Alex Tabarrok on Innovation Barriers and Policies | EconTalk

[00:00:02][Music] [Applause] [Music] welcome to econ talk part of the library of economics and liberty I'm your host Russ Roberts of George Mason University and Stanford University's Hoover Institution our website is econ talk org where you can subscribe find other episodes comment on this podcast and find links and other information related to today's conversation our email address is mail a deacon talk org we'd love to hear from you today is December 14th 2011 and my guest is Alex Tabarrok of George Mason University his latest book is launching the innovation Renaissance it's an e-book available for Kindle at all at Amazon and elsewhere for $2.99 it's a TED book and alex has a TED talk based related to the book Alex welcome to econ talk great great to be here so I want to start with the problem the book is proposing to fix or at least improve which is our innovation situation the United States I think most people still see the United States is a very innovative place maybe not in 2011 because our economy is not doing very well but it's still considered a place and source of innovation so why is there a concern about the current levels of innovation and entrepreneurship in the United States well innovation is one of those things that more is better so I think we would certainly like more now I do take for granted in this book what my colleague Tyler Cowen has called the great stagnation whether you call it a grade or modest stagnation it is true that since about 1973 the rate of productivity growth in the United States has been below it's trended below its trend firm in 1947 to 1973 and we've been falling below that and as you know productivity is the single most important factor in creating a high standard of living when we can do more with less that is better than anything else and so when our productivity levels less than what they might be that's going to be a subject for concern yeah I certainly agree with that I certainly was part of that which is that more is better and I wish we had it an even more innovative economy I think you know my problem with Tyler's analysis and to some extent yours although you don't rely on so many things that Tyler relies on if you just look at the raw productivity numbers from 47 to 73 this is not like it slowed down in 1973 it's that it suddenly changed its slope dramatically so that there's a puzzle there that I suspect has something to do possibly with slower productivity although that's a little hard to understand given that the last 20-30 years have been extremely innovative at least in our everyday lives we look around we see lots of innovation we also had a big change in our the nature or our economy over that those seven 60 years that we're talking about we've had a steady decline in manufacturing as a source of employment and a steady but still a very productive manufacturing Center sector because of the innovation that that's taking place there so I'm a little puzzled by those numbers I don't think again if it's one thing to say well slow down if you see an abrupt change like that you really have to look for things around 1973 and I see post 73 being pretty innovative relative to pre 73 if it's not the day that maybe the day they're not measuring some of the gains that that are out there and of course as we've moved to a more sector increasingly service sector orient economy those innovation gains are gonna get smaller it's gonna be part of the problem that's possible I think it is very difficult to get an intuitive sense of how much innovation is a lot and what we might expect so I do like this intuitive idea of thinking if we go back 60 years 1950 we think about 1950 and it's basically a modern world it's less advanced in our world but you have television you got radio you have airplanes you even have the first a few large computers are around but it's pretty much modern world cars and cars absolutely are ours yeah sure now you go back another 60 years to a 1900 or so something like that 1890 totally different world and it looks there's no airplane there's no radio there's no television and the world from 1890 to 1950 that looks like an impossible change that looks like science fiction that doesn't look like extending out 1890 so I do think that there's also an intuitive argument for the idea that the rate of innovation has not been as high as it was in previous years if you go back over that time period yeah but my focus however is I think we can do better than we are doing now so let's look at the problems that we have now and where we can do better and certainly if they're barriers to innovation which you identify in the book then we should get rid of them if we can so let's talk about those so you identify a whole bunch of different problems and opportunities that aren't being taken advantage of so the first one you mentioned is is the US patent system which is a lie Roenick because of course it was put into place to preserve incentives for innovation so make the case for and against patents what's the argument I mean the argument for patents is that imitation is a lot cheaper than innovation so that if you will if a firm innovate to create something new and another firm can come along imitate that product eat away all those profits and the first firm can't recover its research and development costs now then they would have an incentive to do them and therefore it won't get much innovation exactly then they wouldn't innovate in the first place yeah exactly right now there's a few there's lots of arguments against so one of the first arguments is just to ask you know are patents necessary because often it takes a long time to imitate a product it's not even easy to imitate a product so our patents necessary and I have a number of examples I might look at roses for example roses have been around for of years the Chinese emperor had hundreds of books in his library about how to propagate roses no one has ever claimed that we don't have enough new roses and yet for the first time ever in 1930 we created in the plant Patent Act we could patent roses so did patenting of roses lead to more beautiful roses better-looking people could capture the benefits that fear being copied and exactly did it lead to a flowering no it did not so we didn't see any big increase in rose innovation in fact we might have seen a little bit of a decrease moreover even today most new roses are not patented and in fact this is true most inventions most innovations are not patented I think people a little bit surprised at this but in most fields with a few exceptions chemicals pharmaceuticals being really the two biggest important exceptions so in a lot of fields it's something as we don't allow patents like fashion highly innovative no patents at all but in all fields most innovations and inventions are simply not patented at all and I you know you mentioned an example I've been thinking about recently is sports somebody innovates a new formation and football can't be patented but coaches spend hours looking for a small edge it's true that once you see how it works you can copy it but usually the person who creates it for a variety of reasons might be able to implement it better than the copier either because they understand it better either because it's theirs they're more passion for it and that's also true of course in many many cases with ideas that the people come up with ways to make it harder to copy without using patents and the monopoly power that come with them certainly there's a lot of innovation in the fashion world without patents we had a podcast and that put a link up up on that but there are exceptions as you point out so you would you would not you would not change where you would not get rid of patents on on pharmaceuticals why so suta coals are really the classic case of where the innovation to imitation costs are extraordinarily high so it cost about a billion billion dollars to