Jeffrey Sachs on Charter Cities and How to Reform Graduate Economics Education (Ep. 2 - Live at Mason)

Tyler and Jeffrey on the resource curse, Paul Krugman, premature deindustrialization, the middle income trap, and Sach’s favorite novel.

Tyler and Jeffrey Sachs discuss the resource curse, why Russia failed and Poland succeeded, charter cities, Sach’s China optimism, JFK, Paul Rosenstein-Rodan, whether Africa will be able to overcome the middle income trap, Paul Krugman, Sach’s favorite novel, premature deindustrialization, and how to reform graduate economics education.

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Recorded April 7th, 2015

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TYLER COWEN: I introduce Jeff Sachs; that’s easy. Jeff is one of the world’s best, most famous, and most influential economists. There’s more I could say, but let’s start with that.

The purpose of these series is to have conversations that you don’t find other places on YouTube, and to ask probing questions and have a far-ranging dialogue. What I’d like to do is kind of overview of Jeff’s career and thought and try and see how it all hangs together, how the different pieces relate to each other. What I’d like to do is start with some of the early pieces, from the ’80s and 1990s. Then we’ll work our way up to the present.

The first question, Jeff, and we’ll treat this as a dialogue. Some of your best-cited work has been on the natural resource curse: the idea that economies, when they have natural resources — such as oil — that can harm their prospects for growth rather than helping them. Now we’re in 2015. How do you see this issue today? Do you think that has changed in any way since the first thesis you wrote?

JEFFREY SACHS: First, let me say thank you for having me. I’m really looking forward to our discussion.

About 25 years ago, I started looking more and more at my own work and how economic structure, geography, resource base, and so forth affected development. I’ve been on a learning curve since then. One of the early works that I engaged in at that point with Andrew Warner and others was looking at this question of how resource wealth, resource dependence one could say, affected development.

We found back in the 1990s, looking for the preceding 25 years or so, that the oil-rich countries had grown less rapidly, controlling for seemingly other factors that would be relevant. We started to speculate about that. There’s now a huge literature from many different points of view: politics, pure economics, and so forth. It’s a pretty rich subject and not so simple to summarize. There really is a resource curse for a lot of resource-rich countries.

At this point, looking back, I would put more weight on the political economy aspects probably than the pure, market-driven “Dutch disease” aspects which I talked about a quarter century ago. The idea at the time was that if you have resource wealth that pulls you away from more labor-intensive and technology-intensive industries. You don’t learn as much. You don’t develop as much endogenous growth.

Now I would say if you have resource wealth, one problem is you’re likely to be invaded. You have more vulnerability to geopolitics as well as to internal politics to mess things up.

COWEN: Is this a habit you can kick or is it path dependence? The price of oil now is quite low. Do you think those countries that have a lot of oil, now they’re going to be better off because they’ll be put on this new development path, or is it somehow too late, that they’re stuck with the bad institutions?

SACHS: First, one of the things that I’ve tried to emphasize and that I’ve learned over time is it’s always pretty complicated. There are resource-rich countries that do very well, thank you. There are resource-rich countries that have fallen apart a long time ago and never gotten out of the mess. Any generalization is fraught with problems.

Norway will do well, whether the oil price is high or low. On the other hand, last time the world oil price was persistently low, the Soviet Union collapsed. Russia was near hyperinflation. Different countries under different conditions will adjust to these shocks. Resource-rich Norway, Australia, Canada — I wouldn’t worry too much about them.

Their currencies will weaken. They will find other things to do, whereas some of the very vulnerable countries that have never been able to kick the habit of dependence, like Venezuela, will probably go into a deeper crisis. The Middle East has been in flames now for years. I don’t see any easy way out there, either.

COWEN: Here’s the tension I’m trying to figure out. It relates to a number of issues in your thought. You’ve written some very interesting pieces lately about how the role of institutions is overrated in predicting growth, but institutions seem to play a key role in making the resource theory stick. As you say, Norway has done fine. The US in earlier times did fine with a lot of natural resources.

Does thinking about resources lead you back to seeing institutions as important in some new and different way or are you still basically skeptical about institutions mattering at all and wanting to look most of all to geography? Do you see what I’m getting at?

SACHS: Of course, but again, I’ll say it repeatedly, I’ve never said institutions don’t matter. I’ve said institutions aren’t the only thing. I find often that people take an idea and carry it to an extreme.

This “institution matters” idea is one of those that I’ve found taken to extremes by causing a kind of geographic blindness, if I could say it. Geography obviously matters a lot. Resource base matters a lot. Institutions matter a lot. The world’s complex. We’re dealing with complex systems.

It’s not surprising that different things matter at different times and different places. Of course, institutions make a difference. The art of good economics, in my view, is trying to figure out what’s important, where, when, and in which context.

COWEN: Here’s a claim you’ve made. It’s very striking. It’s one of the most important claims in development economics. Personally, I think it’s true.

When you reviewed Acemoglu and Robinson, you said, “If we go to the year 1960, even knowing who the winners and losers have been, much less forget about forecasting, it’s very hard to come up with a metric of institutions that predicts which countries end up doing well and which countries end up doing poorly.”

When I read that, I tend to think somehow we’re mismeasuring institutional quality. We really need a better measure of institutions, which we don’t have yet. Institutions will someday matter again, but I’m looking for this in vain.

Where does your thought stand on this now? Do you actually think there’s some deeper understanding of institutions that will rescue this proposition? When you throw out North Korea and some other crazy countries, institutions don’t really have the predictive power for growth.

What are your thoughts on this, given that in the across-country regressions, they can do so poorly within the set of semireasonable countries?

SACHS: Acemoglu and Robinson’s book Why Nations Fail was one of my least favorite books. I think it is just a bad book, because it takes one thought and tries to drive it as the only explanation of history. That’s not a good approach in my view to history, which is a very interesting, complex tableau.

They missed one fundamental point right from the start, which is that when you look at development, there are at least two fundamental drivers, not just one. The one that they talk about is innovation, and innovation as being a fundamental driver of growth. There’s a lot of truth to that in the history of the world.

But there’s a second fundamental aspect when we look out in the world and say, “Who’s doing well? Who’s doing badly? Why?” and so forth. That’s what is sometimes called “catching up.” The phenomenon of catching up is very different from the phenomenon of forging ahead at the front of the technology horizon.

When you take that simple distinction, it helps to explain a lot of the post-1960 question that you’re asking. The most successful countries in the world in the last 50 years have been basically the East Asian economies and Southeast Asian economies.

Very rarely do they look like the textbook model of Acemoglu and Robinson of the free market economy and so forth. In fact, the People’s Republic of China they characterize as just — that’s an anomaly that is going to collapse in the future so we don’t have to explain it now.

