Category Archives: Growth Causes and Consequences

A thought experiment on living standards

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Russ Roberts’ latest video.

He asks how willing you would be to take your income today back to 1973 and buy the goods and services available back then at those 1973 prices, or whether you would prefer to stay in the present.

That is, suppose you were offered a time machine in which you could take your current income and use it to choose from a 1973 market basket. Would you get into that time machine?

The official statistics used to calculate inflation and “today’s real income in 1973 dollars” would say that it’s obvious you should get into the time machine. You’ll be so much richer, buying a new car for less than $5000 and buying gas for less than 60 cents a gallon.

But a lot of people would think twice about getting into that time machine. No Internet, that 1973 car won’t be roadworthy very long, when you go Israeli dancing you’ll be stuck doing the boring oldies (for some reason, Russ doesn’t mention that last example), etc.

The bottom line is that the official statistics probably vastly over-estimate the satisfaction you would get out of getting into that time machine. Russ argues that this means that the official statistics under-estimate the gains in satisfaction that have taken place from 1973 to today.

Another way to run the thought experiment might be to take 1973 income and apply it to today’s goods and services. Suppose that you are in the 65th percentile in the income distribution today. Go back and find the 65th percentile in 1973, in 1973 dollars. Now, give yourself that amount, which might be $25,000 (I am totally making that up). Would you rather have that income today, or would you jump into the time machine to take it back to 1973?

Suppose that with an income of $25,000 you would jump into the time machine, because today’s rents and cost of other basics make that $25,000 look puny. You’ll do without the Internet, the more durable car, and the more exciting dances, thank you very much.

Now ask, how much more than that $25,000 would you need in order to talk you out of getting into the time machine? Suppose you would be content with $50,000. In that case, your subjective cost of living has gone up 100 percent, because you asked for an additional $25,000. But the official statistics seem to say that the cost of living has gone up 500 percent, implying that you would require $125,000 to talk you out of jumping into the time machine. That is a big difference. The official statistics are probably heavily biased to overstate the rise in the cost of living (which means that they understate the improvement in living standards) by a substantial amount.

I know what you’re thinking: these thought experiments are ridiculous. We can’t really use them to measure living standards. But the official statistics, and the claims people make about stagnation or growth based on those statistics, amount to thought experiments.

Thought experiments are all we have. It’s just that some of them are blessed with “official” status. And they are probably way off.

Russ Roberts and Arthur Diamond

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on Diamond’s book, Openness to Creative Destruction.

One point of interest is that Diamond offers a contrarian take on the common story that the Internet came from government and DARPA. He argues that DARPA’s vision was largely to connect mainframe computers at research institutions. The full personal computer revolution and network-of-networks owes more to Bob Taylor, who quit DARPA in frustration to go to Xerox PARC. I am not necessarily ready to give up the conventional story, but I recommend listening. This segment is somewhere in the final third of the podcast.

To explore this point further, I went back and re-read Where Wizards Stay Up Late, a history of the Internet published in 1996 by Katie Hafner and Matthew Lyon. The book centers on the development of the first router by Bolt, Beranek and Newman, using a Honeywell computer. It was the size of a refrigerator and weighed 900 pounds. The book becomes uneven after that. Some of the sections are quite interesting, but others cover events and controversies that are long-forgotten, and justifiably so.

In the end, I am not persuaded by Diamond’s take on the Internet. ARPA (the predecessor of DARPA) really was at the heart of developing the long-distance computer network. Once it was up and running, it was transferred to a different defense department agency, which stopped innovating. But then the National Science Foundation started developing a research network, and that evolved into the Internet as we know it, with TCP/IP as created by Vint Cerf and Bob Kahn. A lot of research and development took place outside of government, but overall I think that government sponsorship deserves the bulk of the credit.

Diamond also has an interesting take on the way that the requirement for clinical trials in medicine constrains and distorts the sort of research that is undertaken.

Progress: questions and answers

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Patrick Collison and Tyler Cowen say that we need to study how to achieve faster progress. But they seem to pre-suppose the answers.

the world would benefit from an organized effort to understand how we should identify and train brilliant young people, how the most effective small groups exchange and share ideas, which incentives should exist for all sorts of participants in innovative ecosystems (including scientists, entrepreneurs, managers, and engineers), how much different organizations differ in productivity (and the drivers of those differences), how scientists should be selected and funded, and many other related issues besides.

Implicitly, they assume that progress comes when the larger society

(1) creates opportunities for its “brilliant young people” to work in small groups to generate innovative ideas; and

(2) creates mechanisms to exploit and spread those ideas

Those might be the important factors. But other factors have occurred to students of progress: the competitive environment among states, including wars; demographics that skew toward youth (see this review of The Human Tide); cultural norms for assigning status (e.g., Deirdre McCloskey’s view that cultural support for commerce and innovation created the Industrial Revolution); key political actors, for better (Licklider at DARPA) or worse (the fifteenth-century Chinese emperors who forbid ocean exploration).

