 Good afternoon. Welcome to the Cato Institute. My name is Brink Lindsey. I'm Vice President for Research here at Cato. Delighted that you can join us today for a book forum on a new book by Arnold Kling and Nick Schultz, entitled From Poverty to Prosperity. We tend to attract a highly intelligent and discerning crowd to our events here at Cato. So probably many of you have already picked up on the fact that the gentleman on my right is not Zannie Mittenbeadows, although she was the person who was publicized as the commenter today. They don't call it the cold and flu season for nothing, and alas poor Zannie is observing the season right now with a nasty bug, which incidentally she apparently picked up in Davos while covering the World Economic Forum. Yet another case I guess of international economic contagion? Thank you. But we're delighted to have Tim from the Kauffman Foundation come here and share his thoughts about this book. We're here today to talk about an excellent book with excellent timing, by which I mean it is a superb treatment of a timely topic, and the topic is growth. The number one question in Washington right now is what can be done to get our economy to start growing again? Normally growth is taken for granted in Washington. The normal game in Washington is how to divide the pie, not how to make it bigger. But with the economy having suffered a deep slump, and with unemployment and underemployment now at punishing double digit levels, the urgent issue is how to get people back to work again. Now because this is a cyclical downturn, there's lots of talk about temporary counter cyclical policies. We've already had a huge spending splurge last year, the so-called stimulus bill, and now there's a flurry of activity to enact a so-called jobs bill with more spending and various targeted temporary tax incentives. Much of this is wasteful foolishness, while some of it, at least, might do a little bit of good. But there's widespread recognition in any event that such counter cyclical measures don't really get to the root of the problem. Because given how we got to the current predicament, there's a lot of concern about deeper structural problems with the American economy. After all, our last two economic expansions turned out to be speculative bubbles, or at least degenerated into them. The tech-led boom of the 90s started off real enough before floating off into fantasy land. But the housing-led boom of the past decade now looks like it may have been a good deal of flim-flammery all along. So there's a growing sense that we have to get past quick fixes and make sure that the policy conditions for real and durable growth are in place. And there's no better guide to what those conditions are than this new book from poverty to prosperity. This is a book about the new economics of growth, or economics 2.0, as the authors call it. Traditional economics or economics 1.0 was predominantly occupied with the efficient allocation of resources under conditions of scarcity. Economics 2.0, on the other hand, is concerned with the conditions for overcoming scarcity by creating new resources and wealth. This is a wonderful survey of the new economics of growth, and perhaps its biggest selling point, at least to this reader, is its superb interviews with many of the giants of the new growth economics. The book is especially timely today because the message of the book is so completely counter to the prevailing way of thinking here in Washington right now. The good news is that politicians are paying attention to the problem of growth. The bad news is that too many of them are thinking about it all wrong. The dominant tendency is to conceive of the problem as identifying specific sources of future growth, the so-called industries of the future, and then showering them with subsidies. The flavor of the season, when it comes to industries of the future, is green. Green industries, green jobs are all the rage right now. Indeed, here's what President Obama said just yesterday in a meeting with Senate Democrats. Quote, I continue to believe, and I'm not alone in this, that the country that figures out most rapidly new forms of energy and can commercialize new ideas is going to lead the 21st century economy. I think this is our growth model. Arnold and Nick make clear in their book that this top-down industrial policy approach is a sucker's game. We don't have any idea what the industries of the future are, and certainly we don't have any idea of which specific companies are going to lead those industries of the future. The real task, rather, is to create conditions in which completely unpredictable innovations can occur and get adopted. And for more about how to get that done, I'm going to turn it over to the authors and commenter. I'll introduce the authors one at a time. We start with Nick Schultz who will be leaving off. Nick is editor-in-chief of American.com, which is the fine online publication of the American Enterprise Institute, focusing on business and economics and public affairs. Nick formerly was editor of the excellent website TCS Daily. Before that, he was politics editor at foxnews.com. And with that, I'm going to turn the podium over to Nick Schultz. Thank you, Brink. Let me say at the outset I'd like to thank the Cato Institute for hosting this event. I had a good fortune several years ago back a long time ago when I was a television producer of interviewing Milton Friedman a couple of times at his home in San Francisco. And I remember him saying very clearly and explicitly during the course of one of our interviews that freedom is my highest value. And freedom is, I don't know if it's my highest value, but it's certainly up there in the top tier. And the Cato Institute has done more to defend freedom in this town where it needs defending than just about anybody else. And we're very grateful for your work. So needed now as much as ever. I also want, it's an honor to be here with Brink because I'm going to do my publisher no favors by breaking the first rule of promoting a book, which is immediately talk about somebody else's book. But Brink has written, there are a lot of young people in the room who may not be familiar with it. Brink has written, what in my view is one of the 25 or so best books of the last quarter century, a book called Against the Dead Hand. And if you've never read it or don't know it, please go get it. It's had a profound influence on me, how I look at the world, how I look at geopolitics and economics. And so it's a real honor to be with you. Brink mentioned that the original discussant couldn't be here, but we do have Tim Cain, which is terrific. Tim is at the Kauffman Foundation. I'll probably tell you a little bit more about them. But one of the things I found in doing the research for this book, a big theme of the book is entrepreneurship and entrepreneur led growth. And there had been until recently very little solid economic research that had been done on entrepreneurship. Now there are a number of reasons for that, which Tim might be able to get into. But the research that has been done, a lot of it has been done thanks to support from the Kauffman Foundation. And whether you realize it or not, we're very much in debt to that to our enriched understanding of entrepreneurship and entrepreneur led growth thanks to Tim and his team's work at Kauffman. So it's great to have Tim here. I want to talk about three things today. The first is my interest in this subject, which is a personal nature, which I'll talk about in a second. Second thing is who might be interested in this book. And then the third is just a big takeaway that I'm hoping to leave you with today. My interest in this topic of long run dynamic economic growth actually starts with some of my family history. I come from, as the name Schultz suggests, I come from good German stock, German Lutheran immigrants who came to the United States in the 19th century. And they were cabinet makers. They're basically carpenters. They were engaged in a profession that is not the oldest profession. I don't think any of my ancestors were doing that. But one of the oldest professions in recorded history, and they came to the United States, settled in Chicago, and they were cabinet makers. And when they were there, they entered in the 19th century, the then burgeoning piano making business, the M Schultz and company piano making company of Chicago. They