I think that’s a huge mistake and a misunderstanding of the basics. China’s in a catching-up mode. The institutions of catching up are quite different from the institutions of being the technology leader, for example. Just understanding that would give them a little more clarity about institutions, per se.

COWEN: And corruption, over- or underrated as a driver of growth?

SACHS: It depends. Some places are so corrupt you first wouldn’t want to step foot in them and I’ve had the experience repeatedly when I’m talking to a head of state or a finance minister and I watch their eyes glaze over and realize they’re not interested in what you’re talking about. They’re in a different game. Those places can be driven absolutely into the ground by corruption.

Other places have been corrupt for a long time — I’m thinking of New York, Washington, Lagos, Beijing, and other places — and you get a lot of economic progress. In that sense, there is no purity in the world. I’m not a fan of corruption for a lot of reasons that have started with the ethics.

COWEN: China’s massively corrupt and it’s growing at high rates, right?

SACHS: China has a lot of corruption. The first person to say it is President Xi. The US has a huge amount of corruption and it has done reasonably well over the last 200 years.

COWEN: Let me now ask you a question to challenge the audience, and we’re going to turn to Paul Rosenstein-Rodan, who’s somewhat of a forgotten figure. But I think still an important figure at George Mason, and maybe for you too.

As you know, Rosenstein-Rodan was a development economist. He was one of the pioneers of the notion of the big push of an extended move forward on many fronts, all at the same time. But when you look at the early years of his thought, he studied with Mises. He worked with Hayek. He was an Austrian. He was a subjectivist, methodological individualist, and he made some kind of theoretical shift in his mind.

What is it that you think that Paul Rosenstein-Rodan saw, and presumably you think you see it as well, that the people today who are still Austrians at the theoretical level, what is it that Rosenstein-Rodan saw that allowed him to make that shift or induced him to make that shift at the most basic conceptual level?

SACHS: He was writing during and at the end of World War II, when he was saying, “How are we going to get out of this mess? There are so many pieces that have to be put together. We have to get infrastructure built again. We have to get basic markets operating. There are a lot of interconnected pieces, and so we’re going to have to move on a lot of fronts.” He was facing a historical situation.

I would say that his idea — I’d go back even . . . actually, it’s not back. It was almost contemporaneous with him. Alexander Gerschenkron, who was a very clever economic historian at Harvard. I came as a student just as he was retiring. He was a great mid-century, mid-20th century economic historian.

He observed that what countries do for development depends on how they stand in relation to the leader, and this is a point I was making earlier, which is that catching up is a fundamental phenomenon in development.

There’s a difference of growth, which we study as an economy, how does it grow? From the question of catching up, which is a question for a country that is situated with weak technology, weak infrastructure, weak training, and so forth. In the face of advanced economies, what should they do?

Now that’s been a question that’s been asked for at least 224 years, since Alexander Hamilton sent his letter to the congress on manufacturing in the United States. Because he said we have to catch up with Britain. Then Friedrich List said, “We have to catch up with Britain.” Economic reformers from basically Hamilton on in countries that were lagging behind the lead said, “What do we do to catch up?”

Now you can carry this too far because the insane version of this, and the unbelievably destructive version of this, was Lenin and Stalin. We have to do anything at no matter what cost of life to catch up, or Mao in the Great Leap Forward, which is insanity and cruelty.

But, on the other hand, the idea that you do different things to catch up by accelerating the process or by making the big push in a variety of ways has been shown time and again to have a lot of merit. It’s a balance, once more. The first countries to develop, Britain and the United States . . . Take the US. We’ve achieved almost continuous 1.8 percent per year per capita growth for the last 200 years. Not bad, if you do it for 200 years.

But if you’re an impoverished country today and you say, “What’s our aim? 1.8 percent growth?” No, our aim is 10 percent growth, because we really need to catch up. It turned out, because of that catching-up phenomenon, you can make a very, very rapid advance in a way unthinkable for a country in front. But how do you make that advance? Through pure government just stepping back and letting things happen? No. Through a concerted policy to close gaps. That’s the difference.

COWEN: I’ve been reviewing your work, including these books, and a stack of papers here, which is a small fraction of what you’ve written. I believe they all have your name on them. What I try to do with thinkers sometimes is boil down what they’ve been writing to the smallest number of dimensions possible.

If you’ll bear with me for a moment, I’m going to try to do that with you, and then you tell me where I’m off, or what you would add to that. Reviewing all the things you’ve written . . .

SACHS: You probably know more about me than I do, so let’s see how it goes.


COWEN: Maybe. But there are two phrases that strike me again and again. One is when you mention your wife, Sonia, and talk about differential diagnostics. The other is what you call the epoch of the Anthropocene, which you could think of as the time when human beings are in the world in an active way.

When we start with primitive society, everything is determined by geography and resources. Economic development, in a sense, is an ongoing process where human beings impose their will and their reason on the world in a kind of planning or voluntaristic fashion.

Then there’s a belief that first this needs to be done in a differential way. Not the same recipe everywhere. But a belief in the power of human reason to perform these differential diagnostics to turn this era when humans are on the earth into a time when we’re no longer ruled by resources and geography and the prevalence of malaria. But brought into an era where human reason is in some sense running the show.

If I had to boil down my reread of you into a very short bulletin, that’s what I would say. Now do you agree with that, how would you change it, and what would you add to that?

SACHS: That’s pretty good, first of all. I would subscribe to that summary. I should explain this idea of clinical economics, as I’ve called it, or differential diagnosis. When you’re married to a pediatrician, as I have been for 35 wonderful years, you get up in the middle of the night a lot when patients call with a very sick child.

I’ve listened to my wife take an oral history a thousand — thousands of times, perhaps. It’s a wonderful art, first of all, because a mother calls with a crisis of a baby or a young child — usually a high fever. The first thing that is important to know is that there are a thousand possible etiologies of that fever. My wife doesn’t say institutions. She says . . .


SACHS: . . . “It depends. Let’s hear your problem. Oh, you’re in a desert, you’re here, you’re this . . .” No, when it comes to the child, it could be something as normal as a common cold or a something as devastating as meningitis.

The purpose of a differential diagnosis is two things. First, it is of course to try to get to the core reasons so that you can make a proper prescription based on a proper diagnosis. Second, it’s done in a way that you’re minimizing serious risk.

The first question always that my wife asks is, “Is the baby’s neck stiff, or do you notice that?” Because that’s one of the symptoms of meningitis. If the mother answers that way, the next point is “I’ll meet you at the emergency room. Don’t stop. Just go.” Because it could be something that is fulminant and life-threatening immediately.

If it’s not that, then it can go on for an hour.

But by the way, it’s not just an hour of questions. It’s an hour of sequenced questions down a decision tree, and it’s fascinating to watch. I wish as economists we had those basic skills inbred. I certainly didn’t learn them, and it took me a long time of seeing lots of “patients” to see that one needs that same kind of approach.