create a new pharmaceutical and to create the first pill cost a billion dollars the second pill cost 50 cents so that's a classic case where imitation costs really are low so I do think there's a very good case that's the best case for patents in a field like that but my question is why does every innovation deserve or require the same 20-year patent that's crazy why do we have the system which gives a 1 billion dollar pharmaceutical where there's 1 billion in research and development costs we give that a 20-year patent and one-click shopping we give it the same 20-year patent that makes no sense whatsoever so what I suggest is a more flexible system on I'd like to have a 20 year patent maybe a 15 year patent maybe a three year patent something like that and then we could say look you want to apply for a three year patent we're gonna get this through the system quickly we won't look at it so much if you want a 20 year patent whoever it'll to get up to make the case for it smaller exactly exactly you want a 20 year patent though you'd better show us that you're really deserving you put some costs in there now I just side down on the pharmaceuticals I was surprised you didn't mention this maybe you're just trying to be strategic but it's true it to cost a billion dollars to develop a new drug but there's a reason it costs a billion dollars and a lot of that cost is to no avail it's it's replicating sometimes tests that happened and already happened in Europe a lot of its the regulatory structure around the drug industry and people who are worried about drug pricing one of the ways to solve the drug pricing problem is to remove the patent or shorten the patent I'd like to shorten the reduce the research and development costs and the approval costs are you with me there absolutely so you know we have drug lag and even more importantly we have drug loss there are lots of drugs today which probably could be invented but people know going in the are just too high so sure I would like to see those costs come down as a theoretical point however I still think that the pharmaceutical industry is the best case for a patent in that the innovation imitation costs are very high but there are other things we can do to bring those costs down so let's talk about the expansion of patentability that that's happened in the last 15 years or so where the courts have allowed ideas to be patented business concepts and a lot of people here one others have come forward and said this is crazy and a point you emphasize which i think is very compelling is that when you make it hard when you patent ideas it makes it hard for people to use those ideas to create new innovations so one of the disincentive effects of patenting is that it discourages ideas being used in creative and new ways which are the everything is as you point out in your book standing on the shoulder all who's standing on the shoulders of giants the Newton quote didn't EFT as you say didn't have to pay for it but the rest of us are do you think well that's not a big deal so you pay for it but the problem is that paying for isn't so simple right so let me come back to that point in a minute let me get I want to give you before we quite get there I want to give you another example which i think is important I want your audience to think about the most innovative US company most important innovative US companies you can think of maybe you're thinking about Apple so what some people would that's definitely an innovative think about the Patriots bill because I like the sports thing or maybe I don't know fashion I don't have any fashion expertise as listeners no but go ahead go ahead sorry I'm gonna say Walmart okay now you think about Walmart it's the world's largest corporation half a trillion in sales every year estimated to have saved consumers a quarter of a trillion dollars annually so this is an incredibly important US corporation and if you think about the booming 1990s where were the big productivity grains gains in those in that decade in retail boring you know hundred-year-old retail industry and yet that is where we saw really big productivity improvements a huge chunk of that coming from Walmart and how did they do this was it you know some new high-tech invention no they did it by better training of the sales staff better training of cashiers they did it through some you know RFID chips and things like that application and technology the application process a big in innovation there's that clearly was not patented exactly not patented in fact Walmart world's largest corporation has about 60 patents to its name you know a trivial amount including one for a shoe box so here we see a incredibly important innovative US company not using patents alone I think that's important to really remember it's a great point I only caveat I would I would add is that 60 is a small number compared to I think you'd give Microsoft's which is in the thousands or something but it could be that one of those sixty is the key patent that allowed them to use some sort of information technology but but I think that's not true my guess is as you point out they figured out some ways to apply technology and training and other things everybody copied him target copied him Kmart copied him other copy others copied him who have disappeared because they couldn't do it as well for a whole bunch of reasons that you and I have no idea what what they are I assume it had to do with how it was implemented who implemented it other you know synergies they had with other stuff they were doing but clearly they were able to be innovative without it but in the area of high tech and we'll get to where where we gonna go after this we're gonna go to bacteria little innovation oh and ideas so you know one of the when we talk about these drawbacks to the current system and how lenient it is at allowing things we patented that they make it harder to innovate but I look at the pace of innovation it looks pretty good right I look at the gadgets and the inner the Internet yeah it was it's kind of crazy that one click is patentable it seems kind of crazy that people can patent ideas business concepts it's almost as silly as saying a podcast is she whoever gave they had the first podcast that was a great new invention a radio thing on the web but obviously that's that's foolish and discourages innovation and things that make the world a better place but what's the evidence that this is causing a big problem it does appear to be making a lot of employment for lawyers who have to deal with all this these systems and you know make sure that that they've taken care of all the intellectual property is there something to be worried about well I think the problem is is that you may be looking for the evidence you know where where the lamp is right yeah in that yeah you're looking for evidence of how innovation has been reduced in highly innovative fields but these highly innovative fields the internet and smart phones and so forth they've been innovative not because of these patents but despite them and I think the situation is becoming worse in these fields so what we're seeing right now is firms like Google and Microsoft they're buying up these patent arsenals and they're not doing it because they need access to those technologies they're doing it so that some other firm can't sue them and prevent them from innovating or what's bad about that well what's bad about that I call this the mutually assured destruction at mutually assured destruction I think was not the greatest way to maintain peace mutually assured destruction is probably not the greatest way to maintain innovation either and I think what the real problem of this idea of innovation through strength we will be able to innovate because we have this patent Arsenal behind us is that small firms don't have that and so we're seeing kind of an an IP feudalism we're seeing these very big companies get a hold of these Arsenal's so no one can attack