I don’t have a settled view on the sources of progress. In fact, the issue just screams “causal density,” making it difficult or impossible to rule out hypotheses or to confirm others.

But my inclination is to focus on broader cultural values. The enemies of progress are fear of novelty and envy of success. My thinking is that when those enemies hold sway, progress will be slow. When those enemies are weak, progress will be rapid.

Back to Collison-Cowen’s focus on scientists, perhaps this paper by Azoulay and others, is relevant. The policy implication is that we should enforce early retirement on eminent scientists.

The conservative revolutionary and the archaic progressive

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I annotate a podcast with Peter Thiel and Eric Weinstein. Here is the original podcast (3 hours).

An excerpt from my annotation:

Weinstein says that if you walk into a room and subtract all of the screens, you will think that you are still in the 1970s. That is an indication of lack of progress.

I am inclined to push back. The first car I bought, in 1975, was a Ford Pinto. The quality of cars has gone up a lot since then. The food in my house is much better and much easier to prepare than the food in 1970. Outside my house, food choices at restaurants are dramatically better than they were in 1970. The ability to obtain goods made elsewhere, particularly overseas, has gotten much better. The ability to travel overseas has gotten much better, and once you get there it is much easier to pay for stuff, to find lodging, and so on.

Overall, I note that Thiel comes across as a conservative with the temperament of a revolutionary. Weinstein comes across as a progressive who holds onto some values that now seem archaic.

Barbers, doctors, and Baumol

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In a comment on a post by Bryan Caplan, John Alcorn writes,

Might Helland/Tabarrok and Caplan (and Kling) reach agreement about what kind of evidence could in principle resolve the dispute about the relative weights of the several causes?

My first thought was to suggest looking at an occupation outside of health care and education where we know that the worker/output ratio is relatively fixed, and see what happened there. How about haircuts?

In fact, Tabarrok and Helland include a chart which shows barbers not showing the kind of income gains that doctors have enjoyed. It seems to me that the Baumol effect ought to work at least as much for haircuts as for doctor visits, so I see this as evidence that we need more than just the Baumol effect to explain these observations.

Questioning the Baumol-effect story

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Scott Alexander writes,

Factory workers are not getting paid more. That makes it hard for me to understand how rising wages for factory workers are forcing up salaries for violinists, teachers, and doctors.

. . .College really does seem to be getting less affordable. So do health care, primary education, and all the other areas affected by cost disease. Baumol effects shouldn’t be able to do this, unless I am really confused about them.

Suppose that the economy consists of apples and string quartets, and productivity doubles in apple picking. The Baumol-effect story is that we are now richer, and we can afford to spend more on both apples and string quartets. The increased spending on apples is more than offset by the higher productivity, so apple prices fall. But the productivity of violinists stays constant, so the increased spending on string quartets causes their prices to rise.

As I see it, Alexander is asking: if this is the scenario, then why does it seem as though the apple pickers have not gotten richer?

In a straightforward Baumol-effect story, when the productivity windfall hits the apple industry, some workers should be released from the apple-picking sector to work as violinists, so that we now have more string quartets as well as more apples. Everyone is richer.

Instead, Alexander’s data and anecdotes seem to indicate that we have had a big redistribution of income away from apple pickers and toward violinists. How do you get that? A combination of very inelastic demand for apples and little ability to shift from apple picking to string-quartet playing? That would seem necessary, but it may not be sufficient.

Note that in our national economic data, concepts like “real wages” may be calculated using price indexes that are constructed in a way that treats the demand for apples as totally inelastic, regardless of whether this is actually true. So perhaps the absence of real wage growth in the data is a mere statistical artifact, which opens up a different kettle of worms entirely.

So here is the issue: if Tabarrok and Helland are correct that the Baumol effect explains rising prices in health care and education, then it seems that we should have observed broad-based increases in real incomes. Instead, what we seem to have experienced is a significant redistribution of incomes toward the providers of services in health care and education. If so, then the Baumol-effect story may not suffice, and we need another explanation.

“Subsidize demand, restrict supply” comes to mind.

What gets expensive and why

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Eric Helland and Alex Tabarrok sort out the various proposed explanations. For example, concerning (lower) education, they write,

no metric of school quality shows any improvement that would appear to justify a cost increase of more than five times. Improvements in quality do not appear to explain increases in cost.

. . . Contrary to the usual story, the number of teachers per 100 students has increased since 1950. . . The number of other staff per 100 students also has increased, but at least since 1980 the increase has, if anything, been at a slower rate than the increase in teachers per student.