were entrepreneurs. It was I won't go into the details of the piano the history of the piano industry was actually pretty fascinating industrial history. And they had some success with that. They competed vigorously with companies like Steinway of New York. And they ultimately lost out to Steinway and some others. What they did is they adapted to the fact that they didn't compete as well. They entered a niche market adopting new technologies. And they entered the the player piano market. So they all you probably seen them the old pianos with the rolls and the scrolls. And they were very successful in doing that they harness new technologies they adopt they adapted to competitive pressure. They changed they tried and experimented with new things and they had some success in this market. They they were successful with that up to a point. And that point was competition from new forms of entertainment that came that that Americans and others could access in the middle part of the 20th century. So home forms of of musical entertainment that that sort of pushed the player piano to the to into an earlier era. So what were they to do with this well they adapted again under this competitive pressure seeing that this market was disappearing. And they entered a new business line of business where they created a product called the auto typist. This was based based on existing technology of the player piano and basically what it was is a combination of sort of a typewriter and a Xerox machine. You would it gave you if you were an office manager say you ran a law firm where you had to produce a lot of paper you could type out a letter and then you had this imprint in the same way that a piano scroll had this imprint and then you could publish over and over and over again that same letter to send out to clients or whomever. So they entered an entirely new market and they had enormous success with this for a while until in the second half of the 20th century new forms of technology and innovation started to put pressure on the auto typist. Obviously we had electric typewriters we had actual Xerox machines. We had the personal computer revolution and then the internet to today. And the auto typist one is now sitting in some industrial history museum somewhere. But even my father's generation my couple of my uncles worked for the company up into the 70s. That's how long that this thing stuck around. So that brings me to my own career which has been spent as break indicated a lot of time I've spent in web publishing. Now these were jobs that literally did not exist 15 years ago. And yet I have been gainfully employed working with technology and in sectors that that simply didn't exist. And yet these were the same forces that enabled me to have my career today were those that upset and destroyed my earlier ancestors businesses and lines of work and livelihoods. The now that that's a little bit about my family history. I tell you that because as I looked at that when I looked at sort of standard economic descriptions, they were unable to capture this dynamic process of change over time and they overlooked a number of different things. I mean, you have the standard economic model which takes land labor and capital as factors of production. And then there's a discussion about how to allocate scarce resources as break mentioned. But this overlooks so many factors including things like entrepreneurship, competition, the entry and exit of firms, innovation and technical change, the knowledge base that grows over time that makes continuing technical change possible. And also the institutional mix of laws and norms and conventions that make dynamic economic change possible over time. All this has been largely absent from a sustained discussion of economics up until very recently. And so as I looked at this family history, I said, well, how can I understand this better? But as it turns out, there has been a lot of work over the last two generations in economics that's trying to help answer some of that. It's trying to help explain this dynamic process over time. Arnold's going to talk a little bit more about some of the some of what's in the in the book. But that explains my interest. Now who I'd like to turn to who would be interested in this book. As Brink said, there are a number of interviews with fairly prominent thinkers that will be known to many of the people in this room. Folks like Robert Fogel or Paul Romer, and people like that. But there are also interviews with with with people that may not be as well known to you or whose work you may not be as familiar with. So I encourage you to so encourage you to to spend some time with it. But I also think this is a book that should appeal to it's not partisan book. We joke I used to joke that we probably could have had better book sales if we named it from poverty to prosperity and how Obama is taking us back to poverty again or something like that. But it's a it's an explicitly non partisan book. It's an idea book and it should appeal to honest people of any sort of ideological or political stripe. I actually think in some ways it is a designed to be a conversation with liberals. Arnold once described himself in an essay, a number of years ago as a bleeding heart libertarian. And I sort of think of myself in a in a similar manner. And so what we're presenting in the book should, I think be appealing to liberals. Now I know this is an issue of concern to break who has been trying to engage in a dialogue between libertarians and liberals to see if there's common ground and maybe progressives could be attracted to some of the arguments that libertarians make about markets and about why we should rely on markets more than than state action say this book might be a little bit of a litmus test for that thesis. If honest liberals want to give it a shot, I think there's a lot that they will find in it that should appeal to them. A number of the people that we interview are political liberals. So we'll see if the the love of sort of technocratic management can be overcome by the arguments that are presented in some of these books and we'll see. And then just just a couple of takeaway thoughts. One of the one of the major themes of the book, it has to do with how we understand markets and how we understand what markets do. This will be a little bit of a of a gross generalization. But but in the main, when we have a political discussion about markets, we think sort of break down to two camps, we have one camp that says, well, markets work, they deliver all these these goods. And they work so therefore we should rely on markets. Then this other camp looks at what markets doing in the context, obviously the recent financial mess in the economic downturn, they say, well, look, markets don't work. And that's why we need to have government come in and manage tweak markets so that they work for everybody. Well, one of the messages of this book is that markets fail. But that's why we need markets. What we're advocating is that people take a look at what markets do over time, which is enable space for trial and error and experimentation and searching, which are the only ways reliably over time to have long run economic growth, technological advance and beneficial wealth creation and social change. But it has to be understood in the context of the fact that markets will fail people entrepreneurs will experiment with things that won't work. Sometimes there will be entrepreneurial enthusiasm to the point of a bubble, as we saw with the technology bubble in the late 90s and early 2000s. My sense is there's very little that can be done by technocrats in advance to manage that lawful chaos in a way that doesn't end up throwing out the baby with a bathwater. So again, we were advocating a very sort of realistic assessment of markets, but one that because it acknowledges the markets indeed do fail should appeal to those for whom as a political posture, that's their starting point when they advocate government involvement in the economy. We say that conclusion doesn't necessarily follow and you'll have to read the book to understand that. One final note, the role played by the entrepreneur in economic change over time is one that has not at least until recently, I think been sufficiently appreciated. It's still underappreciated. And I mentioned Tim's coffin foundation has done good work on trying to help us understand what it is that