hello everyone welcome back to conversations with tyler i'm very happy to be here today with ben friedman who has a new wonderful book out religion and the rise of capitalism i'm a big fan of ben's other books he is a professor of economics at harvard a leading macro economist and i'm very honored to have taken his macroeconomics class way back in i believe 1985. ben welcome thank you delighted to be with you tyler and it's
great to see you after all these years to dig right in why do so many americans believe in ghosts and from that what should we infer about our economic future well i have no idea why so many americans believe in ghosts to be honest with you but i do have views about why americans have such strong views about the way we should run our economy and what that means for our economic future counter to most people who think of
our modern economics as a secular product of the enlightenment i think that there are very deep intellectual roots behind the creation of modern western economics and i think those roots have resonances that are still with us today there are many people who complain that economics is a form of religion and i think in a deeper sense there's something to the idea i think we believe when i say we i'm picking up on your
question about americans we believe what we believe about markets and the role of competition and the role of capitalism in our economy because there are religious roots behind the ideas that gave us those i think that's important but if we disaggregate religion somewhat there's a community side of religion there's what you might call an individual disciplined side there's the ideas within the religion there's also a superstitious side within
most religions do you think that the superstitious side of our religions also boosts support for liberal democratic capitalism or is that somehow a negative that leads us astray in other directions i don't i don't think it particularly put it this way it the superstitious side of religion i'm i have to admit i'm uncomfortable with the way you describe that there are many people who believe in what scientists would call supernatural
phenomena and i am aware that that's a part of religion but i'm uncomfortable with describing that as superstitious but knowing what you mean i don't think that it has a lot to do with our economic views certainly it's certainly not a part of my argument about the role of religion in standing behind many of our economic ideas relative to income as you know america is quite religious and there also seems to be weaker belief
in socialism in america compared to say western europe are those two facts related and if so what is the mechanism yes i think they certainly are related to start you're absolutely right compared to other high-income countries americans are more inclined to say they believe in religious doctrines americans are much more likely to participate in religious activities going to church for example and i think this is not
at all unrelated to the fact that americans have a deeper and more active commitment to the ideas of market competition and it goes back to the idea question that i was raising a minute ago of where do our ideas of market competition come from in the first place what i suggest in my book is that we got those ideas 200 300 years ago from what were then new and hotly contended uh ideas within the about
religion theology within the english-speaking protestant world in which people like adam smith and david hume lived and i think that influence is still with us today so no it's not a not at all an accident that the country on the planet where we probably have the greatest commitment to market competition as the driver of economics is precisely as you say an outlier in terms of commitment to
religion and religious activities if we think of the most influential advocates for capitalism in the mid 20th century there's hayek i would say keynes at most phases of his career maybe not all milton friedman they seem to be largely secular rather than religious and if we look at theologians while there's a great diversity of views on average they seem to be left leaning so why is it the religious thinkers lean towards socialism
and the economists are quite secular i think there's a part of the story that you're missing and that has to do with the coming together uh at mid 20th century in america of religious conservatism and economic conservatism and i think the catalyst that brought them together was the existential fear of world communism i mean here we are call it 70 years later and it's difficult to put ourselves back in the shoes
of americans in the 1950s but that was a real fear and communism at least as advocated at that time had a unique feature of being simultaneously the enemy the existential enemy of lots of things that we hold dear it was the enemy of western-style political democracy but it was also the enemy of western-style market capitalism and importantly for purposes of this line of argument it was the enemy of western style religion and i think the
religious conservatives and the the economic conservatives realized that they had an enemy in common and they took the threat seriously and this led them to come together and the person i think who played the greatest role in bringing them together was bill buckley now buckley was not a theologian but he was a religious man he by coincidence he was a roman catholic he wasn't a protestant but i think under the leadership of
buckley and also ministers like i think of billy graham as being very active in this process but others too religious conservatism and economic conservatism came together at mid century america and i think they've been together ever since how is it do you think that in the broader history of capitalism allegiance to markets get switched from catholicism to protestantism so if you think of the commercial revolution in some regards
as a restarting in renaissance italy which is largely catholic if you think about the first real economists they might be the school of salamanca in the 17th century they of course are catholic theologians but by the time you get to the 18th century as you know it's adam smith david hume the united states which starts off as quite a protestant republic obviously is very capitalistic how does that transformation happen
during the course of the 16th and then especially the 17th and on into the 18th centuries in northern europe there was a transformation toward what we would today call a commercial economy a competitive economy a financial economy a monetized economy that created something very different from what they had in the italy and spain context of earlier centuries that you describe i mean yes i'm aware that there were