them but that means that the small firms can't attack them either in fact the small firms are being crushed and what do we know about really disruptive creative disruption that often comes from the small firms so I am worried that we are going to see yes you can get innovation if it's from big Google but what about the little Google you know what about the Google of an 20 20 years ago yeah the next Google right which yes it exists because it can't have the lawyer legal department it's a small size that that it's competitive exactly so the innovation which we're not seeing that's the invisible innovation we're not seeing it you can't look for where it is so some of my best friends for lawyers and it turns out a lot of my best friends are intellectual property lawyers I have I can think of at least three maybe four good friends of mine who are in this world and they're the nicest people there and I really mean there they're good friends I don't see people I happen to know who are who are IP lawyers they of course not surprisingly think that intellectual property and and the expansion of property rights into this areas is very natural and crucial and wonderful they may be a little too close to the problem so I'm wondering there a lot of them are they an important special interest obviously Google in large corporations generally are going to want to discourage small firms from innovating are the legal experts who spend all their down all their hours worrying about whether this intellectual property is accessible or not and at what price and negotiating it they have a strong stake in keeping the world as it is are they discouraging the kind of innovations in this area that we might want to be seeing in a way though I wouldn't phrase it like that they're nice people yeah absolutely and of course a IP lawyer very naturally wants to think of themselves as promoting innovation and when you take a partial equilibrium point of view that's probably what they're doing but I think you have to see it in the larger picture and I would frame it like this so I think an incorrect framing in one which we see a lot is that it's sort of consumers versus the producers of intellectual property and then the consumers want less intellectual property and the producers want more I think that's a bad way of looking at it because when we come to these fields where there's a law of cumulative innovation where you are building a product on previous ideas standing on the shoulders of giants then what you have to recognize is that previous intellectual property it has veto power on new intellectual property and intellectual property has two sides yes it's an incentive to innovate but it's also a cost when you're building on previous intellectual property it's a cost of innovation patents can be a cost of innovation as well as a incentive for innovation so think about a product you know which builds Mahesh requires you know four other patents in order to to move ahead built on four other patents each one of those owners is going to say they want 30% of the profits then that's gonna be hard exchanging like it's tough but when we have a hundred previous patents each of them wants 10% of the profits this is almost an impossible deal to make you know the Koshien bargaining is really hard when you've got lots on just a pure transaction costs of tracking down the hundred and contacting them and opening the negotiation process exactly right and so I think when we look at the big picture that's where innovation is going to be slowed down and it's also where what we need to tell the innovators is not this is a way of restricting your your rights it's a way of making innovation easier it's a way of lowering the cost of your innovation it's a way so that you don't need the permission of everyone else to innovate we want people to stand on the shoulders of giants as I say in the book you know Newton might not have seen so far have you been required to pay for the privilege so what we want to tell innovators yes go ahead and be the Newton stand on the shoulders of giants and you don't have to pay for that we're gonna all go to be able to see farther yeah it's a it's an inspiring vision what are the practical so what one way to practically implement that is to change as you suggest earlier the timing so not every patent would get 20 years any other ideas and what we would you stop some things are being patented I mean the remarkable thing is that the extension of patents to software and semiconductors and business methods and the broadening of the interpretation of these patents it's been almost all judge driven so this is actually not legislation so much its judges judges have decided to interpret these patterns in these broad ways and they don't have to do that so you know the law actually hasn't changed that much I talked a little bit in the book about Edison and the lightbulb and there actually was a previous patent and the lawyer and man had patented the to make the the incandescent filament any fibrous or textile material and Edison came along and he tried you know five thousand different materials before he hit on the one happened to be bamboo and not just any bamboo but bamboo that he had dispatched a man to Japan to find the right bamboo so he had gone through all of these different types of materials and yet Sawyer and man sued him and said we have a patent on any fibrous material and the court looked at that and they said no this is crazy they said you can't give such a broad patent Sawyer and man didn't actually investigate all 5000 of these and if we were to give a such a broad patent this would actually discourage innovation so they said no to the Sawyer and man patent who let Edison go ahead we could do more of that today the trouble today is we have not done what the judges did in the story or a man case we've said you can get a patent on any 5 verse materials to beat the analogously in many other fields we've given these broad patents and that actually discourages people from doing the real work of implementing of Korea actually creating a product now you can just patent an idea it's like a science fiction author can patent ideas long before there ever even possible to be implemented you can patent the idea even before it's technologically possible and that is actually discouraged innovation is interesting let's move on to educate which is the next broad theme of your book you argue that the American education system both K through 12 and at the college levels got some serious problems so let's let's talk about it what's wrong with and of course as a result this is education is a key part of innovation and and and productivity if you don't have a well educated populace you're not gonna have very good economy what's wrong with our education system let's start with K through 12 here's two remarkable facts we just blow me away right now I in the United States people 55 to 64 year old they're more likely to have had a high school education than 25 to 34 year-olds just a little bit but they're more likely so you look everywhere in the world and what do you see you see younger people having more education than older people not true in the United States says a shocking claim incredible incredible the reason is the dropout rate I assume is increase exactly so the high school dropout rate has increased now 25% of males in the United States drop out of high school and that increase since the 1960s even as the prospects for a high school dropout have gotten much worse we've seen an inky an increase 21st century 25 percent of males not graduating high school at mind-boggling why given that I mean one of the underlying facts in related education which has stayed true for over that whole 50 years is that the more education you get on average and I'm gonna emphasize on average we're gonna talk about why on average can be very misleading though an average high school graduates do better than high school dropouts people with some