That’s what I mean by differential diagnosis. Why it’s so annoying to me, the one explanation fits all viewpoints. Because now I’ve seen a lot of places, a lot of crises, a lot of challenges. One of the things that I discovered was how poor our profession is at times in having that sense that the problem that you saw over there is not the same as the problem that you’re seeing here.

COWEN: Let me push on this a bit and see if you can convert me into being more of a Sachsian. One of my worries is that the doctors are not actually in charge. It may be the lawyers, which is . . . We’re in a law school, but still, if I may say, in some ways a step down.

To some extent you have people voting on the baby, not all of whom even know who the baby is or what the baby’s symptoms are. The differential diagnostics may exist in a kind of platonic realm, but you are more optimistic about them than I am.

What would you tell me to address my skepticism and make me more of a Sachsian, given that I have this reluctance to embrace your view the way you hold it?

SACHS: I think I get what you’re driving at and I do have a fundamental view of at least how I want to proceed professionally. But it’s also based a bit on a theory of change.

COWEN: Tell us the theory.

SACHS: I believe that knowledge matters and that the more clarity, the more evidence, the more appropriate an analysis, the more likely we can find a good outcome to things. Many people are cynical. I tend not to be. I’m sometimes accused of being gullible as a result, or being too soft in the face of whatever. But I believe that there’s a way to reach an agreement, typically, among pretty conflictual and often pretty antagonistic actors.

I tend to believe there’s a way out of a crisis, and I tend to believe that a lot of what poses as either pure zero-sum struggle or harsh ideological conflict is often resolvable by good, clear ideas, or good, clear evidence, or a good, clear game plan.

COWEN: So you’re very optimistic about the power of human reason?

SACHS: I believe that’s where we should put our bets.

COWEN: That’s a different claim. See, I believe we should put our bets on human reason. It’s all we have. But I’m not necessarily that . . .

SACHS: Then we don’t have to even disagree, because we’re going to act the same way.

COWEN: Let me mention this book. Reading this book, it really cleared up for me, I think, a lot of the things you believe. It’s called To Move the World: JFK’s Quest for Peace. It came out last year. It’s received attention, but less so from economists, for obvious reasons.

It’s a book about leaders sitting down and just doing something and basically getting it right. Is that fair to say? Solving — more or less solving the Cuban Missile Crisis, defusing tensions, avoiding nuclear war, right?

SACHS: It’s a book, yes, of this remarkable last year of Kennedy’s life, which included the Cuban Missile Crisis and then negotiating the partial nuclear test ban treaty. Basically, I find it a story of tremendous insight and very moving also. If I could put it in pure conceptual jargon, it’s a story of finding a way to the cooperative outcome of a prisoner’s dilemma.

That’s, to my mind, a crucial structural feature of our lives, which is that we face constantly this challenge of finding agreement. We face constantly the logic of defection, as it’s called in the prisoner’s dilemma, or the noncooperative outcome that’s worse for everybody.

The question is what to do about that. The cynics say, “Well, the world’s bound to disagree.” The idealists say, “The world will always agree, or we should always act that way.” I find fascinating and compelling the idea that we should try to find ways to move to cooperation, knowing how fragile that is.

COWEN: This story, it really fits your model of change. That’s why, reading the book, it was like a lightbulb went off in my head.

SACHS: For me, it also went off in my head as I learned more about this, which is that Kennedy and Khrushchev stumbled into nearly the end of the world in October of 1962, and Kennedy made his share of terrible mistakes. Our USG, which I’m usually not too much of a fan of, made its share of terrible mistakes, whether it’s Bay of Pigs or other things.

One by one, we stumbled — not to the desire of either of these leaders — to the point where we were within the hair’s breadth of total annihilation. So many stupid things happen in this world, as almost happened again. Some pilot gets lost over Alaska and flies over the Soviet Union, or Russian local commanders in Cuba have the power to fire nuclear weapons. We’re so close to the edge.

The Cuban missile crisis is defused I think with real humanity by Kennedy, and by Khrushchev. Then they both basically reached the intuition, “This is insane, the way we’re acting. This is crazy.” They find a way to reach an agreement next year.

It’s an agreement in which typically the right on both sides that they face, or the hard-liners, the nationalists on both sides, say, “You can’t agree with each other!” and they find a way to reach an agreement. So to me, it is a paradigm of how we can stay alive in this world and actually get somewhere.

COWEN: If I thought more problems were of an evolutionary nature, had very large numbers of players, didn’t have clear channels of communications, didn’t have elite advisors, but were more of just a big, messy splat. Should I then be more pessimistic about differential diagnostics? Or do you think that as a model of social change still is going to hold?

SACHS: For me, the biggest, most complicated mess that we’re in that is like the one you’re describing is climate change. Which in my now 43 years of thinking about economics, so it’s a long time, is the most complicated mess that I can imagine. It’s got every attribute of just a terrible, terrible problem. It’s global, it’s long-term, it’s uncertain. It’s got vested interests, it’s got hugely unequal payoffs, it’s got everything wrong with it as a problem.

Yet a lot of people do say, “Eh, there’s no chance. You can’t really do much.” If you asked me, “Where do I stand?” I say, “We can solve this problem. There is a way to do it.” I would define solving it at this stage as staying below the two-degree Celsius warming which governments have agreed, but not honored, as an upper limit of warming.

I’m taking an approach of how I think I can contribute to that in a very particular way. That way is by helping to define more clearly what that path involves and managing a 15-country project for the UN on defining pathways that satisfy that.

To my mind that reflects at least my style of what I believe is the way to do this, which is to say, “Well, what does a solution look like?” It comes back to what [Thomas] Schelling called a focal point for bargaining. Here’s where we could go.

I think that is very important to identify in messy situations. Here’s where we can get to. Don’t you see, for all of us, that’s an improvement, that’s better than the mess that we’re on? I believe if you say that enough and you’re clear enough about it, you’ll actually get there.

Or, not really, but you’ll have the best chance of getting there, that that’s a style of problem-solving that we should try to use in these noncooperative games that we play, so-called, which is that there is no magic answer. There is no one leader that defines the solution. We have to actually agree on something. It seems to me to be a good idea to try to agree on something.

COWEN: To pick a success from the past, let me mention Poland. In my opinion, Poland has gone very well. It’s a great country. It’s been a success. If I made the following claim, would you agree with it? That you, Jeffrey Sachs, have done more for economic liberty through the medium and history of Poland than almost any other economist alive today? True or false?


SACHS: I’d say that things I recommended were — that was good advice I gave back then. I’m proud of it. It worked out. It was a very remarkable period of my life and a very remarkable moment and it was exactly one of these periods when you’re just struck at the complexity and the mess and one needed to find a way out of that.

Just to tie that strategy in with how I’m explaining my general approach, actually, I made recommendations for a significant, rapid change of economic institutions, structure, and politics that had a very big effect in the internal dynamics of what was happening and the international dynamics.