entrepreneurs do how entrepreneurial activity arises and shapes economies over time. A big theme of the book is that what entrepreneurs principally do is overcome resistance to change. And that resistance can come in many forms, can come in the form of incumbent firms that are threatened by a new entrant or by a technology who want to use the political process to stop that that entrepreneurial change from happening. And that gets me to one of the worries that that Brink actually highlighted, which is that we may have one thing I worry about is a sort of distortion of entrepreneurship that happens when the political class settles on a few select areas that they think are economic or technological winners. Brink mentioned green technology. And I think that's right. We may meet Arnold and I did a piece recently saying that we may be the beginning stages of a green bubble, green technology bubble that's pumped up by policymakers in the same way that we had a housing bubble that was pumped up in part by policymakers not not in total and there were market forces at work here but policy definitely had a role in the housing bubble that it may well if we end up with a green technology bubble. But what worries me is that the moment that governments get in this business of picking winter technologies, it makes the genuine entrepreneurs job of overcoming resistance that much harder, because you're not only having to overcome incumbent industries, technological lock in people not wanting to change their routines and what they're doing. But you have a very powerful interest that has made a bet in a certain direction and will be not inclined to lose that bet. If anything will be inclined to double down over time. So one challenge is looking taking a very realistic look at entrepreneurship, how it actually works in the economy and what the challenges and threats are which come in the form of government run entrepreneurship or government led entrepreneurship. And so with that, I will sit down and let Arnold talk and I'm looking forward to the Q&A. Thank you. Our next speaker is co-author Arnold Kling, who is an independent scholar and an adjunct scholar here at Cato. He was once upon a time on an economist on the staff of the Federal Reserve System. Also a senior economist at Freddie Mac, where he got an eye full of mischief that later was to explode in all of our faces. He's also an entrepreneur who started HomeFair.com, one of the first commercial sites on the web. He's the author of several books, including a Cato book, Crisis of Abundance, Rethinking How We Pay for Healthcare, and also in a strange quirk of publishing another book, besides from Poverty of Prosperity, that came out just recently called Unchecked and Unbalanced, about the worrying conflict between two trends, the growing dispersion of knowledge and the growing concentration of power and how those two trends don't go together very well. But now he's here to talk about from Poverty of Prosperity. Everybody please welcome Arnold Kling. All right, thanks. I want to congratulate Brink on scheduling this event for February 4th, not February 5th, where another snowstorm is supposed to come in. My understanding is that because these snowstorms have dominated the news recently that President Obama is planning a major address on the topic, my sources tell me that his advisors are telling him not to try to convince people that it's due to global warming, but instead they'll blame the Bush administration's deregulation of the weather, you know, this mess that we inherited. Anyway, this, when Nick and I were writing this book, we went through a number of working titles and one of the working titles was Economics 2.0. The thinking there is that the ideas in this book are very different from what's in the standard economics curriculum, but they're at least as important. And I should emphasize that these are not ideas that are original with Nick and me. On the contrary, they are ideas that we assembled and packaged out of research that has taken place for the most part of the last 50 years, although you can see antecedents to these ideas before that. And I want to just make three, talk about three of the differences between Economics 2.0 and what we call Economics 1.0. The first difference is the questions that we ask. We ask how did countries like ours grow to be so rich and why are some countries still so poor? And we spend basically 350 pages preoccupied with those questions, and yet if you pick up a standard economics textbook, you might not find three and a half pages dedicated to those questions. So that's one difference. Another difference is that, and this is in the subtitle of the book, we focus on intangible factors. We focus on the asset side of the economy. We focus on ideas, entrepreneurship, innovation. And on the liability side, we focus on things that hold countries back, which include predatory government and cultural resistance to change and cultural resistance to learning. So those are all intangible factors as opposed to the traditional tangible sources of wealth of land, labor, and capital. And the third difference which I'll talk about in a few minutes is, but which Nick alluded to a little bit, is the a different way of looking at market effectiveness versus market failure. Okay, so on this difference of how countries became rich and why countries remain poor, Kent's the actual title of this book from poverty to prosperity, comparing the poverty of some countries with the prosperity of others, or how we emerged out of what we would now consider poverty 200 years ago to the prosperity that we have today. So that's the first question. And that question, or that, those questions in a way have been in the news a lot recently because of the aftermath of the earthquake in Haiti. And that really dramatizes how poor a country that is and what that means. And people can ask, you know, how does a country remain that poor? And we don't have a specific discussion of Haiti in the book, but we do discuss poor countries in general. And based on that, I think I can safely make three remarks about the situation in Haiti. First of all, poor countries, again, tend to suffer from government that's predatory, and of course, he had the Duvalier regime in Haiti, and a cultural resistance to learning. Those tend to be syndromes in poor countries. And the most research in the last 50 years stresses the role of property rights and the ability of ordinary citizens to establish and maintain control over businesses and over property in order for there to be wealth creation. So one of the interesting findings that we mentioned in the book is that in poor countries, it tends to take months or even years to get a business license. Whereas we're used in rich countries, we're used to that being a process of days or at most a couple weeks. So that's just an indication of sort of the institutional failures that are often at work in poor countries. Second observation I'd make about Haiti is that in spite of the fact that we would, we think that there are governance issues and cultural issues involved in poverty, in countries being poor, we would not suggest going in and trying to govern the country ourselves or to change the culture from the top down. Cultural institutions and government institutions are deeply embedded and they always function to some extent. So even in this desperate relief situation, probably the more successful aid programs are working with local institutions and local culture rather than trying to work against them. And the third observation I'd make is that we notice a number of countries in which side by side you have one country where the productivity level of workers is very low and in a neighboring country productivity is very high. And in those situations, we've observed a faster increase in productivity for the low productivity workers. If they move to the high productivity country, then if they wait for the institutions of the high productivity country to take root in their country. So that would suggest perhaps that we ought to be relatively lenient in terms of allowing refugees or immigration from Haiti. All right, let me switch gears then to talk about this issue of how we think about market effectiveness and market failure. The standard economics 1.0 approach is what we call static efficiency. And we instead take the approach that Douglas North calls adaptive efficiency. So