The rising cost of labor inputs is the best explanation for the rising cost of education

They focus on the Baumol Effect, about which I wrote

for everything that gets cheaper, something else has to get relatively more expensive. If efficiency shoots up in one sector, then in relative terms it has to decline elsewhere.

The future and the auto-didact

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Yuval Noah Harari wrote,

in the 21st century, we are flooded with enormous amounts of information, and the censors don’t even try to block it. Instead, they are busy spreading misinformation or distracting us with irrelevancies. If you live in some provincial Mexican town and have a smartphone, you can spend many lifetimes just reading Wikipedia, watching TED Talks, and taking free online courses. No government can hope to conceal all the information it doesn’t like. On the other hand, it is alarmingly easy to inundate the public with conflicting reports and red herrings.

That quote should be filed under “Martin Gurri watch.” But what I really want to get to in this post is Harari’s thoughts on the implication of accelerating cultural evolution. He implicitly agrees that the future belongs to auto-didacts.

Unfortunately, teaching kids to embrace the unknown while maintaining their mental balance is far more difficult than teaching them an equation in physics or the causes of the First World War. You cannot learn resilience by reading a book or listening to a lecture. Teachers themselves usually lack the mental flexibility that the 21st century demands since they themselves are the product of the old educational system.

…So the best advice I can give a 15-year-old stuck in an outdated school somewhere in Mexico, India, or Alabama is: don’t rely on the adults too much. Most of them mean well, but they just don’t understand the world. In the past, it was a relatively safe bet to follow the adults, because they knew the world quite well, and the world changed slowly. But the 21st century is going to be different. Because of the increasing pace of change, you can never be certain whether what the adults are telling you is timeless wisdom or outdated bias.

My advice to 15-year-olds is to treat what I have to say as timeless wisdom, even though I am at an age where I probably lack mental flexibility and what I write may come across as outdated bias.

Another elderly person with timeless wisdom is Peggy Noonan, who writes,

Avoid elite universities if you can; they’re too often indoctrination mills anyway. Aim at smaller, second-tier colleges, places of low-key harmony, religiously affiliated when possible—and get a real education. Every school has a library. Every library has books. That’s what you need.

If you missed her piece, entitled “Kids, Don’t Become Success Robots,” be sure to read it.

My thoughts on scientific progress

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A reader asked for my thoughts on the issues raised in the econtalk episode featuring Patrick Collison. Here are a few:

1. The important question is whether there is anything that citizens or government officials can do about the pace of scientific progress. How can one stimulate progress? How can one remove barriers to progress?

2. I think that there are major unanswered questions about the nature of scientific and technical progress. Is it mostly inevitable, or do chance, individual genius, and sudden changes in the regulatory or cultural environment play a big role? Is the process smooth or are there sudden leaps? Are “general purpose technologies” a key element?

3. One of my biases is that I believe that when the technological preconditions exist, progress is inevitable. Often, the preconditions involve the development of instruments that make it possible to observe and measure phenomena that we could not observe and measure before. I would like to believe that if you had limited Newton and Gallileo to the instruments available 150 years before they were born, they would not have come close to doing the work that they did. I would like to believe that the Chinese did not sail west before Columbus sailed east more because they lacked certain instruments (what they are, I cannot say) than because of the Emperor. That is, I would like to believe that if they had the right instruments, they would have gotten around the Emperor.’

More prosaically, Jimi Hendrix could not have made his debut album in 1967 with the guitar technology that existed in 1963, and perhaps not even with the technology that existed in 1965. Steve Jobs could not have spurred Apple to develop a successful smart phone with the technology that existed in 2004.

4. Another one of my biases is that I believe that genius is synergistic, not individualistic. It was John Lennon *and* Paul McCartney *and* Bob Dylan *and* Atco *and* Motown *and* . . .that made 1964 – 1967 such a spectacular musical era. No single musician was responsible for it. It was Xerox Parc *and* DARPA *and* the Homebrew Computer Club *and* Bell Labs *and* NCSA *and* . . .that got us out of the mainframe era and into the modern era of computing. No single individual was responsible.

If you believe my biases, then you want to think in terms of supporting people who are developing new and better instruments to observe and measure. In health care, that might mean supporting researchers working on nanobots that can provide new observations about the life cycle of cells and of whole organs. In energy and materials science, it might mean supporting researchers working on new instruments to measure chemical processes.

If you believe my baises, then you want to think in terms of supporting individuals who are good at copying others and competing with others at the same time. It is this copying/competing dynamic that seems to be at work in synergistic progress.

Speaking of copying/competing, I believe that blogging is seriously under-rated by people who claim to be researchers. Done properly, blogging is fantastically synergistic. Imagine how much faster progress could be if folks were weaned away from academic journals and onto blogs.