college do better than high school graduates people graduate from college do better than people have some college people with graduate degrees do better than college grads and the differences are large particularly if you compare a college graduate to a high school dropout it's an enormous difference so normally we would say well this problem kind of solves itself there's a natural incentive to stay in school and I really wouldn't worry about it why should we be worrying about it doesn't seem to be working why isn't it working and what should be done what could be done so I think there's a few problems one is the quality of teachers has actually gone down so I think that's been a problem this is a case of you know every silver lining has a cloud or something like that in that in 1970 in the 1970s about half of college-educated women became teachers this is at a time when there's maybe you know 4% are getting an MBA less than 10% are going to medical school going to law school these smart women they're becoming teachers well as we've opened up you know by 1980 you've got 30 percent or so of the incoming class of MBAs doctors lawyers are women so these great which is great which is absolutely great their comparative advantage moving into these fields product productivity and so forth and yet that is meant that on average the quality of teachers the Qualla the pool which we are drawing from has gone down in terms of their SAT levels and and so forth so I think we need to fix that you know some conservatives are saying you know it's all the unions and we need to crush the unions thing you know there's something to that but my point of view is that actually maybe not crush them let them get them out of the way have them stand aside so that innovation can take place my point of view is that actually what we need to do is to pay teachers more now we need to come up with a bargain where if we're going to pay more than we need to test we need to qualify we need we need to make sure we are getting quality we need higher standards we do pay more we pay them a lot more than we did in 1960 but we did in a way that didn't guarantee we got better teachers that and you could argue we just didn't pay him enough more to compete with the alternatives but I think it's worse than that so if we doubled all teacher salaries tomorrow they wouldn't become better teachers the challenge is how do you encourage good teachers to be attracted to those higher wages and bad teachers to be rejected because they're not they're not not good enough right we paid them more though we paid them less compared to those other fields that I was talking about that women now have an opportunity to go into so it used to be a teacher and a lawyer starting off in day one have about the same salary today on day one the lawyers got three times the salary so in terms of the opportunities which are available to smart people we made teaching a much less desirable place for smart people to be yeah I'm not sure I'm actually important that is an interesting point you know we've had a lot of podcasts on education and we'll put some links up to those encourage people who want to listen to more ideas on this to go ahead but it just strikes me that we think about case 4:12 a lot of K through some where I'm not sure it's where that the second number is but it's not 12 does it require the skills of a great MBA legal medical mind it requires a set of subtle and tangible skills that I'm not sure related to IQ to be a great teacher maybe high school math you need so you need bright people and we don't do a very good job of attracting math teachers I think that's a problem it's not obvious to me that the gray lining to that silver phenomenon of women going into more well good-paying fields is the problem with our educational system is a problem with our with the way we teach teacher kids well I think it's one problem I'm gonna have to disagree with you a little bit on this point in that I have two kids and hard enough for me to manage two kids yes the idea of managing 20 or 30 in a classroom keeping them all interested in going forward and dealing with each one of their problems I think that's a really tough job well I think it's a very tough job I just don't think IQ or the skills that say make for someone a successful doctor or necessarily means that we don't have much of it I don't I don't think we need to take the blow out of Medicine and keep them in the classroom right but those skills the are availa but those skills they do have alternative uses node and if those alternative uses are being paid highly then in order to get those skills you know we need to draw from them I agree obviously so the and the other part of it so one part of it is you know paying teachers more but requiring more of these teachers as well and the other part of it is I think that we have sort of pushed one road one yellow brick road to education in our society we have said the only type of education that matters is that sit down sit on your hands sit quietly pay attention listen to the teacher absorb what they're saying go to college do this for 12 to 14 to 16 years and that is the type of success which which we count it's the only type of success which we count and I think and the goal of high school is to aspire to do that for another four years somewhere else exactly harder harder classes perhaps but but it's the same model exactly right and yet it's not we need to listen to the dropouts the dropouts are telling us something important because first they're dropping out of high school then a lot of them even went the ones who make it to college end up dropping out of college so this type of learning hard for a college professor to understand but you know some people think college is boring strangely enough or our high school algebra yeah that's right so what we need to do is to think about other types of education you know people think that the only type of education is schooling and it's particularly college schooling but there's other types of education and in Europe here I think they've done a better job of creating more roads to high school workforce so in Germany and Finland and Switzerland many of these other European countries 40 to 70% of the kids in those countries opt for a high school program which involves some apprenticeship involve some training so it's a workplace learning which combines theory with practice the students get paid they are acculturated into the adult world if we don't block off all these teenagers into their own world we introduce them into the adult world and we provide them with skills and these are not you know in the United States we think about these programs vocational training is like shop class being a mechanic right but there's a lot more to it than that being an optician there's a new field called mechatronics you know there's the field cause the old term for it is that you know steam fitting this pipe fitting but when you actually look at it it's you know massive operations control of how a modern factory works so these are high-skilled jobs require a lot of intelligence require a lot of creativity but we don't reward that and to lead us into the college discussion of course when we have aspects of our college education system that are useful for those activities we have to gussy them up with intellectual bells and whistles and window dressing to make it feel like it's scholarly there's obviously a lot of practical things you have to understand to run a factory to run a warehouse we teach some of those things in business schools but business schools that just do that would would feel well that's just a trade and so they have to have this intellectual pretension if we're going to have them in the university and the same is true with legal education right legal about every lawyer I've ever met says I didn't know anything about being a lawyer in law and Liat in law school what'd you learn the theory of law it's like interesting you