static efficiency takes the state of knowledge as given and says how well does the market do at allocating resources efficiently? And if it allocates them optimally then it's statically efficient and if it's unlikely to allocate them optimally then it's not. And from that perspective it's very unlikely that markets are going to be efficient because the conditions that are required are much too stringent. When you take a freshman course you hear that about the problem that externalities can cause. You know things like pollution can mess up market allocations. But there are other things that are even more prevalent of other issues. There are information gaps where people, consumers don't necessarily understand everything about what they're buying. Those cause problems. There are differentiated products which means that you can't have the kind of perfect competition that supposedly is needed for static efficiency. And then you have upfront costs or fixed costs which make it again make it impossible to have enough competition that you'll have perfect static efficiency. So just last week Apple announced a product called the iPad and that illustrates kind of all these problems. First of all information gaps. It's very hard to figure out what it does what it should do or how well it works. I think most of people who buy it will buy it not knowing exactly how well it's going to work or whether it's going to do anything useful for them. It's clearly a differentiated product it's not a commodity and a lot of the costs involved were upfront development costs and research and that's why other entrants are not going to be able to come up with a similar product very quickly. So that's sort of a classic example of a modern economic product or service that clearly is not going to satisfy the conditions for static efficiency. So if you're inclined to evaluate markets in terms of static efficiency you're going to think that just about everywhere there are opportunities for government to step in and allocate resources more effectively. Instead we look at adaptive efficiency we don't say how's the market working today we say over time how how is the market improving? How effective is it at incorporating better cheaper products and services over time? And that so that's a question of dynamic efficiency. Let me illustrate that with sort of what's happened since the worldwide web was introduced about 15 years ago. In the stock brokerage industry there's been a great deal of disruption with a lot of newer cheaper and better services introduced in stock brokerage. So that would be an indication of a dynamically effective market, an adaptively effective market. Real estate brokerage on the other hand has hardly changed at all. In fact if you had asked me 15 years ago I would have been shocked if you would have told me that today we would still see real estate agents sitting in houses collecting standard commissions. So that industry has not been disrupted which suggests perhaps an adaptive market failure. Another contrast would be music publishing versus academic publishing. The music publishing industry has been disrupted quite a bit. We have very different models now, iTunes and so on and my guess is that we're going to see even more disruption in music publishing which suggests that there's a reasonable amount of adaptive efficiency in that market. Now by that I don't necessarily mean that the incumbents have adapted but the overall market has produced adaptive efficiency. In academic publishing on the other hand there's been very little change which is sort of ironic since Tim Burner's Lee founded the World Wide Web not to create a platform for Facebook or Amazon but as a platform for academic communication and yet academic journals still look pretty much the way they did 15 years ago which again indicates to me sort of an adaptive market failure. So adaptive market efficiency means that upstarts can come in try new products and services have the inferior efforts be weeded out but have the successful efforts the better cheaper products work their way into the market and force incumbents either to adapt or to go out of business. So that's what we mean by adaptive efficiency and that's our criterion for looking at market effectiveness versus market failure. And the concern as Nick mentioned is that that government is going to tend to side with the incumbents. Incumbents are politically salient upstarts are not so whereas the static efficiency criterion says if you if you everywhere you look you see opportunities for government to make things better when we look at adaptive efficiency everywhere you look we see government as a threat to make things worse by protecting incumbents and holding back upstarts. So those are the again the three the three differences I want to highlight today between economics 2.0 and economics 1.0 first we ask the question about from poverty to prosperity the title of the book you know what what make how did we get to be so rich as a country and yet how do other countries remain so poor we focus on intangible factors the ideas innovation and entrepreneurship on the plus side predatory government and cultural resistance to learning on the minus side and finally we have a different way of looking at market effectiveness and versus market failure and again I think those ideas are very important I believe that they belong in the standard economics curriculum I think that they ought to be incorporated by in business and financial journalism and economic journalism and I hope that someday they become part of the overall public consciousness thanks our commenter today is Tim Cain who is a senior fellow at the Kauffman Foundation he's also the co-creator and co-author of the economics blog growthology.org which is well worth your time and that reminds me I forgot to mention amongst Arnold's writing projects he is the co-author co-editor of another fine economics blog econ talk which you should all check out and read regularly when Tim was was also in before being at Kauffman editor lead editor and author of the 2007 index of economic freedom co-published by the wall street journal and the heritage foundation Tim is also a successful entrepreneur having founded multiple software firms and in addition was a veteran Air Force officer so he's been on the upstart side and in Leviathan as well so with that comprehensive perspective please welcome Tim Cain. When I was in the Air Force I remember people used to talk about Big Blue as an example of a bureaucratic organization that was slow moving and I thought they meant the Air Force and I was like you're absolutely right but what has been an interesting perspective this book is fantastic let me start with that I've known the two authors for a while but I was blown away and I've been involved in the policy debates like folks here at Kato have and I'd like to say also I've remiss in thanking Kato for having me here and hosting this event Kato has really carried the torch I think for liberty here in Washington D.C. for a long time and it's an honor to be here if I were to point to one thing for someone to think about or read to push forward the idea of human progress that it's happened that it's been successful it would be chapter two of the book that we're talking about today it's really a tour de force and in fact they have a series of charts and numbers from A to Z actually it's from A to AB because you guys ran out of 26 points to make they had 27 points to make each of them is impressive from the acceleration of growth rates over time to food intake calories I mean just a fantastic series of charts that I would highly recommend and in fact if I were teaching economics I would have that chapter be part of reading for whatever course I was teaching whether it was macro micro intro graduate growth everyone can learn a lot from that so here's the important thing to understand you can disagree with everything they write and everything they opine and all of the fantastic economists that are interviewed in this book and their theories but you can't disagree with the facts that they lay out in charts A to chart AB it's really astounding when you think about not just that growth has happened and it's had this impact on our lives and Arnold pointed out the new Apple tablet as sort of a paradigm of thinking how government might get involved so I have with me turned off an iPhone and I've never had techno