[Applause] [Music] [Applause] [Music] conversations with Tyler is produced by the mercada center at George Mason University Bridging the Gap between academic ideas and real world problems learn more at arcades.in conversations withth tyler.com [Music] today I'm very happy to be here with Hal Varian who is Chief Economist at Google and emirus professor at Berkeley Hal welcome thank you good to see you now
one of your most famous articles it dates from 1980 and it's about a theory of the economics of sales ah and one motive for sales is price discrimination but what what's the main alternative explanation of why sales happen well the claim is always overstocking or Fashions changing or selling something at a loss or remainder sale but even that's a bit like a price discrimination explanation it's a CO and durable goods monopolist
you're just unloading it at a loss yeah but but they're unloading at a loss because some new models come along disappear they'll cut the price you know in France you're only allowed to have sales twice a year and they have to be uh legitimate price discounts out of a remarkable fact I discovered and when you say legitimate price discounts what what counts is legitimate had to be charging a higher price before and then
actually cut the price from the previous high price now that we have the internet how is the economics of sales changed so the economics of sales has really found its home on the internet because you look at users some people search for the lowest price and they have all these tools to find it some people just buy on an as-needed basis and so you've got these two segments of the population fits the model that I wrote in 1980
really quite nicely should we be more or less worried about the economics of price discrimination given the internet so we hear two stories of course one is there'll be this highly personalized pricing that will leave consumers with no Surplus whatsoever that story seems to me to be ridiculous because it's so easy for consumers to conduct this kind of search try to find a lower price so consumers have been empowered by this
technology in my view so let's say I'm searching on the internet Amazon has a lot of data about me say they were completely allowed to price discriminate what's my response to this hypothetical Amazon third degree perfect price discrimination what should I do use Google and buy from someone else sure I mean it and by the way this is not an uncommon Behavior because lots of people will go to a big retailer might be
Amazon might be Macy's and they'll get a price and then they do a little search to see if they can improve on that price and so it's a it's a model it's not at all unusual to see people describe that kind of behavior as their normal way of online shopping but the size of that convenience wedge is that captured by Amazon or how much of that Surplus do I get I'm set up for one click on Amazon
right so I want to use Amazon all all else equal well how much would you charge to do two two clicks it's one of these things where yes there's a minor extra cost because the site is trying to make it as easy as possible for you to buy but at the same time they can't really impose any significant cost so the most they can make is the difference between your uh valuation of one click two clicks whatever another topic you've
written a great deal about electronic journals today why are so many of them still priced so high marginal cost is zero right right because they would appear to be semi close substitutes and there are semi close substitutes because as you know you'll often find copies of published papers or pre-prints or something available online the users the end users The Faculty members or the students uh
they can usually get what they want so they don't protest these high prices much it's the libraries that end up paying and the Librarians generally say we want to provide useful information to our constituency so they're not highly motivated to resist these high prices either but I can use Google to look for substitutes right to bring it back to the Amazon comparison yeah but yet journals will still charge say $2,000 a
year for a subscription but not to you it's to the library of the University you're at is a basic answer so there's a little bit of a division of a problem with incentives here in terms of getting you to face the true cost of that journal access why don't libraries Rebel more they do to some degree and you'll see situations especially at smaller places where there they will arrange an interner Library loan or some system
that they can ride on the larger organizations Cod tals and that's that's not at all un common why don't pirate copies now break down the equilibrium so I could go to syub right which is black or gray Market but it's there no one will stop me well again the main use are going to be people at universities the universities already have a license for these things so yes you might go to scub for if you can't find it elsewhere but
just like you said before the path of leas resistance is just search over my library connection and see if we have access to this material but if someone says that well the equilibrium is a kind of Market segmentation where the ready Searchers get it very cheaply or for free yeah the other people are elastic if Amazon is perfectly price discriminating against us do we end up with the same situation is it like the
journal articles or is it somehow we all search and Amazon's price discrimination breaks down altogether well I would say if you take the journal example again as we all know where we're going to get the price reductions is competition and you probably seen that in the last couple years the American economics Association has offered four new journals you've got bigger set of publishing outcomes there's a high level of prestige
attached to these journals and they're very reasonably priced so I think we we are seeing entry of that sort not only in economics but in other scholarly disciplines as well why are textbooks still priced so high uh not all textbooks but many they are priced remarkably high and uh and it's a situation where I think I really would like to like to see lower prices because obviously there's a durable goods
Monopoly problem there as you have more and more competition from previous editions each of the new editions have to differ markedly from the old Edition to support the uh pricing model that's getting harder and harder to do in fact a friend of mine once told me having a successful textbook is like being married to a very wealthy person you don't like much anymore why doesn't the world use more second price auctions ah well that's quite