But the basic idea of course was not mine at all. The basic idea was in the historical moment, and the basic idea was also Solidarity movement’s idea, and here’s what I mean. I was asked at one point, “Write a plan.” It was for me an unbelievable moment which I remember as vividly as anything I remember. Because I said, “I’ll send this to you in a couple weeks.” It was one of Lech Wałęsa’s top advisors who said, “I need it tomorrow morning.”

One of the great life experiences is the lessons of four years of Harvard all-nighters. So I pulled an all-nighter, and I wrote a plan for transforming Poland from a communist, central-planned economy to a market economy. If anyone’s interested, I’ll send you the document, which I recovered from a box sometime a few years ago.

What he told me was, he said, “I don’t care what you put. You have to explain it, but this has to be about Poland’s return to Europe.” The message was like giving a term paper or a one-nighter. Write your essay on how Poland can return to Europe.

For me, that defined everything. First it was the right idea. It was why it was there. It was why it was wanting to help Solidarity. At the time it was what I believed in. But it also defined . . . They had a clear vision. We want to be a normal country in Europe.

COWEN: And they are, right?

SACHS: And they are now, completely. It’s totally normal. As one of the greatest leaders of our time in human rights, Adam Michnik, said, “We’re boring.” They went from the great drama of revolution to being a boring country in Europe.

But the point I want to make, Tyler, is that the endpoint was clear for them. Everything else fits, once you have an idea of that compelling focal point. Then I said, “OK.” Like the guy carving an elephant out of ice. Take away everything that doesn’t look like an elephant. Take away everything that doesn’t look like a European normal economy.

COWEN: Then Russia, which I blame only on the Russians, by the way. But they never had a comparable endpoint in mind. Is that fair to say?

SACHS: I think there are two things. I blame a lot of it on Dick Cheney, so not just on Russia. Russia itself, by virtue of Russia, 11 time zones of the Eurasian land mass, does not have a fixed focal point, and half of Russian history is how we’re a unique civilization, the Third Rome, and half of Russian history is being part of Europe and being part of European civilization. They’ve never settled that question until now.

But the other difference which I found — (I didn’t understand it then, almost at all, by the way. It took me 20 years to understand it, actually.) — was how weird it was that in 1989, and this is geopolitics, which I didn’t understand as it was happening.

In 1989, I made recommendations for Poland. I said several unusual things, like “Don’t pay your debts, get debt cancellation. You need emergency, a billion dollars on this date,” and so forth. Everything I recommended actually ended up happening with US government support.

Then in Russia two years later I was asked by Gorbachev and then by Yeltsin to help them, because they saw what was happening in Poland. They liked that. They wanted something similar. So I said exactly the same things, and the US government kept saying, “No, no way, no way.” I kept saying, “But that kept working there.”

I didn’t understand it in some deep sense for a long, long time, how weird this was. I knew it wasn’t the difference of economic advice. I understand what a financial crisis is.

COWEN: Culturally weird, you mean.

SACHS: No, how weird it was in the historical moment that things that had worked extremely well, had shown themselves, where I had had Brent Scowcroft and Bob Dole and others strongly supporting it, all of a sudden just no support from Washington. The IMF saying, “We’re not going to do this.” I said, “But, Richard Urban, you did that two years ago in Poland.” “We’re not going to do it.” “Why?” Flat.

OK. What’s the lesson of this? Quite important, actually. It’s a little bit off-topic, but very important. We didn’t want to help Russia in 1991. We wanted our unipolar world. I didn’t know that at the time. For me, I wanted to help Russia. This is a chance for freedom, democracy, market economy, normalcy. Yeltsin defined, he said December 11, when I met him the first time, 1991, “We want to be a normal country.” I said, “I will help you, Mr. President.”

We didn’t want that in this country. What I didn’t understand was everything I said about Poland was immediately accepted because it was good advice and because Poland was going to be a bulwark of NATO. Everything I said about Russia didn’t matter whether it was good advice or not. Russia was on the other side.

COWEN: But China did it without us, without American help for the most part. What is it about Russia that meant Russia couldn’t do it? The problem was not like a Khrushchev-Kennedy dialog. But Russia must have failed in some other way where China more or less did not. What is that element?

SACHS: Many things. First of all, Russia faced in 1991 an extremely acute financial crisis. If you haven’t lived through a deep, deep, deep financial crisis, it’s hard to understand what it is.

Now we’ve lived through something mild like that in 2008, which was frightening enough. But I’ve now seen them many times and studied them for my whole career. They’re very fulminant. They’re like that meningitis epidemic. They absolutely can rip a society apart before you turn around.

Russia had that. It had that for all sorts of reasons, but one was that the price of oil had declined at $10 a barrel, and Gorbachev had borrowed tens of billions of dollars from 1985 to 1991 and run out of money. They ran out of reserves at the end of 1991. This was a macro, macro crisis, and it was a very bad one.

The same thing had happened in Poland in a different time dimension, but by 1989, so that’s why it called for debt cancellation, a standstill on debt payments, an emergency stabilization fund.

The first point is financial crisis is in and of itself a distinct category of pathology. Russia had it, China, thank goodness for them, didn’t have it. Russia needed help on a financial crisis. That’s number one.

By the time they got out of the financial crisis, which was several years later, because we completely stuck it to them in amazing ways and allowed the crisis to be fulminant for a number of years. The reformers were gone, the corruption was completely out of control.

I don’t want to exonerate the Russians for the irresponsibility and so on and the lack of good strategy. But often in a historical context, to solve a problem you need both sides operating. There are other serious differences, very major differences that are worth just mentioning. We could go into length. But there’s a big difference of being a urban industrial, broken, Soviet economy.

COWEN: Which was deindustrializing eventually anyway.

SACHS: Which had so overgrown the investor heavy industry, and it was in a lot of collapse, versus being an agrarian, impoverished country, as China was in 1978. The pathways were bound to be very, very different. The geography is different, by the way, because China’s just filled with people who could do low-cost labor right at the ports on the east coast of China.

Whereas for Russia, it’s almost basically a landlocked landmass that was running off of petroleum which had collapsed in global price, which had collapsed in the physical facilities in the countryside, with collapsing steel mills, collapsing everything.

It just looked like a waste dump in 1991 when you went around Russia, absolutely cannibalized airplanes at every airport just rusting away, ton after ton of steel rusting away wherever you turned. Cement melting away wherever you turned. The place had just been a heavy industrial machine for the military-industrial complex for decades.

COWEN: Let’s do some quick question and response. I’ll name some things. You tell me if you think they’re underrated or overrated.

Charter cities concept.

SACHS: I haven’t seen any result of it.

COWEN: Are you hopeful? Powers of human reason? Khrushchev-Kennedy, sit down?