pay you have five to ten years to maybe more of student debt to pay for something that isn't very useful I mean it's interesting maybe some people would like to pay for but that's the only road we don't have a lot of vocational training in business and legal professions and elsewhere and other activities in the Universities we have it outside the university I think there's Bert I see the ads ice assume they're training some people but a lot of what we do in college is not exactly what people would find most useful it's interesting exactly we've divorced the world of work from college and you know with made college I mean it's a great experience you know I don't want to I look at my own University our University and we have you know two Olympic sized swimming pools we've got great athletic facilities we've got restaurants on campus and things like this but it's totally divorced from the work world yeah it's just well let's turn to college now you have some interesting observations about what's happening on college campuses educationally particularly with respect to what people study and I find it funny because you know there's an enormous literature in economics where people look at the relationship between education and and labor force outcomes wages compensation salary and the education variable that enters into the equation is inevitably years of schooling as if each year is a it's like lifting weights you know I've lifted if you lift 50 pounds you get started to live 25 we lift 100 you're sorry than 50 so 12 years of schooling is more than 10 which is more than 8 but of course in the set data set or all these people who are studying radically different things some of which guarantee you a very high paying job from the beginning followed by some great appreciation and others have no employability whatsoever it's a very strange model to talk about what's going on the college campuses with respect to what people are studying yeah I was amazed shocking that some of the numbers in your in your book yeah I was I was amazed when I looked into this data so we think about you know innovation and high tech and we think you know computer science right computers are exploding internet is exploding and yet we graduated more students in computer science 25 years ago than we did today than we do today just a small amount it doesn't matter the population is obviously radically larger today is a proportion exactly and the economy is bigger and more computers so exactly and the same thing is true in mathematics and statistics and chemical engineering you look at all of the so-called STEM fields science technology engineering mathematics and with stagnate stagnated we're absolutely flat Oh what has grown well you know one of the things just to give an example is the visual and performing arts you know we graduated more students in Visual and Performing Arts than in computer science Chemical Engineer microbiology combined combined and we've doubled we've doubled the number of students graduating in Visual and Performing Arts over the past 25 years at the same time as the STEM fields have been absolutely flat so patients are way up part that's because there's a lot more jobs than there used to be in some of those fields right sure so there's nothing you know I have nothing against motion in the media World Entertainment the United States has allowed people to major and study things that wouldn't have been very productive in the past absolutely so I think some of these things are good do I think some of the time we have sold students a bill of goods so you know we graduate we've doubled the number of students graduating in psychology and yet in psychology there aren't enough there aren't as many jobs in the entire country in psychology as we graduate every year Oh oppose it but you know obviously what's going on there is you know that people are interested in psychology they want to learn about themselves they see the college experience as a exploration of self and identity their people are between the ages of 18 and 21 that's a very attractive experience and psychology seems like a normal way to do that it's not the hardest field the grading is relatively easy relative to those other fields we've been talking about so although people study it they don't expect to get a job as a psychologist you might ask them what did they expect to get a job in that that's a good question but that's what they're doing College in compared to say 1950 where college was for people who wanted to go out and get a job College today is an extended forum for some people an extended form of adolescence an opportunity to find one's way in the world it's a very expensive way to do it but that's clearly part of what's going on yeah I think that's right so going back to all those athletic facilities and so forth yeah this is consumption good and you know there's no problem with the consumption good as long as you understand what you're buying but also it's the taxpayers who were subsidizing most of us education on the grounds by the way the economists who invoked there's this externality Elisabet externality if you go study well you pick it I don't know basket weaving or something no that's absolutely right there's very little evidence for there for a positive externality from higher education very little evidence overall if there is an argument to be made I think the best argument is for the science tech tech the STEM fields so if we're going to subsidize college education I would have a subsidized of the fields where there's most likely to be these positive externalities he imagined Alex that we told students entering George Mason University and and the other 50-plus great and many of them are great universities and in in many aspects of what they teach there were being a little tough on the schools but let's face this possibility that we would tell people well you know if you come in and you want to study psychology that's 25,000 dollars if you want to study engineering it's 5,000 that's gonna not it's gonna be a tough sell to the body politic I think well you're probably right though that's all I guess maybe we do need some marketing managers to tell us how best to sell this idea maybe we should salad as a discount if you're willing yeah you know the science and the technology and healthier country you know then you get a discount on your education actually I think the I think the the extracts are small in general I think the the number of people who transform the world and add to both just not just American well-being but people around the world through their innovations a very small number the average graduate in the STEM fields is not doing that so I'd say their argument for subsidy to start with is small and we ought to be using prizes and other activities you mentioned prizes or only the book but other ways to to incentivize the most gifted people in our society to go into those STEM fields and transform them so yeah of course we do know that they creative people in you know instead of taking psychology to do what Steve Jobs did and you know go to India for you know a few months and that's not a bad thing to do either yeah well and of course you know we talked about dropouts but there are a lot of great wonderful contributors to the world to don't go to college and do all kinds of things some of which are in the headlines but a lot of which are just part of being a successful person in life being a good parent there's not I know I don't think we should oversell the importance of a high salary or a high standard of living for a country there's a lot of things going on all around the world that are that are not measured that are just as important so going back to the college though in particular and talking about these STEM fields so so one of the observations you're making which i think is out is very important obviously important is the fact that college is not a solution in and of itself to people who worry about American