Happily Patrick stayed true to the spirit of Conversations with Tyler, and their dialogue covers a wide range of topics including the benefits of diverse monocultures, the state of macroeconomics, Donald Trump, the amazing and eclectic economics faculty at George Mason University, Peter Thiel, Brian Eno, Thomas Schelling, why Twitter is underrated, and — most pressing of all — why Marginal Revolution is so strange looking.
Listen to the full conversation
Recorded January 25th, 2017
Read the full transcript
This conversation was recorded at Stripe’s San Fransisco office in late January 2017.
PATRICK COLLISON: Thank you all very much for coming. I would typically start out with a lengthy introduction of the speaker’s various accomplishments and things that make them notable and noteworthy. But Tyler told me that de rigueur in these conversations is to keep them to 90 minutes. So I don’t think I can really go far down that list in this case. Suffice it to say that you’ve published 15 books? Is that the right count?
TYLER COWEN: I don’t know; I’ve no idea.
COWEN: I think it’s more! [laughs]
COLLISON: Well, he’s published at least the number of books in the stack here, along with — actually, I think, second from the top is his new book, which is about to come out, which I trust you’ve all preordered on Amazon. I won’t be offended, or I’m sure Tyler won’t be offended, if you all take out your phone and go ahead and order it right now: The Complacent Class; I highly recommend it. And published more than 60 papers, obviously: the author of The Great Stagnation, which I think was the work that really brought you to top of mind, at least here in Silicon Valley.
Tyler has visited every US state with the exception of Alaska, I just learned. And then, I think, really most impressively and noteworthy of all, Bloomberg Businessweek named him “America’s hottest economist” back . . . I think, was it two, three years ago?
COWEN: It was before I worked for them.
COLLISON: Before he worked for them and before the era of fake news.
COLLISON: So you can all trust it. It’s out of this conversation.
COWEN: My mother put it on her Facebook page.
On Paul Romer and the last thirty years of macroeconomics
COLLISON: [laughs] So, the first thing I wanted to ask you about is, you’re an economist, at least originally. And Paul Romer, who’s now, of course, the chief economist at the World Bank, he opened his most recent paper with the assertion that for the last 30 years, macroeconomics has been going backwards. And I looked into this and I realized that Tyler got his PhD exactly 30 years ago. I don’t necessarily want to imply anything causal, but do you agree with Paul?
COWEN: [laughs] I don’t agree with Paul. I think we understand credit crunches much better than we used to. We understand the structure of asset returns and when and why risk matters, compared to earlier times. Models where you have multiple equilibria, where more than one thing can happen, we understand better.
I don’t think we’ve solved any ability to predict business cycles or market crashes or Great Recessions. In that sense, there’s not progress, but I think the best theories often imply they’re intrinsically difficult to predict. So I think we ask much better questions, and on that particular issue of science, I’m much more optimistic than is Paul Romer.
COLLISON: What do you think of the paper itself and the claims in it?
COWEN: I thought the paper was quite a polemic. Writing a polemic can be useful. It attracts attention. It jolts people out of their “dogmatic slumbers,” to use the old philosophical term. But that said, a lot of the debate ended up being about either Paul Romer or a particular group of macroeconomists, rather than about what macroeconomics should do.
So I think a central question for macroeconomics is economic growth. I think our understanding of the determinants of growth, just like our understanding of how well science does, is extremely poor. Much of that is ultimately cultural, and bridging economic and cultural ideas we’re very bad at. And I think macro has neglected that centrally important topic. That would be my main critique of macro. But it would be phrased more gently than Paul’s.
COLLISON: I would take it that’s partially because of your differences in temperament and not just the differences in belief structure.
COWEN: Yes. But Paul — when I talk with him, he has a very gentle temperament. So I don’t actually have a good theory of Paul. I get on with him very well; I enjoy exchanging ideas with him. But sometimes he’s a firebrand when he writes.
COLLISON: I want to dig in on this question, where you just mentioned how we have much better models now, but you touched on this notion of our predictive ability. And it seems to me that the old joke about economists, where economics is the field where you can win the Nobel Prize for proving or for showing x, and then later, you can go on to win it for showing that x is in fact false. And the Nobel Prize in ’74, when Myrdal and Hayek shared it, was evidence for this.
But the thing I wanted to ask you is how much progress you think is actually possible here. We’re still having the debate as to what exactly is the nature of the relationship between interest rates and inflation. Right?
COLLISON: And does one drive the other? And in which direction? What’s the nature of the comovement, and so on? Or was the Washington Consensus correct? Is the Washington Consensus correct? How much freedom around the movement of capital should there be in developing nations, and so on? What’s the right policy to adopt if you’re a developing country?