these trade fairs yes i'm aware that the italians led the way in banking i don't think that's the same thing i i think these were not really market economies in the way that we know today for that matter 17th century britain wasn't either but it was an awful lot closer i think it was in northern europe i think of holland i think of britain that's where the uh commercial economy developed and that's where the great
debate over the not just the advantages but the the morals of a commercial economy came to the fore and it was people like smith and hume in the mid to latter part of the 18th century who finally finally had a real story about why market economies work and why market economies should not be thought of as inimical to our morals if you look at the eastern orthodox countries in europe both today and arguably ever
they don't seem to have had truly stable liberal democratic capitalism that i can think of not really one instance why is that does it have anything to do with religious ideas i don't know but i think uh i would point to the century or so of dominant dominance under soviet communism as the primary the the primary cause i mean look for example of the difference in attitudes between people who are living in west germany and the former
east germany look these were the same groups of folks from years ago but the east germans lived under a half a century of dominance by the soviet union in a communist system i think that had you can't get away from the fact that that was very important and the good news would be that a a half a century is while not a short period of time is nonetheless temporary and i would say the the good news would be going forward in
time we would we would see them maybe not you and i in our lifetimes but uh our children would see them moving beyond their current authoritarian difficulties but maybe not maybe maybe there are forces that are deeper than just their experience under soviet communism but even before soviet rule they don't seem to have been on the same path as say england france or belgium and a country such as the former yugoslavia
was never that much dominated by the soviets but its remnants still are marginally stable you know probably slovenia is that was closest of course to what is now austria and the other parts they're not doing that well right they have fascist movements uh they had civil wars whether you look at before the soviets or cases where the soviets weren't that strong there just seems to be underperformance it's as if there's a line in europe
and and what does that line signify what does it correlate with well again in my mind the the number one uh when you point to a line the number one thing you're talking with dividing the east and the west the number one thing you're talking about uh is the uh the place where the soviet union was dominant and not but i understand that there are all sorts of cultural features look at a country like poland for example poland
never had the experience of uh democracy the way the west did poland was a country that got partitioned what three times in the course of the last few hundred years look at a country like hungary hungary was part of the austro-hungarian empire uh look at uh where else the the czechs i think are doing uh doing better the checks at least come out of a quasi-democratic uh experience but i certainly don't want to suggest
that the soviet experience was the only thing going on there and i don't want to suggest that in the same way i don't want to suggest that the religious influence is the only thing that was driving our western economics and its creation but i think these are both very important your colleague joe henrich in his new book on weird he argues that medieval canonical laws set the western world on a unique path in essence because the
clergy discouraged cousin marriage and that led to much weaker clan systems in western europe do you agree it sounds plausible i have to confess i haven't read joe's book and i'm embarrassed but i uh i haven't read it in our department we had a department-wide seminar with joe as a speaker and unfortunately i had another commitment and couldn't hear him and i'm very sorry about that but i'm sympathetic to the idea another
uh truly great book that i would point to along those lines is by my late colleague david landis who wrote about the cultural influence on the development of markets capitalism economic growth landis's book was very aptly titled the wealth and poverty of nations the issue is why do some countries some societies flourish economically and others don't and long before it was fashionable landis pointed to cultural influences and
landis didn't point so much to the church but landis pointed to geography what uh what was very interesting in at the beginning of his book was his story about the geography of western europe compared to the geography of china he he raised raised the following questions suppose uh in say some period like what you're talking about say 1400 1500 something like that somebody had asked you somebody come along and said tyler tell
me which part they would explain they would have had to explain to you what an industrial revolution was and then somebody said okay tyler now that i've explained it to you i'm going to tell you that one region of the world is going to experience an industrial revolution and on the strength of that is going to dominate most of the world for the next 500 years uh which one would it be david's argument was that you would probably
have predicted chi and then the question was well why not and one part of his answer was that with its geography being requiring these large-scale canal water systems the chinese society lent itself to centralization in a way that western europe with all of these mountains and uh other geographical features didn't so that while you could travel from south for thousands of miles in china and you're still under the same emperor
in western europe all you had to do is go over some set of hills and you're in a different principality well i think all of these things are very important what do you think of the renaissance hypothesis that what's special about christianity is that christ who obviously is a very focal holy individual is also a victim and so that within christianity are the roots of a theory of individual rights
that it's doing more than just glorifying power it's moving away from might making that might makes right and in the long run that's providing the foundations for these liberal democratic societies an idea deeply buried in the roots of christianity well i would say this is not unique to christianity remember the foundational jewish tradition or myth depending on how you want to look at it has to do with emergence from slavery