competitiveness a lot of and I think for special interest reasons meaning are people like us who are professors and the middle class who overwhelmingly benefit not to pour from the subsidies of college there's always this groundswell of interest that the way we need to get out of our stagnation is to more people need to go to college well what you and I are saying and then I you're saying I agree with you is that maybe too many going already or if they are going out of study something else yeah I think more we need more education but education is different than schooling and that's the thing which I think most people are failing to see right now so what you know what other than hectoring people and or differential pricing schemes what what else might be done to make some of these fields more attractive do we need what do we need to do anything I mean they already pay more well you know one of the problems when it yeah in the university itself is great inflation because grade inflation has hit the arts and the social sciences much more than it is hit you know mathematics and engineering and so forth a lot of which are by the way the Gateway to you know medical school where they're gonna weed out lots of people they're gonna use grades to do it exactly exactly so if you want to be a lawyer for whatever reason is true the best thing to do is this make get straight A's you know why you're in college and if that means you have to do it by taking you know intro to history or psychology or something like that rather than calculus 101 then that's the way to do it because in those in those history classes and so forth you're much more likely to get that a now so one thing we could do if we could create a more even playing field in terms of grades and there are ways of doing that you know we can look at for example statistically and say okay this student got an A while they were in the history class and they got a C while they're in the math class while this student got an A in the math class and you know a B in the history class you know we can even those out and create a overall grade doesn't the market do that already I mean do we really need to worry about that don't people understand that history is a little bit usually more easily easy the grading is easier in say psychology or history I don't know if it is in history but I've seen actual data on psychology and on some other social sciences everybody knows that it's not a secret why do we need to reweighed in some formal way what's the big deal yeah I think it's surprising I do think that there's a puzzle here and I don't actually have the solution to this puzzle but I but it is true that employers don't appear to pay as much attention as you and I would to what what fields that students graduate with some exceptions of course but either they find it too difficult to do or they just look at where the person went to college but I I do think there's a puzzle there and I'm not sure what the answer is our colleague Brian Kaplan on our sister site econ log often writes that there's very little value added at all to education it's all signalling it's all just that I don't care what made you made you as long as you got through you showed the persistence I only think I'm paying for is that these you got into the school which was a filter for quality and then you get out because that meant you could do that weird thing called sit sit at the desk and write the papers and take the tests and that that's got some value and so persistence and discipline and I'm not that cynical but but there was part there's part of that there I think the other part it comes back to what you talked about earlier which is the quality of high school education if if high school math is badly taught if high school science is badly taught you're gonna not get those people when they leave high school excited about studying them at those fields in a more rigorous and intense way in college and I think that's that's part of the problem yeah that's a good point if we can start at the bottom and improve people's education all the way along an important point that I want to make about education by the way is there's probably no other area where we can have as much of a opportunity to increase innovation and increase growth and in education I mean just thinking about it this way almost all US workers will go through the u.s. education system not all but almost all US workers will go through the u.s. education system so think about if we improve our education system tomorrow well at first we're only going to get a small gain because only the new workers will come in under the new system but as we get more and more workers coming in under the improved system that means that we have a hundred million people educated a little bit better but a hundred million people a little bit better we are talking about trillions of dollars of potential gains there so there's no other place there's no other bottleneck where we can have as much influence on the on the US economy or US society than in the education system because it's where all of our workers are going to be channeled at some point through that system so we have a small change there means a big change over all over the next 40 years that sounds good I'm not sure that's true I mean I come back what you said earlier a lot of what we learn in life we don't learn in a classroom and so I'm not sure how I think there are many many ways that we become more productive and more knowledgeable and more skilled and we figure those ways out and we sometimes do that despite our education and sometimes our education as well allows us to do it so you know I think it's fascinating you think about your education of mine right we spent a lot a lot we logged a lot of hours in the economics classrooms as undergrads and graduate students and we learned a lot there obviously we learned a huge amount but I'm amazed how much I've learned since then you could argue that's what helped me learn how to learn certainly there was a basic framework there but we're a really narrow technical field economics I you know somebody who goes through the standard K through 12 education system and then goes on to study I don't know doesn't matter what it is in college I just have a feeling a lot of what they learns afterwards anyway maybe we ought to be shortening the whole process and getting people out into the world at an earlier age they were mature enough and maybe I think there's some truth to that for college for sure for k-12 I think it's it's going to be more important and I would say you know you're right you know people like you and I who have alternative sources of education you know are our parents our family friends our peer group all of these things are working in our advantage but for a lot of the kids in high school they don't have those other factors worshiping their advantage ever so the one that we can really move the one lever we have I think we need to do everything we can to shift that lever I totally agree with you no doubt let's talk about government writ large you have a provocative idea in the book that we need to get away from the what you call the warfare welfare state and toward a more innovative perspective in government's role talk about the warfare welfare state and what what do you think we ought to be replacing it with well the warfare welfare state is really what we have in the United States if we look at where we're spending our money it's almost huge fraction is in warfare and in welfare so you look at the welfare you mean transfer payments not just a to the right not just a - you know family or something like that you look at the big four defense Social Security Medicare Medicaid these are a 60% 70% of the budget and this is all about as for payments it's all about dividing the pie it's not about growing the growing the pie bigger so much it's all warfare and Welfare we don't even think about innovation that's really often not even part of