And it seems to me that . . . well, I won’t answer what it seems to me. I’ll ask you the question, To what degree do you have confidence that economics will ever get to durable answers to these questions, and what do you imagine the version of the Paul Romer paper in 30 years to look like?
COWEN: Frank Knight once said something wise, maybe overstated, but he said, “The main function of economics was to offset the stupid theorizing of other people.” So it’s very useful as a form of discipline. And economics is a way of thinking — it’s very useful for inoculating you against other kinds of mistakes, even though in some ways, it may be a mistake itself. But I would say, in macro, we’re very good at retrodiction. If you look at the Great Recession, and you try to trace when and where were the bad mortgages made, and which banks held them, and when did they go bad, we can trace that with a level of detail and care, that, say, we couldn’t have done for the 1979-1982 recession. And that’s a scientific advance.
But in terms of control, we believed in the great moderation; we were wrong. Now we’re probably wrong again. You have people like Jeremy Stein, who are convinced the Fed shouldn’t be holding rates down, people like Paul Krugman, who are more or less convinced they should have been. And given that we cannot rerun alternate histories, I don’t think statistics simply getting better will ever settle a lot of these key questions. So economics will always be hovering between art and science.
COLLISON: Will it always be retrodictive, or does it become predictive at some point?
COWEN: I don’t think it will be predictive any time soon, not in our lifetimes. Not on a lot of important issues. There’s plenty of micro where it’s predictive. So people who work at Uber, they have a dataset and they can now answer questions with that. That works pretty well.
COLLISON: OK, on what basis should we then be making macroeconomic decisions?
COWEN: Well, we have to make macroeconomic decisions. To do nothing is also a macroeconomic decision.
COLLISON: Right. [laughs]
COWEN: I think the notion of having a Federal Reserve System that is predictable and tries to keep the nominal flow of purchasing power growing at some steady rate, we know that something like that is close to the best we can do in a fairly impressionistic way. And that’s really important. People didn’t know that in 1929. It’s a huge victory for the contemporary world.
COLLISON: So do you think that, from a forward-looking standpoint, we should try to come up with some very minimal set of stable rules along the lines of what you just mentioned? And after that, the, again, forward-looking predictive efforts we’ve done most of as much as we are likely to be able to do, and everything after that is filling in the details on what happened, ex post.
COWEN: I agree with that, but I would add another caveat. If you have a good rule, you have to wonder if all systems — including the US Constitution — all systems in the world eventually can be gamed. It could be your macro rule would be good for a long time, but it could be gamed if only through people figuring out how to use politics to distort or lie about the indicators. So I’m not sure there’s an eternal solution, but I think there are policy semi-solutions that at least are good for 20 or 30 years.
COLLISON: You’re touching on this notion that maybe economics is a lot of post-hoc illustrative power.
On culture and economics
COLLISON: Uncertain how much predictive power it has. You’ve written a lot about how the study of economics has influenced your appreciation for the arts, and for literature, and for food, and all of the rest. You haven’t written as much about the influence in the reverse direction. How has your appreciation for and study of the arts influenced your study of economics? And is this a version of that?
COWEN: This is a version of that. Here would be a simple example: If you think about Renaissance Florence, at its peak, its population, arguably, was between 60,000 and 80,000 people. And there were surrounding areas; you could debate the number. But they had some really quite remarkable achievements that have stood the test of time and lasted, and today have very high market value. Now, in very naive theories of economics, that shouldn’t be possible. People in Renaissance Florence, they didn’t produce a refrigerator that we’re still using or a tech company that we still consult.
But there’s something different about, say, the visual arts, where that was possible, and it was done with small numbers. So there’s something about the inputs to some kinds of production we don’t understand. I would suggest if we’re trying to figure out, like what makes Silicon Valley work, actually, by studying how they did what they did in the Florentine Renaissance is highly important. You learn what are the missing inputs that make for other kinds of miracles.
Ireland and writing would be another example.
COLLISON: [laughs] What fraction of tenured economists in the US do you think would agree with your take on the predictive power of macroeconomics?
COWEN: There’s really a sharp distinction here between people who do macro and people who don’t. So those who don’t are typically pretty cynical, but I think they’re actually too cynical. Macro is the favored whipping boy of a lot of economists. And the public is always upset at the macroeconomy, so you’ll always find an audience for this. But I think macro is slightly underrated. But then in macro, you have too many people who are simply too arrogant. They think they’re working on God’s chosen method in different ways. And that’s wrong also; it’s much more pluralistic than that. You’re just grabbing parts of the elephant in a fairly blind way, I think.
COLLISON: What field outside of economics has the most to say about macroeconomics?
COWEN: Well, if you’re discounting statistics or econometrics, I think psychology. Some form of social psychology.
COLLISON: You mean, along the lines of . . .