and oppression and so the idea that might doesn't necessarily make right is not unique to christianity i don't know whether political systems are driven by the fact that we in the west have a kind of judeo-christian culture we're going to find we're going to find out over time but it does seem to be the case at least so far well what's certainly the case historically is that a modern liberal with a small l democracy with a small d
originated in [Music] protestant countries and i think what's uh clear so far is that those are the predominant ones you know if we had been having this conversation say 20 years ago we might have had a different view 20 years ago we might have pointed to some of these data from freedom house and other institutions and said look it started in the west and it's spreading everywhere well here we are it's a democracy seems
to be on the retreat at the moment but i'm optimistic that that trend will turn around too if we look at muslim countries it seems that muslim immigrants to non-muslim countries on average both do very well and are quite likely to be involved in commerce uh the history of islam seems quite positive for commerce muhammad was himself a merchant there are limitations on usury and the like but overall the doctrine of the
religion is arguably more pro-commerce than his christianity so why is it that so few islamic nations have embraced liberal democratic capitalism and very few are democracies right malaysia to some extent indonesia but overall the record is not that democratic there are two points of view that i think are probably both right uh one is that somewhere along the way islam took a very interesting turn
that moved those societies from being at the very forefront which they were of scientific advance and cultural height to a more stagnant backward looking orientation timur kuran's book i think is the key one on that but many other people my colleague noah feldman at harvard have views of all this as well the second view is uh the the second view is that the islamic view of lending uh is particularly inimical
to economic development now this is a view in which one doesn't lend an interest which originates in the hebrew bible and was taken up by the early christian thinkers as well many historians of the economic development point to the movement away from the ban on lending at interest under luther and then especially under calvin as the key step that freed western society to move toward a more um a more financially based
and therefore expansive economic posture and that's been blocked in the islamic world by the strictures on banking and lending i think there's something to both of these views but they're very different why are mormons so capitalistic i don't know that's a very interesting that's a very interesting question mormons have been very successful economically in the united states and the history of the mormon first the history of the mormon church
you know only goes back to the first half of the 19th century now instead of judaism and christianity and islam we're now not talking about something that goes back talking about something that goes back not even 200 years and so it ought to be possible to for people who are knowledgeable about mormonism to have a lot to say about about it but it is certainly true that in our american society mormons have been extremely
successful economically it's a common argument from historians and sometimes marxist historians disputed to be clear that the rise of capitalism was accompanied by a rise in anti-semitism arise in racism different forms of domination and that these were part and parcel of the same process do you agree you've written a famous book moral consequences of economic growth did religion as it manifested itself in
the form of capitalism and higher state capacity also give rise to these very bad events i don't think so i don't think there's a connection we can certainly point to successful market-oriented societies that have had their share of religious prejudice whether it's against jews or roman catholics today whether it's against against muslims in various western countries but i don't see any connection in fact i would argue
the opposite i would argue that what makes room for these people to come to societies where they are not indigenous and to do well and to do well in ways that integrate them in the society is precisely the feature of economic growth now that's that's an answer about economic growth not about capitalism versus communism versus something else but the historical fact has is that we haven't seen that kind of economic growth except under
market-oriented economies and therefore what's true of societies that experience economic growth by and large turns out to be a statement about market-oriented economies as well is that a u-shaped curve however so we know the dutch republic the later british empire the united states uh were havens for persecuted people but also if you look at the very early years of colonizing the world it arguably needed economic growth to
project so much imperial power kill or kill through disease so many indigenous peoples so is it the case the benefits of economic growth for tolerance only kick in much later and first you have to go through what are actually a number of centuries where economic growth is very bad for tolerance and mutual coexistence i guess what you're really asking is whether colonization and imperial expansion is a necessary feature of economic
growth i think it's hard to know because so much of the colonization to which you're referring was in the pre-modern period we don't we haven't in recent years seen very many of the major economic powers go off and take over other people's lands the way people did think of the british in australia think of europeans in south america think of british and french and spanish in north america that ultimately got sorted out
in the british favor but it's true that in these pre-modern eras there was a lot of colonial expansion there was a lot of taking over of other people's countries and of course when you take over other people's countries that's not good for the people who were there before you got there so that that pretty easy to see but i don't think of that as much of a feature of modern economic growth i don't i don't see who's being
exploited in modern economic growth americans right now paul as significantly less religious than they did say 20 years ago is that affecting how we think about economics i don't think so to be clear we've been talking for the last 20 minutes half hour however long we've been going about the influence of religion on economic development and maybe i should make clear that is not the subject of the book that i've just written