SACHS: Look, cities are . . . If you’re talking Paul Romer’s concept.

COWEN: Yes, among others.

SACHS: I think they’re . . . And I have to put it this way. I’m happy for the idea of cities to say, “We should do something different.” I’m not happy to say, “We’re going to take an extraterritorial place in your country. It’s not going to be governed locally. It’s going to have an external board.” There are lots of specific features that never struck me as politically realistic, and they didn’t turn out to be realistic.

COWEN: The Export-Import Bank. Overrated or underrated?

SACHS: I’d vote for it.

COWEN: You’d vote to keep it?

SACHS: I’d vote to keep it.

COWEN: Even though it’s corporate welfare?

SACHS: Yeah, because it basically sells useful things to places that need useful things. I believe that in general, our international capital markets underperform their role of financing international flows. I think we need institutions to overcome the inherent shortcomings of international finance.

COWEN: Anthropologists.

SACHS: Anthropologists?

COWEN: They’re often critical of economists and development. You’re an economist. In a very broad sense, you’re representing the profession. A lot of anthropologists criticize what economists do at a pretty broad level. Are you persuaded by what they say, or not?

SACHS: First of all, I think that anthropology in the form of getting a very deep, extra-thick description of a society is a very important kind of approach, one of many. Second, we need an anthropology of economics in the original, literal sense of the word, which is a theory of man much better than we have.

We have an 18th-century theory of humanity in a world of 20th-century evolutionary psychology, neuroscience, and a century of psychological understanding. We need a new anthropology in our field.

COWEN: The economy of Mexico, overrated or underrated?

SACHS: It’s probably accurately rated, which is “Eh,” really strangely underperforming for a long time, with a lot of difficulty, but 100 million people living in a kind of middle-income stasis and probably really facing the curse of so far from God, so near to the United States.

The paradox: that somehow the US has created as many problems as it’s created opportunities. It has created a militarized narcotics trafficking and war on drugs, for example, which has been devastating for Mexico in modern times.

COWEN: If I said this: the core problem in Mexico is there’s too much labor in the informal sector. Productivity in the formal sector is often remarkably high. Mexico will become number three for auto exports. They’re going to pass South Korea.

But you can only squeeze so much more in productivity gains out of the formal sector, and moving from the informal sector to the formal sector for labor is a slow process. It goes on slowly. That’s what we see. To accelerate that, Mexico needs in some ways to deregulate. Would you agree or disagree?

SACHS: I don’t know. Mexico is a little bit, I would say, just stepping back, a little bit of a mystery for me, why it hasn’t done better in development.

COWEN: Let’s talk about Africa. Now you must know Dani Rodrik’s work. He and I, maybe you too, he’s worried about premature deindustrialization. That in the old days, countries like the US would have over a quarter of their labor force working in manufacturing with middle-class jobs, often be democratic, and then they would deindustrialize.

The new wave of emerging economies, we’re often seeing them deindustrialize at 10 to 15 percent of the workforce being in manufacturing. It may be that service-sector jobs for cultural, economic reasons, some reasons, don’t give you the same kind of enduring, increasing returns, ongoing, self-reinforcing economic growth. So when it comes to Africa or other parts of the world, are you worried about premature deindustrialization?

SACHS: Not very much.

COWEN: Why not?

SACHS: I don’t think that there’s any magic to manufacturing. What there is crucially is a need for all developing countries to export. You need to export because you need to import technology. Manufacturing has been a route to export earnings, to earning a place in the world that allows you to import the technology which 99.9 percent comes from outside your country.

The question to ask for Africa is how is it going to pay its way in the world? Not whether it’s going to have manufacturing or not. That’s why, by the way, import-substituting manufacturing was no great help for countries that pursued that to an excess. What has worked is export-oriented manufacturing. Maybe it’ll be export-oriented services, mining, agribusiness, and other things.

In general if I ask the question, “Is Africa disadvantaged by having to catch up today versus having to catch up 25 years net-net?” I’d say better off now, because the basic tools for catching up with the information age are stronger now than before.

COWEN: But when you say mining, I worry about your own resource curse. When you say services, India has done this to some extent, as we all know. But if you look at Indian service exports, they’re often done out of a kind of feudal bastion, almost. Companies which build their own roads, their own infrastructure, almost like small private cities.

If you’re inside that sphere, it works pretty well for you. But it’s actually a very small segment of the Indian population. That space, they have a head start there. If you think what percent of the Nigerian workforce can be employed exporting services . . . Do you think there’s an argument it could be more than three or 4 percent?

SACHS: I think the question of how any low-income country pays its way in the world, as I said, is a real question. If it weren’t for that question, there is no shortage of identifiable jobs that Africa needs for the coming two generations. It needs teachers and it needs doctors and it needs construction workers and it needs engineers and it needs public administration and it needs everything, because it’s coming from poor, rural, overwhelmingly agriculture.

I’m not worried about the job root, but what I am worried about is the balance of payments basically, which is that like any of us, we thrive if we can sell our services somehow. That’s true at a country level as it is at an individual level. If you are in an environment where you have nothing to sell, you may have a comparative advantage but if you have nothing to sell, it doesn’t matter. Everybody, every place has a comparative advantage but it doesn’t necessarily make you prosperous.

I worry very much about places like Chad, Niger, Central African Republic, Mali because they’re landlocked, they are in incredibly difficult physical geographic conditions, very dry, drying most likely, warming, massive disease burden, most of them with no easy natural resource base, too far from ports to do any kind of assembly operations. It’s a stepping stone for development.

COWEN: Geography again.

SACHS: Just extraordinarily difficult. It’s why I also worry about Africa’s demographic trends because obviously I think a lot about the difficulties of development. You’re mentioning some, but as hard as it is for Africa now with one billion in sub-Saharan Africa, Africa’s going to have two billion people before the middle of the century on the trajectory. It’s going to have around four billion people on the so-called medium variant fertility trajectory that the UN population division puts forward.

I find sustainable development in Africa in those terms not feasible. I couldn’t answer that question, what is a viable path. When you think about the problems of development in very poor, difficult conditions as much of sub-Saharan Africa has right now, the best thing going forward is this tremendous room for catching up.

That means a lot of leapfrogging technologies and the fact that there is a true, phenomenal, wonderful, powerful information revolution underway of which we’re just in the early stages. We’re still on the first slope of the S-curve in that, and that’s great.

But, there are huge headwinds of which I would say demography and climate change are two, plus the traditional facts for a lot of Africa: disease, very difficult tropical environment, and 14 landlocked countries, all of which make this a very special problem.

COWEN: Let me give you another Dani Rodrik argument. He says that once countries get a foothold in manufacturing, their productivity levels converge pretty quickly, but in agriculture it’s much longer. You’ve probably looked at those same numbers. It at least seems true to me. Do you agree with this, and do you think it’s a major problem facing Africa? If so, what should they do about it?