COWEN: Why there’s contagion of beliefs, why beliefs move together, why people move to fear and panic.
COLLISON: Yep, yep, the behavioral stuff?
COWEN: That’s right.
COLLISON: Yeah. What are the, say, top two most underinvested areas of economics today?
COWEN: Culture and economics, for me, is by far the most underinvested. I still think randomized control trials, they’re expensive, but you do actually learn things from them, which are probably true. That’s remarkable.
COWEN: They contain actual knowledge. Now, it’s true the questions you can ask are narrower, but it seems odd to turn down the reward of actual knowledge, right? [laughs]
COLLISON: You recently linked to the new book whose title is escaping me — you’ll probably remember it — on the series of interviews on random control trials in economics. And there’s all these questions about to what degree they have external validity and so on. Do you think the critics are overstating the case?
COWEN: One of the main criticisms is, if you do randomized control trials, you’re studying something like, “Well, does paying mothers to bring their children in for vaccines work in getting the mothers to bring the children in?” You’re not asking big-picture questions of political economy. But big-picture questions of political economy — they can be very hard to control. There’s no one who can steer, say, what will happen with India or Kenya, but you can change some policy regarding, “Do you reward mothers for bringing their children in for vaccinations?”
You know the subtitle of our blog, “Small Steps Toward a Much Better World”: there’s something to that. We can make a lot of these small steps. It’s also related to the correct attitude about management. A lot of good management is doing very small things and not always some grand philosophy. So I think this is actually still underrated.
COLLISON: You said that culture is one of the most underinvested areas.
COLLISON: And you’ve written several books about culture, but among them Creative Destruction, and this is, at least as I read it, on the face of it, a defense of the effects of globalization on culture, right? And that while globalization might cause a decrease in across-country cultural diversity, we shouldn’t look at it at some God’s eye view, objective level. We should instead be focused on the individual, the subjective, and the operative level of diversity.
Here in San Francisco, we see the fruits of all that globalization, right? But you also say in the book, you do acknowledge the point, that there might be a decrease in total global cultural diversity as a consequence of globalization. If you think culture is so important and so underinvested in and so understudied, is it not too hasty to advocate for a force that’s producing a net reduction in the quantity of it in the world?
COWEN: Well, there are multiple readings of a number of my books. And I would say, when you’re looking at the globalization of culture, we’ve engaged in a rather significant cashing-in exercise. Say you have a very small community, Inuit in Canada or artists in Bali, they’re very small in number. And until they’re in some way reached by larger, richer cultures they can trade with, in many instances, they’re not that creative. They have some tradition, but it’s not fully mobilized. Then there’s this intense cultural interchange, and it’s very fruitful. There’s a flowering, there’s more commercial sale. Top creators come to be, more genres are defined. There’s more diversity within the Balinese world or within Inuit sculpture, say.
But eventually, that peters out as the smaller communities are absorbed by larger ones. Over the last century, we’ve done an unprecedented amount of this cashing in, by having smaller cultures obliterated. Now, one way to look at it is, well, they’re there and if you never touch them, that’s a shame. Is there an optimal rate of cashing in? I’m not sure that’s a variable you can control. But I think along some critical dimensions, our next century will be less creative than the last because we’ve cashed in on such a large number of small groups. And I worry about this with Ireland, too, a place you’re familiar with. The Irish literary tradition flowers, arguably, in the first half of the 20th century.
COWEN: And I worry now that people in Ireland hear too much American English, too much English English, and that style of writing, talking, joking, limericks, is becoming somewhat less distinct. Still many wonderful writers from Ireland, but again, it’s like an optimal stock depletion problem, and maybe we’ve pressed on the button a little too hard.
COLLISON: The transaction costs should be higher?
COWEN: Should be. But again, it’s a hard variable to control. With the tech world, in some ways, the tech world might be growing too quickly. People very quickly shift to Facebook, and that allows them to do much more socializing. And that, in some ways, actually limits the diversity of the world. They’re happier individually, but that’s another instance of cashing in that actually may not be socially optimal.
COLLISON: Is it that you believe that we can’t do anything about this, and so we should appreciate the consequences as best we can and make the best of it? Or you think that we should not do anything about this?
COWEN: As an individual, there are definitely things you can do. You can be quirkier. You can be eccentric. You can partake in some networks rather than others, and subsidize things that otherwise might have their stocks depleted too quickly. At the macro level, it’s hard to steer.
The Nassim Taleb case — that free trade gives you too much monoculture — I take it seriously at an intellectual level. But the amount by which you would need to cut off trade to really create separately existing independent parts of the world that would give us greater protection against existential risk, it seems you would literally need to go back to 1500 to do that. And that’s not feasible; it wouldn’t be desirable.