what i've written is a book about the influence of religion on economic thinking it's a book of intellectual history not economic history it's a book about where our ideas about modern economics come from and the fact that the fact that uh different people with different religious orientations have participated in economics in a different way i don't think matters now importantly uh there although i characterize my hypothesis as weber upside down
referring to the german sociologist max weber and i'd be glad to explain why but one element of weber that i do take and retain is the idea that religious imp impulses religious influences on how people think are very long lasting and persist long after people no longer believe in the particular religious impulse to begin with now that i think is directly responsive to your question because even if it turns out that
americans over time become distinctly less religiously committed than they were i think in this variant way the fact that the country came out of a certain era of protestant thought will serve as a kind of catalyst catalyst in the sense that a catalyst is something that triggers a chemical reaction and then after the catalyst is gone the reaction is still there and the result of the reaction is still there i think the role
of religious thinking in shaping our early economic thinking in modern western economics is going to persist and even if the current trend continues for another decade another half century toward americans becoming less religiously committed i think it will still be there is there persistence in the world as a whole so if we look at china for many decades china is very very poor maybe per capita income of two to three
hundred dollars uh china of course over the last several decades has grown rapidly and is extremely commercial and its overall mentality if we think about india people use the phrase hindu rate of growth in a derogatory fashion of course we wouldn't talk that way anymore but more importantly india has had many years with high rates of economic growth and people who leave india have done especially well earning
i believe immigrants to america from india are now by far the highest earners so does that indicate persistence isn't that strong that once the environment changes people's ideas are quite malleable and they evolved to fit the new environment well once again i think there's a difference between asking about persistence in people's beliefs and persistence in people's behavior when it comes to behavior a principle that
economists have been dedicated to for well over a hundred years is that when the environment changes and the incentives and constraints that affect people's behavior change then the behavior changes and so is there persistence in rates of economic growth across countries i don't think there is there's consid there's there's persistence in who's rich and who's poor but persistence in economic growth rates is harder to
hurt or depend down by contrast is there persistence in the way people think in what they believe well i think there certainly is and just look around at the way in which americans have different ideas about lots of things than chinese do than russians do you were asking before about the fact that eastern europeans have been unsuccessful for the most part in mounting stable liberal democracies well i think this is a matter of
persistence of something i was pointing to the soviet experience you were suggesting from uh it's a persistence of something from earlier on and i'm sympathetic to that too but i would distinguish the persistence of thinking from the persistence of behavior economic growth is stephen pinker's optimism about growth correct you're referring to his better angels of our nature book and your book on economic growth right
do you agree with stephen i i've i've never talked about my economic growth book with steve and so i honestly don't know what uh what he thinks about it i can say what i think about his book on better angels of our nature i think it hinges heavily on how you think about the first half of the 20th century to recall his argument is that violence in the world uh has been on a downward trend and he's optimistic that it will continue
on a downward trend and if you just drew the trend line and you looked at what happened in world war one world war ii and so forth you would say my goodness in the western world that's an extraordinary increase in the volume of killing uh within the lifetime of certainly my parents and i'm guessing yours as well so what do you do with that well by and large steve treats this as an aberration and once you uh it's
it would be an extreme characterization of what he does to say he throws it out as an outlier that that would be unfair but if you remove world war one and world war ii from the scatter plot then the trend line sure points downward now he's interested in things more than uh just wartime deaths he's interested in who who who gets murdered walking down the street so somebody can steal his wallet he's interested in that sort of thing
but i think to me at least it's the it's the wars that dominate is christianity also the most martial of the major religions if you look at the united states people who sign up for the military they come disproportionately from the south right again to my knowledge of the major western religions i would absolutely not say that i think all just about all religions have a kind of militancy to them in their initial phases
look at islam for example in the early years of islam the muslim forces conquered all of africa conquered uh large parts of southern europe uh conquered essentially all of spain islamic armies went up as far as uh what was it the i'm now trying to remember my high school history was it the battle of poitiers when the french finally turned around the muslim advance later on under suleiman the muslim forces again conquered much of southern europe
going up as far as the battle at vienna so i think islam is certainly a very militaristic religion in its early days judaism as well again i mentioned a few minutes ago the foundational myth in the hebrew bible of the hebrew slaves fleeing egypt and what did they do when they fled egypt they then conquered canaan the holy land so there's certainly a militaristic strain there so the answer is no i would not
particularly point to christianity is you is uniquely militaristic among certainly not among western religions how do you think having grown up in louisville influenced the content of your latest book it's a more religious area than where many of our elite scholars come from right well maybe that's true you are certainly correct i come from kentucky incidentally i have very fond memories of coming from kentucky my family had been