SACHS: It’s an example of the ecological context and geography being important. The reason you can get manufacturing convergence of productivity easily is that those are standardized technologies, usually part of international value chains. The specs, equipment, and machinery don’t come domestically. They come internationally. The procedures, everything about the production systems, are basically part of an international system.

When it comes to agriculture, you’re in a completely different world. What counts is your soil, your pests, your climate conditions, your crop varieties locally. That’s why technological diffusion in agriculture is much more complex. You cannot simply take, most of the time, something that worked here and plant it here.

The double miracle of the Indian Green Revolution was actually two miracles. One was that crop yields went up quickly — but, second, that they were from seeds from Sonora, Mexico, that Norman Borlaug had taken to India. Lo and behold, after one year of a little bit of experimentation on how to plant them, he and M. S. Swaminathan found that you could use Mexican seeds in the Indian context in the Punjab.

The point that Rodrik may be emphasizing here, or finding implicitly, is that technologies diffuse at different rates depending on their capacity for standardization.

Manufacturing is typically a very standardized global process. You can make the phones. If you’re making the phones, you’re making the same phones whether it’s in Thailand, in China, in Foxconn wherever it is it. Whereas if you’re controlling disease, your disease burdens are different, your ecology is different. If you’re growing food, it’s different. Therefore the context is much more complex.

COWEN: Of all the wonderful music in Africa, you must have heard a lot of it. What’s your favorite?

SACHS: Drums.

COWEN: Drums? From which part?

SACHS: Of course, everywhere. It’s beautiful. Basically it’s a truism and obvious, but how much of American music is African music? We live on a culture that came from Africa, through the Caribbean, to jazz, to so much. When you watch African music you see so much of the heritage, roots, and improvements of culture and music that you see here.

COWEN: From all countries, what’s your favorite novel? Which novel has influenced you the most? How has it shaped your thinking? How does it play into the other points we’ve been discussing? Peter Thiel said Lord of the Rings and The Master and Margarita.

SACHS: I’m a complete sucker for Doctor Zhivago.

COWEN: Doctor Zhivago?

SACHS: Absolutely.

COWEN: What does it show about Russians and their future?

SACHS: I love the basic idea that in the midst of this revolution Zhivago said, “Somebody has to just live.” It’s the most human, wonderful story. I am a complete sucker for it.

COWEN: China and Chinese demography, what will happen with China now, and what do they need to do?

SACHS: What’s happened of fundamental significance for the world is that East Asia has become the third growth pole in the world, or arguably the second, because for the first 200 years of modern economic growth, it was all the North Atlantic.

You could call that two regions or one depending on how you want to define it, but it was the US and Europe that defined 90 percent of the technological advance that created the underlying dynamics to which the whole rest of the world would engage in catching up, integration, or falling under imperial rule, or whatever it was.

Now, because of the long history of Japanese development, because of the 50-year history of Korean and Taiwanese, Hong Kong, Singapore development, and especially because of the post-1978 scale of China’s achievement, East Asia is an absolutely key, transformative growth pole of the world. This, I think, is a fundamental geopolitical, historical, and economic significance.

COWEN: But is China crashing now? There’s a real estate bubble, a lot of provincial debt, funny numbers, excess capacity. What’s your take?

SACHS: My take is that China will be a great and successful country in the 21st century.

COWEN: [Lawrence] Summers and Lant Pritchett say China will slow down and grow at 4 percent if they’re lucky. Do you agree?

SACHS: Summers and Lant Pritchett have been wrong about China for 20 years.


SACHS: And they continue to be. And Krugman, too. There was this feeling in Cambridge, for some reason, 25 years ago, “We don’t like East Asia too much.” I’m caricaturing just a little bit. China is a bubble. “The Myth of the East Asian Miracle,” remember Krugman’s article and so forth?

They just got it wrong time and again. They had failed to understand, and the same with Acemoglu. It’s the same story. It doesn’t fit our model exactly, so it can’t happen. It’s got to collapse. That’s not right. It’s happening. That’s the story of our time. It’s happening.

One and a half billion, two billion people including other parts of Southeast Asia — they’re on an upswing. That’s great. It’s wonderful. It’s the most significant scaled improvement of material conditions in the history of the world in a short period of time. It’s deep. It’s great civilizations, great cultures, great capacity.

COWEN: You think they’ll keep growing at 7 percent or not too far from that number?

SACHS: I think that the general idea of Robert Barro [and Xavier Sala-i-Martin] from 20 years ago that every time you approach by half the way to the frontier you lose about two percentage points of growth is about right.

COWEN: And will apply to them?

SACHS: Of course.

COWEN: What’s your biggest disagreement with Krugman today?

SACHS: Today? Yesterday’s column.


COWEN: Please tell us more.

SACHS: He wrote a ridiculous column yesterday.

COWEN: What do you disagree with?

SACHS: It’s an interesting story. Yesterday he wrote about how horrible the UK government has been and how they’re going to possibly win an election by telling the story that they’ve done a decent job economically. He’s had a kind of venom for the government. My response, which I’ll publish soon, is called something like “Krugman’s Anti-Cameron Vitriol,” because it really is vitriolic.

What I did was just put the UK recovery next to the US recovery, and they look almost identical. He loves the Obama recovery, and he hates the UK. He says one’s awful, one’s great. It’s ideology. It’s not fact-driven.

COWEN: You’re more skeptical about fiscal stimulus than he is, right?

SACHS: He has told his readers two times a week for five years the simplest version of the crudest Keynesian model, which is the way out of a downturn is fiscal stimulus. I worked on macroeconomic adjustment programs in dozens of countries for 35 years. I don’t buy it. I think he really took a complicated subject and said, “There’s one answer, and it comes back to the same approach.”

COWEN: Preferential diagnostics.

SACHS: Yeah, and basically, by the way, he did, in my view, two things wrong. He misdiagnosed the 2008 crisis, and second, then, gave the prescription to it. The misdiagnosis, in my view, is it was not a Keynesian animal spirit’s crisis, meaning that suddenly there was just a collapse of investment and you needed fiscal stimulus to undo it.

It was two things, I would say. If you want to classify it, it was a Hayekian displacement from a credit boom, but even that wasn’t enough to lead to a crisis. It was Lehman Brothers failing in September 14, 2008, that drove a financial panic. Addressing a financial panic is a condition that needs to be addressed as its own pathology.

That’s my view that if you approached it that way — because I remember arguing with Summers that weekend, and many weekends after that — approach it as unlocking the financial panic, not as the need for reaching a $1.6 trillion deficit in 2009. Just get credit going again.

In that case, I think, Bernanke, by the way, did the right thing, which was flood the market with liquidity, make extraordinary purchases, QE, all the rest. I thought it was the right policy in 2008 to ’09, not the fiscal stimulus, because I didn’t think it would work. I didn’t think it was necessary.