lust like I have for this it's a fantastic device and I remember when I didn't have one for a while I hate to adopt things too early but I knew I was going to get this and I remember 20 years ago when I was at the Air Force Academy we were the first class to have computers right so there's a flash from the past but you can imagine going through basic training right and you're the first class with with computers in the class above you didn't get them so they're thinking all right we're the Neanderthal macho guys and we're just going to take it out on you guys during basic training because you're a bunch of rotor headed geeks that's what we went through that summer but nobody imagined that you were going to carry around something that had more power than that computer on our desktop in their pocket and this book challenge you to think not just the world we live in now and how wonderful it is and then human progress is a reality but that 20 years forward what will this technology look like or what will have been incorporated because if if if Tim Kaine of 2010 were to talk to Tim Kaine of 1990 and say not only will you have a computer in your pocket but you'll be able to have a mapping program in it you'll you'll be able to talk instantaneously on this phone slash computer to someone in Japan I mean that's just a profound change in the way that we live and to think what it will be like in 20 years understand those forces you can draw a lot of that out of this book that's certainly what I got out of it here's what I think is still missing and I want to challenge the authors to address in Q&A let me back up and say at the coffin foundation I started this blog called the growthology and I actually was mentored by by the two authors who have blogs of their own and I realized there are these amazing individual opinions these economic bloggers and no one's tried to collect them all together and survey them and get a consensus sort of do a a wiki nomics or crowd sourcing of that set of opinions so just this week we launched a survey of leading economics bloggers and one of the questions in there that that these were all questions that bloggers themselves came up with one of the questions that I wanted to ask was if you could come up with a growth model for busy policymakers what would it look like what are the three things it would include I originally phrased the question as if you could come up with a growth model that even a congressman can understand but my editor said that was a little bit rough so we changed it busy policymaker because there's a model for the other side for the static side and that model is I think even Keynes would cringe the Keynesian model which says y equals c plus i plus g plus nx right and it's very easy when c goes down when when aggregate consumption goes down you can just inflate g even though you talk to you know bright democrats bright republicans they all understand that that doesn't describe the world we live in we're still stuck with it that's still the fallback mentality is if the stimulus bill that was passed by bush wasn't big enough let's make a bigger one for obama and if that one didn't work well enough let's just double the size and try it again why don't we have a competing growth model and this is the question I wanted to get at what are those three variables that you would include and I have to say I was disappointed with the results I got back I think the three things that were highest were human capital which is fantastic innovation again great to see that included and economic freedom and as the former editor of the index of economic freedom I thought that was alright too but I put in the word scale and I think if I could get every congressman to understand the idea that if we can increase the scale of our economy that's where we get specialization that's where we get a lot of innovation from and it was the lowest choice of all so I wanted to challenge you guys on that is that the right model is that the right even approach that we should have a very simplified model doesn't describe everything but I think it does fall in line with what they came up with one of their core ideas being there's the hardware view of the world which is sort of the classic model of output equals a combination of physical capital physical labor physical land and the new model which we implicitly understand is software they describe as software David Brooks when he reviewed this book in the New York Times very favorably called it the protocol economy Michael Mandel likes to call it innovation economics so a lot of people get this but we know it we know it's a software thing but how can we put it in a in a simple equation that even a busy policy maker can understand that's sort of a conversation I'd like to have with you all the other thing is I want to point out I saw a number of authors in this book not just talk about growth but about the acceleration of growth and in fact one of the authors not included but who's who's worth following is Brad DeLong who cited in the book though so he's not interviewed but he he cited and in fact DeLong pointed out the some benchmarks of how income per capita has risen over time and I remember haven't published this anywhere but if you imagine that the growth rate hasn't just been a flat sort of 2% per year but then it's actually been accelerating since say 1800 that boils down to about adding 0.1 percentage point of growth to your overall growth rate every decade so that say in another 70 years will be at 3% a year decade after that 3.1 what are the implications for that the implications are unfortunately to some that we're not going to have a world where the development gap that's discussed between say Haiti and the United States is is filled in that the poor countries won't converge that was actually something I've been looking at since my dissertation in economics I thought I would be able to find evidence that there was indirect convergence over the long term and instead what you see is the wealthy country especially the lead economy diverging getting wealthier and wealthier and wealthier and you look at places like Haiti and they're stagnant so I normally agree with almost everything here Brink but this is sort of my fun way to trying to think of a way I could disagree or stir up the pot let's talk about Haiti is Arnold's second point right that we really can't do much but be a beacon of light and show them how liberty works here in this country and then hopefully they'll follow because it seems to be there in some sort of a trap and I would agree that you know sending in the Marines and taking over the country whole hog imperialism circa 1800 it's not going to work but isn't there some middle ground that we could that we could find and doesn't maybe even Paul Romer suggest this with some of his thinking so that's a conversation to have about those countries catching up the second challenge is is the U.S. really going to be that lead economy 100 years from now that's diverging away I'd like to think so but a few of the writers talk about China and that China seems to maybe have a better sense of economics 2.0 than we do here in Washington D.C. So again fantastic book highly recommended as much as I love all the interviews I can't again overemphasize how much I enjoy chapter 2. Thank you. We'll open it up to Q&A but first I just wondered if either Arnold or Nick wanted to respond at all to the challenges that the Tim raised first just about the poverty trap and and is that real and is there any way that in your research or your survey of research that looks like a generally promising exit strategy from a poverty trap and then secondly just handicapping looking forward whether the U.S. is going to maintain its position as a leading innovative economy or whether it's falling off the pace well the first words out of my mouth when you ask what are the Tim's first issue of what model would you give to policy makers the first words out of my mouth are trial and error that's I think been a theme of my thinking for a long time so you have to be careful I may be very biased about it I wrote about it in every book that I've written including Crisis of London saying that we need trial and error solutions in healthcare and I think that would be my solution in the poverty trap that there's trial and error starting from the situations where they are I'm tempted to just outsource my views on