, sort of, these issues can sort of move to Canada. I mean, it's interesting, and maybe just speaks to, you know, migration, and, you know, you look at, sort of, different migrant groups and ethnic innovation. You know, Bill Kerr has done a lot of research on this, and I know that one of the interesting findings that you'll find in the USPTO patent data is that ethnic Indians often have the highest patenting rates, well above any other ethnic group, as well as Asian immigrants, and interestingly, Canada, for, I think, a number of reasons, tends to select on those particular immigrant groups in particular, which I think, in general, have these very high rates of patenting and innovation, and so maybe that is a part of, and just having an overall, an immigration system that's more conducive to high-skill immigration and just allowing more high-skilled immigrants in, in general, is part of that. That would be my, sort of, working conjecture.”
Tyler: “Yeah, sure, and India is still greatly underrated, even after all the recent coverage, which has given it more deserved attention. There's so much coming from India. I think India will be, for the next, like, 30 years, what Central Europe was for the early to mid-20th century, and the world just hasn't digested that yet. This is why I set up Emergent Ventures India as separate. I was getting so many good India applications, and Shruti Rajagopalan, who runs that, I just thought it needed its own person, and someone who, of course, was from India and knows India very well, and that's just gone great, so I'm super bullish on India also, yes, and Indian migrants both.”
Jon: “Totally, I mean, it's just a whole study of innovation and migration. It's one of my own personal research interests, but I want to sort of move back to Thomas Schelling and sort of this topic of where the world and its geopolitical system is going and where its various global systems are going. Nuclear war, to try and seem like topics that are sort of now backed in, along with sort of the state of democratic political systems, I think the latter's maybe a little overhyped and certainly been around since the mid-2010s with the election of sort of various so-called populist candidates. But, you know, get back to your late Ph.D. advisor Thomas Schelling, you know, who thought a lot about nuclear deterrence and nuclear equilibrium, you know, we have this Oppenheimer movie coming out this summer about the Los Alamos National Laboratory and the development of the first nuclear weapons. You know, we've got this terrible and strangely rare land war between a nuclear power, Russia, and Ukraine. You know, it seems like very, very rare that we see something like that. How transformed do you think the sort of just nuclear in general has been since the 1940s? I mean, do you think that, obviously, you're like an advocate for sort of renewed nuclear power or renewed reliance on nuclear power as an energy source. I mean, do you think that nuclear disaster of some form is like inevitable over the next century or a couple centuries and avoiding conflict, you know, between nuclear powers seems to be working so well up until recently this era of the sort of end of history and last man in the 1990s. I feel like that was sort of like the peak, you know, kumbaya amongst democratic capitalist nations moment occurred. You know, it's also after the end of the U.S.S.R. and communism when sort of, yeah, that Fukuyama narrative sort of really took hold and we had, you know, again, this idea that harmonious global democratic capitalism was sort of the end state of political history. But I mean, recently we've seen all these, you know, aggressive non-democratic countries like China, Russia, Saudi Arabia, and even a case being made that, you know, democracies made way in India and all this sort of new battle lines drawn across various allegiances. I'm curious, like, where do you make of the future in terms of its global political economy and conflict?”
Tyler: “Well, in any given year, the chance of nuclear weapons being used, I think, is extremely low. And that's good news. But as you know from probability, the clock ticks and you have enough years, the chance they will be used is actually pretty high. And that's what worries me. It may even be accidental use, but things can spiral out of control. So, at some point, the accident will happen or the war will come, and that will be a terrifying time. We'll need to get through it. I think it's implausible to think nuclear weapons never will be used. I've been very deeply concerned with this. I mean, even before I met Schelling, it's partly why I sought out Schelling. And I've never had a period in my life where I thought I didn't need to have this as my number one worry for the world.”
Jon: “I mean, I'm curious, so nuclear stuff aside for a moment, I'm curious, like, what do you think about, you just wrote a review on your blog of Patrick Deneen's new book, Regime Change, and he's sort of this, you know, post-liberal, you know, we need to rethink liberalism, like, what do you think is the state of free market capitalism and sort of democracy in the world today? I mean, do you think that sort of the end of democracy is like a very overhyped narrative? Do you think that we're sort of in a new Washington consensus that free trade and things like that are kind of a bygone or past era, and even free capital flows, the IMF isn't really big on anymore? Are we kind of in a new regime that has some sane power in terms of how sort of international economics should be working, or do you think that this is just all kind of a flash in the pan and we'll get back to, you know, neoliberalism sooner than we know it, or maybe we're just neoliberals under a new name, I guess, is maybe a third option, I guess?”