I thought it would lead to a big diversion of attention and public investment actually from longer-term things, which in a way is how I would interpret our recent political history. In other words, Obama used his political capital for the wrong thing in that fiscal stimulus.

In any event, I have disagreed with Krugman all through these years about this. He kept saying, “We’re in a depression. We’re in a depression.” Then when we started to recover I said, “Oh, we’re recovering.” “No, no, we’re still in a depression.”

Then when we really recovered he said, “Just as I said. We recovered because we had this 2009 stimulus.” We recovered in the context of a significant fiscal cut, actually, not what he recommended because fiscal policy wasn’t the decisive element of this business cycle.

COWEN: We have about five minutes left. I’ll give you two questions, and you can divvy up the time for them as you wish. First is to tell us a bit about your new work on “rise of the robots.” Also, do you view this as a description of what’s happening already or a prediction for the future? Second, tell us how to fix graduate education in economics. The floor is yours.


SACHS: Good.

COWEN: We’ll also learn something about your priorities.


SACHS: OK. So, robots.

COWEN: It may be the same answer for both, right?


COWEN: Robot professors.

SACHS: Very quick. Yeah, robots could teach our classes too. Very quick on robots, fascinating. I’m a technophile and a techno-believer. I do believe that we are in a very rapid ascent of information technology.

I believe that it is displacing lots of jobs and it is one of the reasons for the low wages, the stagnation of real earnings in the economy because the path of manufacturing employment, which we talked about, has shrunk considerably, chronically.

More will come. It will also spread through the service economy as well. You don’t need baristas in Starbucks. We will walk in, soon, to a Starbucks, and our iris will be scanned. Your default mode of a mocha latte venti will come out automatically of a machine. You’ll take it out the other door.

COWEN: They’ll predict which days you’re going to come, even, right?

SACHS: Pardon me?

COWEN: They’ll predict which days you’re going to come.

SACHS: Yeah, they’ll have a very good idea. They’ll welcome you by name, of course, as you arrive. “Oh, we were expecting you. You’re 10 minutes late. Is everything OK, Mr. Sachs?”


SACHS: Because Google will know where you are any moment anyway. That’s coming, and it will transform, fundamentally, the labor market. The interesting conceptual question is, “Is this a good thing or a bad thing?”

As economists we should say instinctively, “It’s a great thing. Are you kidding? We can have the robots do all the work for us,” and I believe that’s what we’ve hoped for ever since leaving Eden when we were condemned to work in the fields 10,000 years ago in the Neolithic Revolution. We’ve been trying to escape heavy labor. If the robots will do it, fantastic.

But there is this, actually, deep conceptual question. There is something right, actually, theoretically about the argument that the demand for labor falls, the wages decline, and that can actually lead to a downward spiral in our economies.

I have a paper from last year with Larry Kotlikoff showing how that works. I have another paper coming out in a couple of weeks that I really like showing, in an overlapping generations context, how you can get weird outcomes.

But what’s always true is that, with enough government intervention, redistribution of various kinds from old to young, for example, from capital owners to labor owners, of course you can make everybody better off — because pure technological change by definition, if properly handled, can make everybody better off.

This question of how we’re going to handle this transition is a really interesting one. I believe it’s happening. I believe it’s a fascinating subject for analysis and research. I believe it’s not been studied in very much depth yet. That leads me to the second question, because it is a good segue. What do we learn in economics? I believe not the right things. I’ll take just this question.

In my view, whether it’s the geography questions or the manufacturing question that you asked about or the robotics or whatever it is, what’s fascinating for us in our real lives and in our societal choices is the change that we’re constantly living in during this past 230 years since Watt gave us the steam engine. We’ve been in 230 years of relentless change; technological change, structural change, societal change, cultural change.

Yet our economics models are basically static, meant to be timeless. If we really want to understand the world, we need to go deep into understanding what Baxter is doing — Baxter the Robot — or Watson, or what really is changing technologically.

COWEN: Concretely, at the graduate level, what would you do with them?

SACHS: Economics. We avoid that, I think, conceptually, because if you study anything too specific it’s out of date in 10 years. So we study general principles. I think that’s epistemologically the weakness of our field. We want to be the four underlying, natural forces of the social universe rather than studying specifics.

COWEN: More like the anthropologists.

SACHS: No, more like the biologists. If Watson and Crick had written their 1953 paper saying, “Assume n base pairs.” They can match by [n × (n − 1)] / 2 combinations. It wouldn’t be a very good model of DNA. They actually said there are four base pairs, and there are two natural matchings. It happens to be a double helix.

We’re going to study the detail out of that for the next 40 years. Yeah, it’s arbitrary. There could be other DNA, but we’re going to study this one. Economists don’t do that, because we have a harder job, in some sense, which is that we’re not studying a stable environment. We’re studying a changing environment. Whatever we study in depth will be out of date. We’re looking at a moving target.

To compensate for that by never getting into detail has been our approach, but we’re always behind the curve, then. We never have good answers when they’re needed. That’s what I would like us to study.

I would like economists to be working with engineers, to be working with public health, to be working with the medical professionals so that we’re actually working on the real systems of our time and adding our pieces to that, understanding and studying that so that we have an answer to robotics, not a pure theoretical model, which is nice and fun, but something that can be helpful.

COWEN: On that, we will close the formal discussion. Thank you, Jeff.

Audience Q&A

AUDIENCE MEMBER: My question is regarding robotics, potentially — or futuristically speaking — taking over what would be the low-skill jobs at first. What do you think the implications would be on immigration?

SACHS: The effect on . . . ?

AUDIENCE MEMBER: On immigration, due to the changing labor market.

SACHS: Yes, the robots are a kind of immigrant, so they’re competing with the other workers that provide some services that are being replaced by the machines or by the artificial intelligence systems. There is a big distributional effect, in my view. Those who own the robots, as it were, whether it’s Larry Page and Sergey Brin or others, make a fortune. And those who own the labor that is being substituted see a real decline of their income.

Again, conceptually, the idea that machines could do the heavy lifting for us is a good thing for society. I don’t know if it’s a real insight or not, but I went to Virunga National Park in Rwanda [sic] a couple of years ago to visit the great apes, the gorillas.

You spend this remarkable time in the bamboo forest watching them. What do they do all day? They play. They lie around. They eat some bamboo shoots. A little sex now and then. Basically, it’s a pretty leisurely existence. We’re told, by anthropologists, that that’s not so much unlike hunter-gatherer societies in the pre-Neolithic.

We got into a different mode about 10,000 years ago. Became sedentary. Human populations rose. For the next 10,000 years, people broke their backs trying to stay alive growing food. We got into a kind of mode where, basically, very, very, very hard labor. The big quest of modern times is to get out of that hard, heavy physical labor. That’s what everyone in the world wants.