there for a very long time and i have fond memories of the area i never thought of it as is particularly different though i never when i when i arrived at harvard as an undergraduate or when i worked in investment banking in new york i i never thought of it that i have this uh great difference in outlook from my harvard classmates in the in the i mention harvard because in those days harvard undergraduates were much less
geographically diversified than they are now and when i worked in investment banking in new york that was a pretty new yorky new englandy culture i never thought of myself as having a background that was terribly different from anybody else your argument in your book on economic growth about the moral benefits of growth how much is it a levels effect versus the rates of growth effect the hypothesis that i offered in that
book very importantly was about the rate of growth effect it's about people realizing that they are living better than their parents lived it's about people realizing that the opportunities for their children are better than the opportunities that they had it's very much a rate of growth effect and the reason i say that's important now going back to the argument i made in that earlier book the reason it's important is twofold one
it was a warning against our being complacent it's a warning that no matter how rich our society is if we get into a situation in which large numbers of people feel that they no longer have a sense of forward progress in their material lives and they don't see that turning around anytime soon and they don't have optimism either that their children will face a better economic future that's the circumstance
under which people turn away from these small liberal small d democratic values like tolerance and respect for diversity generosity openness of opportunity even respect for democratic political institutions so an important aspect of the rate of growth aspect of the argument as opposed to the level aspect is a warning about our potentially being complacent when we shouldn't my former colleague alexander
gershenkrone had this marvelous phrase about a democracy without democrats well he was referring to weimar germany but i think it's a warning for us very much today in the united states when so many people's incomes are stagnating and then at the same time the second implication of the fact that it's a rate of growth argument is uh some optimism that uh countries around the world where income levels are far below ours
don't have to wait till they reach our level of income before they can develop into liberal democracies now as i was saying a minute ago uh 20 years ago when i wrote that book i that the data gave me much more reason to be optimistic than i am at least for the short run now about low-income countries democratic prospects but i i still believe in the hypothesis in the long run aren't there some reasons to be more
optimistic so if we look at taiwan where median income has not really gone up since 1989 in real terms they seem much more tolerant much more democratic than they used to be japanese economic growth has slowed down uh they're certainly no less democratic probably more democratic definitely more tolerant haven't we seen a fairly large number of countries with much slower growth and whatever their problems or flaws they seem to be more tolerant
gay rights rights of women many different issues well there are many aspects of the kind of liberal democratic tendencies that i uh spelled out in that book and tolerance is is is one of them i was very reluctant then and i still am to point to these small city-states as examples people often threw up to me singapore as a counter-example to what i was talking about look singapore is what five million people something like
that it's really a big city taiwan is somewhat larger i i know but it's a very special situation because of its fear of the chinese i i would be confident that in the greater number of cases those societies which are able to mount serious sustained widely distributed economic growth will do better on these dimensions like tolerance and democracy and generosity and provision of opportunity than those that do not okay in the
middle of these chats we always have an underrated versus overrated section are you ready uh i've listened to some of your podcasts before and it's always struck me as one of the most uh surely one of the most unusual aspect of conversation but yes absolutely go ahead consumption taxes for the united states an underrated or overrated idea i would be for a consumption tax which is i guess a way of saying since we don't have one i
guess i would that would be a way of saying that it's underrated i would be for it but not as a substitute for our income tax i would be for it as a supplement to our income tax so i guess that's that i'm saying it's underrated the volcker deflation underrated or overrated i think paul volcker is one of the greatest heroes of my lifetime and doing what he did under the pressure that he sustained in order to
turn around our inflation i think is one of the greatest acts of public service i have ever seen and so even though i am aware that lots of people then and now have been cheering for paul volcker and what he did i would cheer even louder and so i would say it's even underrated i happen to be to have been working at the federal reserve but do you know if you're [Music] yeah you're old enough to remember of
course i remember it all very well yeah yeah there was a firm in texas a construction firm called lone star industries that used to take out during the volcker disinflation you called it a deflation i believe like that was the incorrect word you're right i'd like like to correct that there was no deflation under volcker it was a disinflation and during the period of the volcker disinflation this firm called lone star industries in texas
used to take out full page ads in the wall street journal about what a criminal paul volcker was i happened to have been working at the federal reserve board one summer uh this was in a an earlier era in which um security in buildings like this was much less so we we would just come and go and walk in and out and one day out in front of the building this enormous flatbed truck pulled up stacked high with lumber
and we all sort of went down and looked at it and what was it and the truck driver gets out and he says i have a delivery for a mr voelker and we all said well what is that about and you know eventually we got to see the letter that came with it and i can't remember whether it was from the same firm lone star industries or not but it was from some construction company and basically the note said paul because of you i can no longer use this