Haiti to Bill Easterly who is one of the people we interviewed in the book and who has a blog called aidwatch.org aidwatch.org and he you know I guess my views are just so similar to his and his or have so much well more well informed than mine that I would just take his views but I think he had a trial and error he uses the term searchers rather than planners that local people searching, trying out things rather than coming up with a grand plan that will get your way out of poverty for the future I think we speculate a little bit I my view of the future is informed a bit what I by what I call Kurzweil Nomics you know Ray Kurzweil's view of ever accelerating change led by Moore's law I think there's there's room for some skepticism there but I and I am actually skeptical about a lot of Kurzweil's view but I think the potential for ever accelerating growth is there one of the people that we interview in our book Amar Bide would I think I don't know maybe could be mangling his name actually but I think he he would dismiss any concern that China will displace us because if China does come up with new inventions his analytical frame would suggest that we will adopt them much more quickly he talks about the role of venturesome consumers in producing growth that it's you shouldn't just think of the lone heroic entrepreneur Steve Jobs as being the promoter of growth it's the fact that there's so many fools out here who are willing to try anything Steve Jobs puts out and try to make something useful out of it that in fact make us a a faster growing country and from that point of view any innovation that comes from China is not a threat but an opportunity yeah just a couple to reinforce a couple of those points yeah if there's a model it's trial and error and I'd extend that to point out if you want to introduce this to a policymaker or congressman and explain trial and error you also have to couple that with a realistic assessment of how politics actually works and the reason that again political interference is so problematic because and it has to do with the error side of trial and error there the the political tolerance for error is so low from government failure that what you have is when you have government failure in the policy arena you have either a temptation among policymakers to point their finger at something else that must be the problem or to say like with the case of the stimulus well we didn't do enough so we need to do more of the same and let's double down our bets on that one of the you need to contrast that with how markets actually work trial and error markets work where error is punished and new firms can come in and advance technologies or products that work and those that don't can't and they don't get support and that's how progress continues over time whether or not you can get a policymaker to adopt the trial and error model which means basically letting the market work failures and warts and all is an open question because it's not really in the DNA of politicians who want to try to start monkeying with things on this point about what can we do to close the the development gap Paul Romer who we interviewed in the book has this really interesting idea for charter cities which some of you may know about where he basically looks at the success that China has had where China has had success in the coastal regions and elsewhere where they were basically areas where they change the institutional mix of laws in permitting market activity and you've had enormous growth there so if you can adopt this model say in Haiti if you could turn Port-au-Prince into a charter city where you change the institutional makeup there there might be hope for real rapid change now he also says and I think he's probably right about this you can't you need to be invited in to do this and I think what he's trying to do is set up an architecture where he or people like Hernanda de Soto or others Brink Lindsay could be brought in and try to help you set up an institutional mix that will work with your cultural norms that already exist and so there might be some hope there so I'm not totally pessimistic about about the future otherwise you know more immigration which I know is not politically pleasant for a lot of people but certainly in the case of Haiti with refugees we should be be bringing as many as we can hear and the final point about about China I'm actually there are some people we interview in the book who are very bullish about China and I have I think sort of I'm a little agnostic on it I would say that what you've seen with the dust up with Google and other things recently suggests that China's place that the technological frontier is going to be limited they're happy permitting free free enterprise in areas that don't really challenge state control but in frontier technologies of information technology communications that threaten the regime there they don't like it and you know what innovators aren't going to go and work there for a long period of time or really innovate there they'll go to other countries where they can they'll come to the United States they'll go to India they'll go to other places in Asia so it's an open question about how quickly China opens and really embraces the technological frontier and then this last point Arnold mentioned about ventures and consumers which the the demand side of for innovation and technological change is a totally overlooked aspect of the discourse on this we have the heroic entrepreneur create something that's the end of the story well no it's not you have to have a culture where you have consumers who are habituated to trying things out and there that's very much the case here in the United States people will run out and buy the iPad even if they have no idea what it's going to do and maybe it'll be a bust you know Steve Jobs has had a number of busts the i-cube or whatever it was and a number of other he's had a lot of failures but he operates in a market that's very open to taking risks and trying even on the consumer side and that leads me to think that the United States is actually pretty well positioned you know for the next 50 or 100 years let me just add my own two cents I'm all for the spirit behind your trial and error mantra but it needs something more than that because I think Washington's got trial and error down pat particularly the error part the problem is the feedback loops connected to the to the trial and error process in the market we have good ideas leading to profits leading to imitation and bad ideas leading to losses leading to dropping bad ideas and we have rather the opposite dynamic offered in Washington where bad ideas attract more money with that let's open it up to questions please give your name and make it a question and make it a quick question so we can fit in lots right here a microphone will be coming to you I can't help but take the opportunity to say when you say we got to study how politics works I think we you meant how politics we have to learn how politics doesn't work but anyway that's just my quip my question is how are you different than than what the Austrians are saying I mean certainly they have always been emphasizing entrepreneurship and the fact that you know you there's countless intangible factors to consider and an analysis so how how would you say what you're saying differs from what the Austrian economists say I wouldn't I'd be willing to plead guilty to there being a a big Austrian antecedent to what we write I think it's just informed by some more recent research that tends to support that point of view but you can see plenty of Hayek and Schumpeter in in what we write gentlemen on the aisle Dan Lieberman opponents have speculated that just accommodate population growth the U.S. economy will have to grow 3% of the year which means after 24 years the GDP will double from 14 trillion to 28 trillion which is probably bigger than the combined economies of the world today so it's seen that in a very short time we will go from scarcity to depletion we will probably use up all the resources of the world in a very short time so should we talking about growth or should we talking about fundamental changes to an economy which needs to be stabilized and needs to be preventing from total failure so will we have depletion of resources the let me give you what I I think would be a Paul Romer type answer Paul Romer said gee in in physics we learn