Tyler: “I think media overstate a lot of trends, so clearly cross-border immigration is down more broadly, but trade across borders really is not down. It's proven remarkably robust, even with COVID, which was a huge negative shock of some kind. Some countries are less democratic. Turkey would be an example, though they do still have elections, which seem to matter, but you can see more countries going backwards than forwards. You could say Peruvian democracy is under threat, a number of Latin countries, maybe the risk of a nondemocratic coup has gone up. So, we should be concerned. But I think that as a trend it is much, much overstated, and the successful countries where people want to live are democratic capitalist countries, and everyone more or less knows that, and I don't think that's going to change. So, I would still bet on democratic capitalism and its associated ideologies. I know it's somewhat out of fashion, but it’s what people say and what people do. And just look, where do people actually want to migrate when they have the choice? It's obvious which places and systems are still winning, and I think that enduring truth will prove more important.”
Jon: “Do you think that this whole sort of new wave of ideas around industrial policy, do you think that that has staying power?”
Tyler: “Well, I think for green energy we have to do something. I'm never sure what is best to do, but if we do something that rubs me the wrong way, I feel there's some version of that I need to accept. I'm not sure we're doing the right version of that, but, like, something's going to happen that free-trade lovers will not be entirely comfortable with. I don't know if we'll solve, you know, the carbon emissions problem, but wherever we end up, you know, I think it will be a one-time thing, and more and more of the economy, which is relatively free, will grow at the expense of the parts which are not relatively free. Just like, say, the tech sector has kept on growing. Now AI is likely to grow as a part of our economy. So, the long-run prognosis, I think, looks pretty good for neoliberalism, and this exception for green energy, again, I think we need to do something. So, for me, it's not the end of the world. But again, if you look at the details of what Biden has done, there are still a lot of good criticisms you can make. It's like jobs created count as a benefit, not as a cost. And we as economists more or less know that's wrong, right?”
Jon: “Absolutely. Tyler, we've seen both economic growth and population hit a slowdown, certainly in developed countries over the recent decade. I mean, do you think that economic growth and population are hitting an upper bound? And why do you think this may or may not be the case? I mean, do you think that there's economic reasons or cultural reasons underlying this phenomenon?”
Tyler: “I think the main cause behind the demographic slowdown with population is simply the ongoing spread of birth control, and many women realizing that having more than one kid is not always that fun for them. It's not obvious that that will change anytime soon. The economic growth slowed down. I think artificial intelligence will in due time reverse and that we have a new transformative general-purpose technology that will have many applications. And I think we'll see a lot more progress again, and the world will change rapidly and will feel very weird for a while. So, we're going to get a mixed bag. Elon Musk is right. We need to worry about shrinking population. But we have a lot of time to solve that problem. I don't think at the moment we have any solution in sight.”
Jon: “Well, I'm curious, you sort of outlined some technological and sort of economic reasons. There's obviously some people believe that the cost of housing is a big part of why people are having less children. I think certainly land use regulations are a huge issue causing housing supply shortages, not just in the U.S., but across developed countries. And some have sort of responded that we need to be in these and get affordable housing. Some places like Hungary and the German government are changing tax laws so that people have more than four children and don't have to pay tax for the rest of their lives. I'm curious, you're a cultural economist. I'm curious, you don't see this as maybe being sort of a broader cultural phenomenon. I've seen some statistics from Pew, for example, that those that have seen a decline in religious beliefs, or, you know, say, recent decades are, you know, a big chunk of those who are less likely to have children. I mean, often these things, it's kind of an all-of-the-above answer, and it's not just sort of one monocausal type explanation. But I'm curious, like, do you see sort of, like, any sort of interactions between culture and technology? You know, people are spending, you know, two or three hours a day on their cell phones, on social media. Maybe that's affecting culture in such a way that, you know, that they, I don't know, don't feel as much social pressure to have children. When, you know, traditionally, you know, if all your friends were having children, you know, there'd be social pressure on you to do so. Do you see there being sort of, like, maybe a cultural explanation?”
Tyler: “I don't think it's mainly economic. So, as you know, Japan has built plenty, and their TFR is about 1.3. South Korea has built plenty. It's not as cheap to live there as in Japan, but their TFR is 0.8. Countries that have tried birth subsidies, which I'm willing to try, but it doesn't seem they've been especially effective. Maybe they're just not big enough yet, but at some margin, the expense really matters, too. So, I think it's mostly cultural, and the joys of raising children have not gone up as much as the joys of doing other things. Maybe that's the key problem.”
Jon: “Wonderful. Well, Tyler, I'm going to have to stop there. It's been such an interesting conversation, and a real honor to have you on. So many thought-provoking questions and answers. Thank you so much for joining us today. Certainly, looking forward to your upcoming book on schools of economic thought and famous economists.”
Tyler: “Great to chat with you.”
Jon: “Today, our guest was Tyler Cowen, who is a professor of economics at George Mason University and the faculty director of the Mercatus Center, as well as the co-founder of the popular Marginal Revolution blog. This is the Capitalism and Freedom in the 21st Century podcast, where we talk about economics, markets, and public policy. I'm Jon Hartley, your host. Thanks so much for joining us.