use this lumber so here you take it you take it well this was the kind of stuff that was going on uh and so i was paul volcker overrated underrated as much praise as he received i think he's one of the most underrated people i've ever known annuities why do the markets for them function so poorly is it an underrated thing more people should buy them or it's just never going to make sense the idea of annuities is
underrated the idea that people should be able to buy themselves out of a very important risk namely the financial risk of how long they're going to live i mean annuity is just the flip side of an insurance policy and when we buy insurance we're insuring against the risk of dying too early when we buy an immunity an annuity we're buying insurance against the risk of living too long why doesn't the market for annuities
uh work better it's because of what economists call adverse selection that is to say people who sign up to buy annuities have knowledge about themselves that the sellers of annuities don't and if you look at the data on who buys annuities in the united states annuity buyers have a distinctly longer mortality experience than the general population they know that they're going to live longer now once that experience becomes clear
then the sellers of annuities have to price the annuities not on the assumption that their customers will be ordinary americans but that their customers will be long-lived americans well that just makes the annuities even less attractive for ordinary people and makes the adverse selection even worse but the long life people don't buy them either as far as i can tell right you could apply big data figure out who's going to live long
while the japanese american woman in new jersey sell her annuities priced fairly but but she also doesn't do it i think this process in which i described in which the special information people have about themselves leads to this adverse selection in the customer base which leads to higher pricing which leads to more adverse selection has gone on to the point at which we are in a very bad equilibrium very very few individual americans
buy individual life annuities so what is the market for annuities it's a mar it's a market with groups and why does that matter because if some annuity provider like tiaa the big insurance company provides annuities to the universe of all college professors in the united states then they at least have some way of getting around getting around the adverse selection but i think we are in a bad equilibrium
and uh individuals are not attracted to individual life annuities i think it's it's because of the adverse selection and it's luke unfortunate critique overrated or underrated and i think i know your answer uh i think is a way over rated for the benefit of your listeners who don't know what the lucas critique it refers to robert lucas uh a university of chicago economist who won and very much deserved the nobel prize field
and the idea is that people not just economists not just financial wizards ordinary people know enough about how the economy works that they are going to undo in their private behavior the effect of any government policy uh into intervention and so take your most recent question as an example suppose the government provides uh some uh enhanced form of life annuity we already have a form of life annuity provided publicly
in the united states the word for that is social security but suppose there was some big change in the public's in the social security system the lucas critique idea would be that people will understand the implications of this for their own and everybody else's behavior and as a result of that understanding we'll take actions that once everybody has taken that action will undo the intended effect of whatever the policy reform is
i think that just places much too much burden on the knowledge and understanding of ordinary citizens and therefore my answer is overrated victor niederhoffer as a squash player i never uh you probably are referring to the fact that uh you know for many years i was a squash player i wasn't good enough to play with vic niederhoffer uh i would love to have done that but i wasn't good enough i understand he was mighty good so i
would say if anything he was underrated fiscal sustainability paul krugman and others argue that because interest payments as a share of u.s gdp are stable or sometimes even declining that our current path is fiscally sustainable do you agree no i don't it is certainly true that if long-term interest rates remain and by which i mean real interest rates interest rates net of inflation remain at or near their current levels or even
go down then the fiscal burden associated with any given debt level that the government or for that matter of business or for that matter a homeowner has uh is much more uh much more sustainable a question that i put to my students now that it would never have occurred to me to put to you and your classmates 30-odd years ago is the following you are a young graduate student just getting married
and you and your wife would like to buy a house or you and your husband would like to buy a house because nowadays unlike when you were a student we have lots of women graduate students which is a good thing so you and your wife or husband would like to buy a house and some bank is willing to lend to you to buy that house at a zero interest rate how big a house do you buy if somebody is willing to lend to you at a zero
interest rate well that's a version of what's an extreme version of what you're saying so if interest rates remain super low then government business households can all afford higher levels of debts without it becoming in any way unsustainable now i kept emphasizing if interest rates remain low and we don't know that they will and now if i can put in a plug for a policy idea this is why i have been recommending to anybody who will
listen that this is a great time for the united states treasury to lengthen out the maturity of the u.s government's outstanding debt the average maturity of the outstanding debt is around six years and we happen to have super low interest rates it would be lovely to think that they're going to be here forever some economists think they will be i'm more cautious i would use the current market environment as a way to lock in those interest rates
because we know that we're going to have a high government debt level for a very long period of time and much better it not be a burden pandemic aside if on average g is greater than r can't we just grow our way out of the debt as you mentioned now borrowing rates are negative in real terms right economic growth on average is positive so just keep on plowing straight ahead let the clock tick there are two parts of the