about the law of conservation of matter we don't learn that matter gets depleted so what what economic activity consists of is taking to the extent that it's physical activity at all and of course a lot of it is is becoming again intangible activity communications and so on but to the extent that it's physical activity it's taking some molecules and transforming them to other molecules so in that sense there is no depletion we're coming up with new recipes for transforming molecules so I think if you were to read the interview with Paul Romer in our book you'd get a perspective that says that we really don't face an issue of depletion of resources that that's really not the way the economy works and you know that and I think some of the facts that we mentioned in the book include the fact that like for instance the the weight per dollar of GDP is is falling sort of the physical components of GDP are falling relative to the mental components yeah I'd also add I mean that that's a there's a long history of worrying about that exact question limits to growth and none of the predictions seem to bear out in dynamic economies and free economy so I think as long as the the economy remains relatively open and free that's not something that I'm particularly worried about thanks I Jim Manzi Manhattan Institute and former entrepreneur so I have a lot of questions I'll just try and ask two quick ones one is do you think that uncertainty in the sense of Frank Knight unquantifiable uncertainty is inherent to entrepreneurial behavior and innovation and therefore we will never have a mathematical understanding of its structure or do you think it's plausible that we'll get there and second if you take trial and error and say as you did that part of that is letting failures fail I think that will that creates and natural conflicts in that the losers in the process have a understandable material interest in slowing down innovation and do you agree that that creates an internal inherent tension in democratic capitalism and if you do do you have a point of view about how to deal with it okay okay the first question is you know is it does 19 and uncertainty make it essentially impossible to come up with a mathematical model of entrepreneurship I think that's right I think again I'll advertise one of the people that we talk within the book Joel Mokir talks about exactly that that innovation that economic growth is unpredictable precisely because of that because you you know no one knows which innovations are going to work or where they're going to come from so there's this this element of unpredictability to economic growth that's just inherent in that I'm in that camp so the next question is sort of innovation creates losers as well as winners and what kind of political dynamic does that create in a in our society well I mean we see the type of dynamic it creates it creates a dynamic where the government takes over general motors because you know it can't think of of you know it can't conceive of general motors going out of business and then you ask well what to do about that and I think I guess I would try to come up with better ideas than taking over general motors I don't think the standard mantra of retraining workers really works I think the way employment dynamics work in this country is that old workers retire early sometimes when their industries decline and young workers come in with new skills so I think I guess I don't have a great answer for that I I think there's certainly a case for trying to develop a a sound and compassionate safety net that that is that is more oriented toward being a safety net than toward being this kind of political mishmash the accidental welfare state that we've kind of developed but I think that's that's difficult politically but I think my my political solutions probably come more in the other book where I have have wilder ideas about competitive government and you know I just just a a brief point there's nothing I don't think there there are scale economies in government that justify a 300 million person polity you know if if you need if you needed to have so many things decided for 300 million people out of Washington D.C. then Switzerland could not possibly work Denmark could not possibly work Singapore could not possibly work the fact that those much smaller polities have decent welfare states and decent governments suggest to me that we could have a much more competitive governmental system where a lot more of these even welfare state functions took place at much lower levels of government sorry but that's that that's into the other book yeah I agree with Arnold on on 19 uncertainty and and your second question is one that for me personally in working on this book wrestled with the most and don't have I would say any sort of satisfactory answer is a question that we asked a lot of the of the interviewees in the book it's very clear to that they don't have satisfactory answers in terms of some close set that you can say well here's what we can do and this solves the problem of the creation of of losers in a dynamic economy interestingly Ned Phelps who's one of the economists that we interview in the book has been thinking a lot about this question in the context of Rawlsian political philosophy and is doing a lot of extremely interesting philosophical work right now on this and I think it's in part because he takes very seriously the wanting to maintain the gains and advantages that we get from a dynamic economy but also taking seriously the sort of Rawlsian critique about what happens when you have losers in a market economy but he turns it around a little bit and he says well you also have to understand if you're going to have an expansive view of human potential the limits that you're going to put on entrepreneurs and innovators need to be taken into that calculus which is not something that Rawls ever did and I think that's a useful original way of trying to enlarge the discussion about it that the peers are power politics involved it doesn't really solve that but it begins to I think subtly change the the discussion in a very helpful way again it's not that's not going to be that satisfying to you but it's useful there's some interesting ferment going on well jim's going to answer that in his own books yeah just straight comment on the issue of scale of government which I think ties in very well to the trial and error point you get a lot more trial and error going on if you've got a more decentralized governance structure and the contrast between dark that it might first appear because that's a very decentralized system where a lot goes on at the canton level so they have a kind of universal health care system but it's done canton by canton differently and just contrast that to obama care where we try to write the rules for one six there were one seventh of the economy and one fell swoop right there the lady she called all me a reason foundation I'm a columnist and one of the questions that I absolutely are responses from readers that I hate is when they tell me why did I write this column as opposed to some other column but I'm going to commit the same sin over here and ask you the following question which is as I understand it the premise of your book or the question of your book is why are some countries poor and some countries rich and the answer that you give one of the answers that you give is predatory government well that's not exactly news essentially that means governments that societies that don't have the rule of law and accountable government which is an institutional issue so wouldn't I have been better to actually begin with the inquiry why do some societies and countries evolve the rule of law and accountable government and why some don't before studying the question of why some are poor and some are rich I'll go first of that one um it's a it's a perfectly good question one thing I would say is that that certainly wealth disparities between and among countries but it's about a lot more than that it what's unique about the book I think is that it draws together several different strands of research in different areas and that have not been brought together before as a as a work of synthesis and what we're trying to do is show similarities in in research in in economic history technology development um business and firm formation new firm formation and a lot of areas where scholars have