But I think he’s getting at a tradeoff that a lot of the rest of us aren’t sufficiently willing to admit. That in some ways, we’re investing in literally a monoculture of diversity. And that’s a little dangerous.
Like every city has restaurants. I saw a Guam restaurant on Mission [Street] when I was walking today. I ate at a Cambodian restaurant. Two days before, I was at Mandalay, a Burmese restaurant. And many cities have these. And we call it “diversity,” but we have to be careful also not to just be fooling ourselves.
COLLISON: So is connectivity the worst thing that ever happened to global culture?
COWEN: You need connectivity. Today’s world has much longer life expectancy, people are happier, they’re better off, we produce more things. But there’s a danger in connectivity. And the extreme acceleration of connectivity through tech, I would say, is a huge, non-controlled experiment that we need to be a little cautious about.
COLLISON: You wrote with Derek Parfit back in the early ’90s about how our intuitions about the discount rate we should have for the future are wrong. The discount rate should be much lower, and we should care way more about people in the distant future. And if you believe that, shouldn’t that, on this particular cultural point, cause you even more concern? Because 500, 1,000, 5,000 years’ time, we’re not just slightly but enormously decreasing the amount of culture that they can expect.
COWEN: But keep in mind, if you don’t mine the stocks of these smaller diverse cultures, their outputs deteriorate and decay. So there’s so much from the past we’ll never have a clue about because it’s gone, and we never “exploited” it. That’s most of the culture, completely a closed book to us. If we’re worried about the future, you actually want to do exploitation plus preservation. Now, maybe we haven’t done enough preservation. But it doesn’t steer you away from the exploitation, caring a lot about the very distant future.
COLLISON: You point out that Taleb says that the things we’ll have to do in order to counteract this effect will be so totalitarian that they’re not really even worth taking seriously. On the micro level, or on the local level, is there anything we can do to . . . perhaps we can’t solve it, but we can reduce the effect somewhat?
COWEN: Well, spend less time on Facebook. Use Google in funny ways. Right? Be careful —
COLLISON: Should we just use Bing?
COWEN: Well, Bing is too much like Google. Simply being a weirdo with Google will suffice, I think. Be careful how you use Netflix streaming. If what’s streaming on Netflix is your filter, you are part of the problem, I would say.
COLLISON: But these are all actions for the individuals. I mean, us as a society, are there any policies we can enact or that we ought to follow?
COWEN: Well, our main policies toward the arts, more and more, have to do with copyright, patent, and intellectual property. I think, for the most part, those are too strict. We could improve them, and we’d get more creativity and more borrowing. But I don’t think, at the margin, those changes, good though they may be, will have a major impact on this issue. Just the core: How do ordinary people spend most of their time? That’s the big driver here. Other than having drastic changes in policy, I think most of what we have to do are these small steps at the individual level toward the much better world.
And more randomization. Think more carefully about physical space. When I was growing up, I would drive my car into a town, maybe Philadelphia, with my friend, Dan Klein. First thing we would do is get to a telephone booth. Remember those? And like evil people, we’d rip out the pages for used bookstores and then drive around and try to find them. And we would find them by basically yelling out the window and asking people where some street might be.
COWEN: And that seems horribly inefficient.
COLLISON: It does.
COWEN: But I think keeping a memory of why those odd, bizarre practices have some efficient elements when thought of as search algorithms. Preserving that knowledge is very important. And I think people who write or think or communicate with others can do that.
COLLISON: Would this all suggest that we should be even sadder than we are in the decline of various languages around the world?
COWEN: Yes . . .
COLLISON: Spoken language.
COWEN: We should try to preserve them when we can. Nahuatl is actually my favorite language when I hear it, and it still has well over a million speakers. It’s not in immediate danger, but I would predict, in less than 200 years, it will be gone. Gaelic has made somewhat of a comeback, but it’s still up in the air, perhaps.
COLLISON: On this point, would you write the same book today?
COWEN: Not the same book. But when I reread that book, I think I capture the multiple layers of how globalization is dynamic and creative and welfare enhancing, but dangerous and stock depleting and giving us this funny monoculture of extreme diversity, patting ourselves on the back, but all being a bit diverse in the same way. I think that’s in the book, and I’m happy about that. We love to play at diversity theater.
COLLISON: Say more.
COWEN: That’s one thing striking to me about the current world. You need different kinds of representation. But the kind of moves you make to get there often create a monoculture of its own. And you see this when you compare the coasts to other parts of America.
I once wrote a blog post saying, “Well, there’s a lot more diversity amongst supporters of Trump than supporters of Hillary Clinton.” This got me in a lot of trouble. People wrote to me, outraged, “How can that be?” But there’s many kinds of diversity. For instance, a simple principle is, our correct point of view will be less diverse than people who are wrong because there are many more ways to be wrong.