sustainability question and you hit one of them correctly if you're growing if your economy is growing in real terms faster than the debt then you can grow your way out of any debt but there's another side of it and that's how rapidly are you taking on new debt so let's take your question seriously and say we're going to put the pandemic aside in the year before the pandemic we're talking about the
government's fiscal year 2019 so ended in ended september 30 2019 none of us had talked about pandemics yet in that year the u.s government spent four and a half trillion dollars and it only took in in revenues three and a half trillion dollars so that one trillion dollar deficit even at a time of a fully employed economy and of course before the uh before the pandemic hit that was nearly five percent of our national income
and so even though our economy was growing nicely more rapidly than the rate of interest that the government was paying on the debt we were on the other side of the equation adding new debt so rapidly that the debt to income ratio was going up instead of down so simply pointing to the so-called r minus g factor i think is a very incomplete way to look at the question of sustainability again pandemic aside but
have we been seeing crowding out in recent years with high fiscal deficits or crowding in perhaps on balance i would guess that there has been neither uh and the reason is that interest rates uh have been super low going back to that it's the idea that when the government issues debt this might crowd out private investment subject that i wrote a lot about years ago when interest rates are higher that's not just some arithmetic or mechanical
relationship there has to be a mechanism involved and the mechanism is the availability and the cost of financing for business investment or for homeowners that want to build a house or buy one with interest rates as low as they've been in the last few years i think it's very difficult to point to a crowding out story and say that somehow magically because the government has issued a lot of debt uh businesses haven't been investing
or homeowners haven't been building houses because credit has been pretty available the rate of interest on that credit uh is has been low again i was asking my graduate students about the hypothetical example of a zero interest rate not a prohibitively high one so i would say no i don't i don't see the story whereby there's been a lot of crowding out and no crowding out from the fed paying interest on reserves
that of course is a form of fiscal policy it lowers the velocity of some of the monetary aggregates presumably discourages banks from making loans won't that crowd out some private investment i think the answer is the same tyler the interest at rate at which the federal reserve has been uh crediting reserve balances held by the commercial banks is super super low now the economics behind your question is that is correct no
bank is going to lend to tyler cowan to start a new business or to ben friedman to buy a new house at a rate lower than it can get by leaving the reserves on deposit at the local federal reserve bank and drawing the credit but those interest rates are just super super low and so if you had had an idea for a business and had wanted to go in and get a loan i don't think the fact that the federal reserve was crediting reserve
balances would have made any difference whatsoever now as you know we have a much more explicit form of price inflation targeting than when you wrote your earlier papers on credit as a leading indicator so there's been a switch of regimes to some extent do you think that in the current world that credit as a good leading indicator still makes sense no i don't i think the empirical basis for the argument that i made you're
going back now 30 odd years ago is no longer there i would say it's very much in parallel with what happened to peop things like monetary targeting famously at the end of his life milton friedman uh acknowledged that monetary targeting had been a failure that was his words in this famous interview that he gave and the reason was the empirical breakdown of the relationship between various monetary aggregates whether it's
so-called m1 m2 whatever and levels of economic activity back when milton did his great work in the 1950s and 1960s there had been for quite some years a very stable reliable relationship between at least long run rates of growth of money and long run price inflation and my contribution i still like to think it was a contribution at that time was to point out that similar relationships just as empirically uh valid uh
were there for at least some measures of credit importantly not just bank credit but broader credit including the bond market now i'm just going to say that over over time these measures uh lost their close relationship with national income prices whatever and therefore i wouldn't recommend either one today neither money nor credit what do you think of nominal gdp rules you mean targeting nominal gdp sure a rate of growth and a level
uh i don't i don't first place i i don't think targeting nominal gdp levels makes any sense there is some argument for targeting the price level but i don't think that carries over to targeting the nominal gdp level targeting the rate of growth of nominal gdp is not a bad idea um it's a simplified form of saying that we're targeting real growth and targeting inflation together just adding them together and treating them as the same
thing i would prefer to be somewhat more sophisticated about the analysis i would prefer to think of real economic growth as separate from price inflation when real economic growth or when the level of economic activity is far below full employment that's a time when real economic growth doesn't have the cost of potentially creating inflation pressures and by contrast in a fully employed economy we do have to worry about
price inflation and i would prefer to keep those two uh items separate in the analysis so i'm not a fan of nominal gdp targeting it's it's not the worst idea uh ever but i would prefer to do it in a more sophisticated way how would you change the governance of the fed if at all i don't think anybody today would design the federal reserve in the way in which it was designed 100 years ago with a board of governors and these 12
regional reserve banks and these presidents of the regional reserve banks who are not confirmed by the senate playing the key role in establishing monetary policy that said i would leave it alone because my sense is that with the current politics of our country i am sorry to say i think if we open that box we are much more likely to come out with something that's worse than what we have so while i don't know anybody who would