the agenda the example I give is thinking about medical care Obamacare you know we had a huge debate over this it was the syphilis people back and forth okay now what do we know about medical care well we know two things we know one that a huge amount of medical care is wasted I think everybody on both the right and the left agree agree with this this point you know if at a given point in time you can spend a lot or you can spend a little and it just doesn't make that much difference you know we you know look look at Steve Jobs okay Steve Dolf one of the wealthiest people in the world but he gets cancer his survival probabilities are not that much higher than if you and I got cancer all of that wealth does very little in the final analysis we're all gonna die so it doesn't do anything in the final lap but even a few years doesn't do him I don't think Robin Hanson so sure that we did do that podcast on a singularity I know he's hopeful cryogenics who knows but yeah let's let's work with I'll work with you on that all right I'll go with you the second thing we know is that even though spending more at any given point in time doesn't buy you much medical research actually seems to get you an awful lot so the life expectancy in the United States has been going up a little bit every year it's fantastic even simply looking at the gains from improved cardiovascular survivable survivability that's actually worth trillions of dollars the fact that people are living longer is worth trillions not all of that is due to due to research Samet just eating better young exactly and so forth but solve it is so we have a potential to have trillion-dollar improvements by thinking about innovation and yet did that come up in the medical care in the debate over Obamacare no is all about how to divide the pie it was all about is is the pie being divided equally does everyone have equal access to medical care when thinking about it in terms of an innovation framework its how can we make how can we invest research and develop new things which are going to save our lives which are going to extend lifespan and the opportunities there are tremendous and yet you look at the budget for the National Institutes of Health or the National Science Foundation and we're talking you know thirty billion something like that it's a very small amount compared to what we spend on warfare and welfare so some of my best friends work there to the NIH they're great people a huge respect forum but is that money well spent you say it's only thirty billion if it were sixty you think we'd get a bigger what what you think we'd get more return I think it's much better spent than a lot of other things we spend on and I do like so you know you and I are certainly not we certainly be an agreement that we don't want to try and centrally plan a science in any way but if we think about what the NIH the NSF how they work I think that's much more coherence with our kind of Hayekian way of viewing things in that the money is not centrally planned it's distributed by peers so you know people propose make proposals to the NSF and the NSF gets a group of scientists and engineers and they decide okay we're going to fund this or not it's not perfect plenty of problems but the guy at the top is not making those decisions it's a much more decentralized approach it's got a separate set of problems there's group think there's fads there's people honoring their own work implicitly the people who cite them and there's some there's a lot of problems with this life no I wonder what the well but the you know the question is something like Michael Milken who got prostate cancer and launched a very large effort to to solve prostate cancer through very my understanding is very innovative techniques and then outside-the-box didn't go along with what the NIH was thinking so I I wonder my is not a presumption I just don't have the data at my fingertips but the amount of them privately spent medical research money Dwarfs what NIH did we spend an enormous amount on medical research now people debate how much that's on marketing of new drugs or how much of it's just application rather than fundamental research and that's obviously a relevant issue but that we spend a lot money on R&D in America uh yeah but they do I want more of it going through the government well I would like more I would like to see the government budget shift from warfare and welfare towards innovation so that's what I think we need to sell because that's a that's a story which I think Americans intuitively understand Americans are very forward-thinking very progressive people they like science they're interested in a better future they're thinking about the future so I think we could sell an innovation state and I'd much rather us have an innovation state than to be bombing Libya many other cut I think it's over yeah so just just to get people's mindset to change course it's got an argument against that would be that one of the major initiatives of the Obama administration has been the creation of green innovation in the green area and environmentally friendly stuff that led to a does some disastrous it's still story isn't fully unfolded yet but the Solyndra example where money was in rather large sum of money five hundred million dollars was lent to a company that wasn't a viable institution at the time and turned out not to be able to pay it back so right so that's exactly the type of centrally planned science which I'm not in favor of so that was money going to a specific company with a specific idea and at the final end the final stages I think the case for investing in much more basic science at a much earlier stage where it's open you know open to many different people you know again peer-reviewed not centrally-planned basic science as well as from the universities with all those let's get those stem graduates let's get them into the universities let's fund that a little bit more that's where I think the case is to be made again stem is science technology engineering and math right right are we in there economics does act as part of the eat we are not we're stemming I say we're stem like we're stem --is-- we're sort of serious but among the social science is greater inflation is much less unique Australian explosive seen that at least in some data what data I've looked at it's been true one thing you didn't talk about which surprised me is venture capital industry so one thing that distinguishes America for much of the rest of the world is venture capital and in all this debate about the 1% one of the great things about the 1% wherever they get it from we've talked off and on air but that some of the 1% and it's not the same people it's not a it's not a fixed group but some of the wealthiest people in America earn their money through making the world a better place and some earn it by taking it from the rest of us through the political process but either way they have because they have large amounts of money we have in America of the opportunity for venture capital where wealthy people steer money into new new vendor prizes and that's rare it's not common around the world it is a huge source of innovation for America that of course benefits people around the world cuz a lot of the medical devices and innovations we that are so that are going on in technology in Silicon Valley they're funded by people making a bet that if they make a bad bet they lose all their money and to make a good bet they make an enormous amount I love that system I think it works well as long as we let both parts work losses and profits and my suspicion and this comes from conversations I've had with venture capitalists is that we've hamstrung we've we've handicapped that industry recently through regulations that weren't designed to affect it but of course ended up doing it on a perhaps unintentionally such as sarbanes-oxley so we made it much harder for for small firms to go public small firms venture capitalist I've