As soon as you can get out of agriculture, people do. That’s why we’re down to 1 percent of our labor force in agriculture. It’s very hard work. When you watch people bent over for eight hours in the fields in Africa today, it’s no joy for their lives. It’s extraordinarily difficult.

I say all of this because what machines do, what smart machines have been doing for 200 years, is allowing us to ease that physical burden. We’ve had robots for a long time now. They’re just getting smarter and smarter because they have microprocessors now and artificial intelligence. They’re allowing humanity to escape from a very heavy load.

On principle, this is a nice thing. This is where we would like to go. If it leads to turmoil, massive inequalities of power and income and wealth, or, by the way, the other dystopian possibilities, which George Orwell depicted. We already have a mass surveillance state in this country, probably not too far from here. I hope they’re listening.

I expect every time I pick up the phone — I used to say, “Hello, NSA, I know you’re listening.” Then I was told it’s probably six intelligence agencies listening.

All I’m saying is, like all the things we discussed, I believe that artificial intelligence robotics is real, deep, transformative, potentially for the good, possibly for the bad, and, therefore, a matter of analysis and choice.

AUDIENCE MEMBER: The water issue. California. Governor Brown has recently discussed water issues in California. When I was down in Texas, they have dry lakes around Austin, and they’re rationing the last two or three years I was out there. I think you mentioned Africa, the dryness in the countries. How is water going to impact our global economies?

SACHS: The water issue is a pervasive global issue. Colleagues of mine published in PNAS a few weeks ago and then another article. One on the fact that with climate change, the models show that the American Southwest and Great Plains are likely to dry very, very significantly during the 21st century.

The climate models basically show massive water problems in many places in the world and for two big reasons. Many dry places now, which are often on the descending zone of convective forces like in Hadley cell, become drier with climate change because these convective forces become more powerful.

Second, in general, with higher temperatures, evapotranspiration is faster so the soils dry out. All of this means that water crises will intensify. Even without the climate change, water stress is pervasive because population increases and agricultural demands are huge. We have 60,000 major dams in the world diverting runoff already.

That means famous places like the ROC, which dried out irrespective of the climate change in the past. I can tell you about recent research, and it absolutely comports what I see with my own eyes in many places. Syria had a huge drought, the biggest in its modern history, from 2006 to ’10. It led to many social ramifications that contributed to the explosion of violence starting in 2011.

This fact of these ecological crises turning into social catastrophes, I think, is a very real phenomenon. We should not presume that somehow we’ll just be able to handle this stuff. I’m told constantly, “Crisis leads to innovation and solution.” The truth is that’s sometimes true, and sometimes crisis leads to catastrophe.

COWEN: What I’m going to do — I think we have time for two more questions. I’ll take the two sequentially, and then Jeff can address the two together as he sees fit. Don’t answer the first right away. A question here, a question there, and then back to Jeff.

AUDIENCE MEMBER: Given that a goal of economic development policy is to help low-income countries catch up, what do you believe the Ex-Im Bank’s role, and export subsidies more generally, have in economic development, especially with the knowledge that many of the beneficiaries of Ex-Im assistance are firms in countries with rich economies like Mexico, India, Hong Kong?

COWEN: And the second question?

AUDIENCE MEMBER: You said that economics should, in a sense, be more humble about its knowledge and economists tend to think that there’s a certain knowledge of economics that they know, that they have a value-added. Do you see that as justified, that economists’ economic way of thinking has some value-added?

SACHS: I guess the question on Ex-Im Bank, I’ll just make it more general. The big returns to investment in the coming decades, in my view, are largely in the low- and middle-income countries, not surprisingly because their capital is scarce, because they have a big capacity to catch up. They have a big human need also.

In an idealized world, a tremendous amount of finance would flow from the savings in high-income countries to capital stock in low- and middle-income countries. Of course, some of that happens, for instance, to China or to Mexico in the past. It’s relatively constrained because there are huge institutional barriers, not the least of which is getting repaid for these loans when they’re cross-border.

Institutions which facilitate that kind of international capital flow can be very good at global improvement. In my view, we have too few of those. That’s why I’m constantly arguing for both more aid, which are grants, but also more financing through institutions because I think both of these can improve the human condition, make the world safer, help more countries get out of their crises, and so forth.

Ex-Im Bank is not my favorite institution, but I think it’s fine. I think it should be improved. There are many specific issues of this financing which I’m not too keen on. I would like longer-term, 20- or 30-year loans for infrastructure mainly to low-income countries. Ex-Im Bank is a little bit of a model for that, but we could do better.

In terms of what do economists know, “a lot” is the answer. There are really a lot of powerful insights into two kinds of issues that are core to economics. One is, managing scarce resources is a general problem. The second is how markets function.

Both of those provide a wealth of useful knowledge for human betterment, but what economists tend not to do is to get into the details, as it were. We think that the general knowledge is sufficient. That, I think, is a mistake.

As I’ve tried to describe in our conversation now, and as I’ve learned in 35 years of work in the field in more than 125 countries, the context is essential because we’re dealing with very complex phenomena. The complex phenomena do not lend themselves to slogans, to easy answers, or to single solutions.

They’re more like engineering problems, agronomy problems, or health problems. You have to understand the context, the technologies you have at hand, the choice sets that you really have, in order to be constructive in this.

There may be room for a few pure theorists in a field like this. In my life I’ve met a few brilliant geniuses, very few, who could sit in an office and think great thoughts and contribute to the world. It’s a very small number, by the way. Then I’ve met lots of people who generalize, which doesn’t move me because I don’t find it helpful. I find it distracting, confusing, misguided, or misplaced.

For most of us mortals, I think the deep engagement in real problems is crucial. I wouldn’t want to train doctors without the medical students walking the wards with their mentors. I don’t like training economists without them grappling with real problems in real places and learning the complexity of the interacting physical, technological, political, economic, natural systems.

It’s the complexity of these interacting systems that defines how we need to respond. We’re not training students that way. We’re training them in general principles or in very fancy statistical exercises that actually miss the point.

Just a final word about that. We have so much statistical machinery to ask the question, “What can you learn from this dataset?” That’s the wrong question because the dataset is always a tiny, tiny fraction of what you can know about the problem that you’re studying.

If you want to know about the problem, get out there and learn about it. Don’t think that you’re going to find it in your dataset. For that we need a different kind of epistemological approach and a different kind of teaching approach as well.

I want our students out on the hospital wards, as it were, but that means being out in the world working and solving problems and dealing with people across many different fields and many different parts of social systems to be able to aggregate to and integrate into meaningful holistic solutions.

COWEN: Jeff has a new book out, The Age of Sustainable Development. He will be doing signings outside at the reception. Jeff, thank you again for so much of your time.


SACHS: Thank you.

The Mercatus Center gratefully acknowledges the assistance of Stephen M. Jones in curating most of the hyperlinks found in this transcript.