defend in the abstract the structure we've got i wouldn't change it at least not now let's close with a few questions about you how is it you stay so motivated to learn new things when not everyone in the economics profession is the same way that's a good question i i don't as you're suggesting my style of economic work is very different from other people i tend to undertake these long-range projects that take me such a
long time [Music] because i have to go off and learn a lot of things that i didn't know you know in the book that i've just written readers had grown up in a rigorous presbyterian sunday school the book would have been 100 pages shorter because i wouldn't have had to walk my readers through all sorts of things and if i had grown up in a rigorous presbyterian sunday school which i didn't uh i could have written the book at
least two years more rapidly because i wouldn't have had to go off and learn all that stuff but i did so i undertake these projects why do i learn these things in part because i enjoy learning about them but in part because i i think they're important for the questions that i want to answer i didn't start this most recent project from the direction of saying let's think about the influence of religion i
started from the other end i started by saying i want to know i want to explore where our current modern western economics came from and that then led me to seeing the importance of these religious influences on our economic thinking and then i realized that i had to go off and learn a lot of things that i didn't know about well i did it who first spotted your talent and how did they do it what did they see oh um who
who who first i would assume my mother i suppose but in your career was it a professor or a friend of the family who said like oh ben you seem like you'd be great at economics how did that happen no i came into economics i wouldn't say by accident as of the time when i graduated from college i had no intention whatsoever of being an economist i assumed that i was going to go to law school when i was in when i was a senior in
college the only two uh graduate schools that i applied to were i applied to two law schools and that was the end of it but it so happened that i won one of these fellowships to study abroad for a few years and then once i this was in britain and once i got there then i had to study something and so since i had been doing economics as an undergraduate and i had found it interesting i kept going with economics and then by
the time i'd then done economics at a graduate level for a couple of years in england then i said well you know this is really more interesting than what i think my lawyer friends do and so i'm going to stick with it but it wasn't that anybody particularly steered me into economics and when you get more by when you look at graduate students what non-obvious qualities do you look for as markers of their talent smarts hard
work of course but non-obvious qualities i like to look for people who get their questions from looking at the world rather than from looking at the literature i understand that there are certainly plenty of very successful economists who got their start and even continued their trajectory by reading the professional economic literature and saying well here's this important paper and i think i can improve on what
so and so did in his or her analysis that's just never been very tempting to me to me economics is interesting because it's about the world and the world is throwing up all sorts of interesting questions whether it's about why economies grow you've asked in this conversation about in price inflation about how we conduct monetary policy about fiscal policy many of my colleagues are interested in more microeconomic issues of labor
markets and education and health and how industries organize themselves so but i i try to encourage our graduate students to look at the world look at what's interesting out there and so much to be so much we don't know so much we don't understand so much we'd like to explain get there get their questions from there and then turn to the literature to see if you can figure out how to come up with some answers what's the most
important idea you have taken from religion the most important idea i've taken from religion and it may even be protestantism though you are probably not a protestant right but we all are in a sense as americans if ideas are persistent uh if you're asking now not about the most important implication of religion for our economic thinking which is what i've written about but the most important implication for
of religion more generally i would say it's in how we lead our lives i once had a conversation with an uh an older man and we went on for some time and he just thought about life in a very different way than i did and the more we went at it the more it turned out that this was somebody who didn't himself have any kind of um religious background religious affiliation religious commitment religious training and that didn't make him right didn't
make him wrong didn't make me right didn't make me wrong but what uh that conversation drove home to me is that he had he just had very different ideas about how to live life uh than i do and surely that's got to be the most important thing people take away from it and last question what will you do next well my next project i think is going to be one in on which i recently read one of your papers i recently read an interesting paper of
yours in a national bureau of economic research conference volume on artificial intelligence i thought you had a lot of interesting things to say about a.i and distribution and how ai changes the constraints on our society i have persuaded myself that the greatest economic challenge or to put it the other way the greatest societal challenge we will be facing over the next generation that stems from the economic sphere
is going to come from our increasing reliance on robots and ai and i'm not pretending to invent reinvent myself as a labor economist any more than in this new book i've reinvented myself as a theologian i didn't or in the previous one i didn't reinvent myself as a social historian i'm going to learn a lot about things like that but i i think i would like to see if i can say something about how we can handle the challenges to
our um society to our politics to our way of moral thinking that i think are going to come from automation and ai it's a tough challenge i've started but i haven't made much progress the new book again listeners is benjamin friedman religion and the rise of capitalism do also by ben's older books and ben thank you very much for coming with us today thank you tyler it's a pleasure to see you again