talked to say that's not an option everybody now tries to get bought out rather than going public on their own get bought out by some has already incurred the fixed costs of sarbanes-oxley and and the lead staff that does that and that makes it harder to come up with we've closed off our route for new products and new ideas yeah I think there's a lot of cases like that you know I think about innovation as involving ideas money and markets it's bringing all those three things together which really matter and the venture capitalist part of the industry is an incredibly important aspect of that on regulation more generally I III think we're not we tend to evaluate regulations one by one you know is this a good idea is this a good idea is this a good idea and yet you know a thousand pounds of feathers each one of them is laid but the whole thing is still heavy and you can have a lot of good regulations which together is one bad one heavy weight and I think this is a problem in our mindset Michael Mandel has a nice metaphor he says you know these regulations are like throwing a pebble into the stream you know one pebble does nothing but you keep throwing more and more pebbles and pretty soon you block up the stream of innovation and I see us you know one of the bingette influences on my thinking has been Mansur Olsen's rise in the client of Nations and what Mansur Olson talks about is this accretion of interest groups over time and you get everyone is trying to divide that pie up more and more in their favor and it slows down decision-making it makes things more bureaucratic you need more committees in the small and in the in the large and you just look at what's going on in our in our politics I look at something like the Hoover Dam okay let's put aside big government project okay let's just put aside that for the moment could we even build the Hoover Dam today I mean technologically yes we could do it but could politically do we have the will to do something like that today or would there be so many environmental groups and I'm not just blaming them but so many lawyers so many state and local governments so many veto players we have so many play now who can say no and almost no one who can say yes and she talked about the example I think is very telling in the book is hello Lynne evasion there is an airport creation in the United States right absolutely start you can't build an airport in America it's but almost impossible you can't start you can't build an oil refinery it just it's it's the costs are right now for whatever reason it could be because just not productive now it's hard to believe looks like it's extremely should be extremely valuable but it's clear there are a lot of costs perhaps worth while that but but your point isn't that the costs aren't worthwhile aren't worth paying your point is that the nature of the costs are such that these interlocking aspects of it mean that the real cost is bigger than any one piece of it exactly I mean the real cost is is getting all these groups together to an agreement which is almost impossible and you just think about the infrastructure that we have a huge amount of our infrastructure was built in the 30s and the 40s and the 50s thinking about the interstate highway system and so forth but we cannot rely on the infrastructure of our past to take us to the future we need to build our own infrastructure and right now I just don't see us even being capable of doing that you know I go to China and you see in China building going on everywhere highways and yeah I know the highways are running through so they're at war farmer and control Alex it could be a good thing when I'm building our own infrastructure anymore we get too much of it already maybe yeah they're having it's true that means owning laws which I hate it's really nice conversation with right Aven about that how much these bureaucratic interlocking things keep innovation from happening and forget innovation development is a simpler word here that's right but on the other hand going to a world where you know a central cabal is is able to like it doesn't have to be public I mean the think about the you know the Keystone pipeline you're not able to build that so there's a lot of private infrastructure which has simply become too expensive takes too long to build and we can build these airports privately but you know this just not is this not possible and here we have a massive increase in air traffic in the United States and this tiny bottleneck of airports where we cannot build another one the last one we built was Denver she went which is like 78 was the starting of it something like that huh wasn't completed till many years and I think it's kind of weeks ago some people are still looking for their luggage meanwhile China's building like 10 to 100 airports every year that's not a way to take us to the 21st century I think they like not great I semi agree and I think Chinese and Japan also by the way and there's Keynesian zeal they seem to like concrete a lot they're pouring a lot of concrete those places some which is I think is the people who pour the concrete or have a lot of friends but we're almost out of time let's talk when you finish you make some recommendations at the end of the book some of which we've talked touched on why don't you list them and and just talk briefly about the ones we haven't talked about sure so we talked a lot about patents and you know I think we just expanded our patent system too much we need to prune back on patents to actually leave room for more growth we need to pay teachers better and in return we need to demand better teachers more accountability and this means more charters means more vouchers more private schools as well and more competitive flexible and open system we've pushed College as the totem is the only way to be educated it's one way being schooled it's not the only way of being educated we need to think more about alternative ways of education including apprenticeship programs and including focusing college education more on the STEM fields we didn't talk about much about immigration it could never be pressed because you know high school immigration high skilled immigration I think is such an obvious such a completely clear thing to do that it's a it's shocking that we haven't done it already you know we have you know it's easier it's lit it's literally easier to win the lottery than it is for a person of and high skills to get a visa into the United States and what I mean by that is we give out more visas in the lottery program you know random allocation than we do to these people of extraordinary ability now that that's insane how can you have a system like that where you just randomly give out visas and there's more of them than you give to people of extraordinary ability that's that's crazy we need to cut back on unregulated we need to think about it as I said regulation as not simply thinking about regulation or so and each as each regulation comes up we need to think about the pebbles in the stream we need to think about what happens when you accrete what happens when these things build up and I would like to see us change our mindset from the warfare welfare state towards innovation I do believe that Americans are an innovative people there are forward-thinking people they believe in making the pie bigger rather than in fighting over dividing the pie so I would like to I would like to see a politics which emphasizes innovation more than it does all these other things we've been talking about my guest today has been Alex Tabarrok Alex thanks for being part of econ talk thank you [Music] [Applause] this is econ talk part of the library of economics and liberty for more econ taco de canto org where you can also comment on today's podcasts and find links and readings related to today's conversation the sound engineer for econ talk is rich go yet I'm your host Russ Roberts thanks for listening talk to you on Monday [Music] you