been working and not thinking say I'm working on the origin of new businesses I'm not necessarily thinking about the disparities between countries but there's a lot of research on new firm formation that's relevant to this so I would just say the the book is a work of synthesis the and I'll I'll leave it to Arnold after that I mean it's I can't capture everything that's in it with that but then I'll leave the rest to Arnold well I guess I'd say that one clearly unresolved issue in the book might be phrased very crudely is is it institutions or is it culture or is it government or is it culture and and we have people on both sides of that I mean on the one hand you have Paul Romer clearly says oh look at look at Hong Kong you know that's the same culture that you can find in other places in in Asia and China and look at how much better it did than other places so clearly institutions matter and then you have people like Douglas North and probably in the background Hayek would say well you know it's kind of hard to change change a culture so I I think that's somewhat of an unresolved issue in my own mind I guess I'm a mostly cultural determinist with the view that institutions can change things or when they're really heavy-handed like you know communist institutions by being so heavy-handed and so brutal could actually overcome cultures and so you see the difference between north and south korea showing up in those terms and I'd also add this is the area where this is kind of a cop out for an author to say this but where a lot more needs to be done I mean and and and the people we talked in the book that's clearly the case I mean Doug North you know it was the leader of the new institutional economics school which he would prefer to change at this point to new institutional social science he's taking a much more expansive view of what needs to be studied to understand this question of how cultures change how societies change and and so a lot of the work is history and a lot of the work is social science and needs to be done for different small communities or at the national or regional level so a lot of that is where it needs to happen I just wanted to make a comment bring thanks for inviting me in on when you think about why countries are stuck and how they change over time I mean usually there are a lot of revolutions that happen including how the United States sort of got on this path and to to sort of tie this in with their common earlier trial and error I think that's the right answer and I think it's an unsatisfying answer because I don't think it will be politically persuasive but the U.S. had a very federalist structure for a long time but we've been creeping away from that so if I were to ask a lot of thinkers around this town who I think get this concept and get this book their solution would be the federal government needs to be more involved in giving tax credits for R&D so that we can have innovation a very centralized response so there are people that sort of get everything that's being said and they don't get the underpinning that how does real change happen and it happens with competitive units and that's really the worry I have I am an optimist in this sort of U.S. versus China debate but I'm still not fully bought into the optimism because I see the U.S. creeping towards less federalism more central control and in a political structure that itself is an entrepreneurial right you've got two parties that don't want to open up to entrepreneurial ideas they want to maintain their their lock are they going to tolerate an entrepreneurial economy you know I think there's a lot of momentum in our favor but I but I wonder about can we get to a trial and error politics again just add from my own thinking and researching about this precise puzzle why some poor countries adopt the institutions and policies that make them grow rich and others don't I'm afraid that an ineradicable element is some countries are lucky if you look at poor countries that got rich over the past half century or so countries like Taiwan South Korea Singapore Chile they were all autocracies generally autocracies are terrible for growth but they all also had communist left-wing insurgencies to deal with so it was this strange kind of correlation of forces where on the one hand not being democratically accountable they had distance from the kind of special interests that otherwise might have choked growth in the crib on the other hand they had to worry about popular discontent and do something to buy it off by providing broader based growth and that kind of sweet spot seemed to produce pro-growth policies in those jurisdictions how do you recreate that somewhere else who knows right back there Hudo Brillenburg farm internet and management I had a comment and a question let me ask a question first can anybody would anybody like to comment on the future of not of innovation but of of creating the organization for innovation management if you like as we've been talking about there's a creeping so making that more difficult in the United States there's no I don't see any other competing economy where that seems to be done any better so I just wanted if you guys would like to talk about not where we are but where where you think things might develop and just to make another comment people don't often think of this but another very successful country that succeeded under imperialism was Puerto Rico it's the highest GDP per capita of all of all the Latin American countries and I would not make that an example but I'm saying there are other places where the culture is the same Puerto Ricans are the same as the Cubans as everybody else but they had an organization put above them that seem to have worked out for them but they're not happy about it by the way but they're not so unhappy to vote for full independency there so they're you want to take a shot I think the question of future organization for entrepreneurship is too difficult for me to throw off in a two-minute answer my one comment on Puerto Rico is that there's another example where you see a lot of migration right between Puerto Rico and the mainland U.S. and so you have to kind of control for that factor sort of seeing what how that exception played out yeah it's I'm with you and not seeing other countries right now as being ready to sort of take the mantle of technology frontier away from the United States I don't like the certainly most of the political trends at work as it relates to that in this country I know this is something that Jim Mansey is working on right now it's an open question and there are a lot of obviously spillover benefits that go to other countries because the United States is at the technology frontier that's a part of the conversation that's largely absent from our political discourse in a really unhealthy way because it just reinforces what I think are erroneous assumptions about where new technology and innovation actually comes from and how that can be sustained over the long haul so but it's but where that will be in the future I think is still pretty much an open question I think we'll take one more question this lady right here this Deborah Coyotana from democracy work there hasn't been in academia in law and the and in economics the push to make money equal political power or legal power there hasn't been that discussion there hasn't been that desire with that in mind right throughout the history of law in the United States in the development of corporations how do you or have you looked at the issue of legal liability when you're talking about expansion when you're talking about designed inflation and the effects of genocide volatility narcotics terrorism and this high-end enterprise that you're talking about in a very side what do you call it a la carte way do you do you address the issue of legal liability towards genocide for the conditions within the third world countries for poverty creating poverty with inflation designed inflation that that's right really in the in the scope of the book I mean the book is about well it doesn't really touch on touch on that I would say well I think with that stumper we'll call it a day the conversation can continue around sandwiches for lunch there are books available for sale please feel free to purchase more than one your friends will love them and the authors will be happy to sign them they make great gifts thank you all for coming