quite an interesting question especially now you probably seen this note that Google was Swit switching to a uh first price auction on display ads yes and the reason they did that is because they wanted to put all of the ad sellers on a Level Playing Field and there was concern I think unfounded concern but I but I will say there's definitely concern about having the last look at the price and so if I'm the if you're
going through a series of auctions as you as you often are then the person who gets a look at the last price can say oh well do I want to beat that or not we all know from the revenue equivalence theorem that you would expect a continuous first price auction to end up about the same place as a one-time right second price auction so we'll have a nice chance to see how well that theory Works in this context why don't we see
more descending price auctions just start with a high price keep on lowering it when someone says it's mine it's theirs well or even better the first person to push the button gets the item but he has to pay the price when the second person clicks the button so you've got a combination of a sealed bid and a descending auction that's a very good question I mean of course we do see it still happens in the Netherlands at
the flower auction if you're passing through skle one of these days it's a 5 minute taxi drive you could go see the market in in all of its Glory but I I don't really know I think it you need to have this equipment this infrastructure that will allow you to do it well that used to be kind of hard but now with a mobile phone it just comes down to being an app so uh why I don't know if I buy
something at sbe's there's the price I pay for winning the auction and then I pay a 15% buyer premium yeah why does that make sense why does that persist is that a behavioral Quirk that people think they're getting it for cheap and then the 15% is tacked on and they're fooled well remember the sues is offering some Services they're offering you some guarantees about whether this is an original they're offering you uh
certain amenities and so on now whether that's worth a 15% fee that's up to you to decide but but why is that a percentage fee there's other ways you could charge people for those Services right sure sure and I think I think the there's you know it's a two big firms doing this kind of antiques Fine Arts auctions and so on they've established these patterns of behavior and I'm sure that we will see challenges to that in
the future because it's so easy to experiment with auction design now do SBE and Christies have anything to learn from Google about auctions or vice versa well remember they normally use this ascending bid English auction and as you know the second bid auction is equivalent under certain circumstances but there is some degree of excitement irrationally irrationality Madness of crowds whatever you want to say that
people get caught up in the bidding and they probably do make higher revenue from the ascending bid auction than from the theoretically equivalent uh Victory auction how much do you believe in Winter's curse well Winter's curse would be most relevant when there's some asymmetry of I think from what I can tell looking at the experimental literature that naive players do have a Winner's curse but they learn uh over time to shade their
bids in a way that gives them a better uh you know better outcome so there's a learning Behavior going on there but if there aren't many auctions where everyone is experienced then on average we see winers curse well when I started out at the University of Michigan and wanted to furnish my first house I would go to auctions and one of the rules of thumb that I developed was you never go to the auction that has the best stuff
because everybody's there you go to the auction that's sort of second best because then you have a better chance of beating the uh the dealers so there's a lot of I don't know Common Sense sort of strategies that people use in this and I and I I think there are inefficiencies that can be exploited at least in these small scale auctions with uh nonprofessional buyers why doesn't business use more prediction markets
they would seem to make sense right bet on IDE is aggregate information we've all read Hayek right and we had a prediction market and I'll tell you the problem with it the problem is the things that we really wanted to get a probability assessment on were things that were so sensitive that we thought we would violate the SEC rules on Insider knowledge because if a small group of people knows about some
acquisition or something like that that is a secret among this small group you might like to have a probability assessment of whether that would go through but then anybody who looks at the auction is now an Insider so it's a problem in you have to find things that a are of interest to the company but B do not reveal financially critical information that's not so easy to do but there are plenty of times when insider
trading is either legal or not enforced plenty of countries where it's been legal and there we don't see many markets in companies if any right so it it seems like it ought to have to be some more General explanation or no well I'm just referring to our particular case there was another example at the same time Ford was running a market and Ford would have Futures markets on price of gasoline which was very relevant to
them it was an external price and so on and it extended beyond the usual Futures Market that's the other thing you're not going to get anywhere if you're just duplicating a market that already exists you have to add something to it to make it attractive to to insiders so we ran a number of cases internally we found some interesting Behavior there's a article by Bo Cil on our experience with this uh with this auction but ultimately we ran
into this problem that I described the most valuable predictions would be the most sensitive predictions and you didn't want to do that in public if you were a young entrepreneur what industry would you look to improve upon using mechanism design tools health of course Health but how how so how can improve health well they're all sorts of screwed up incentives so if you start thinking about it from mechanism design point of
view you can imagine situations where you could improve those incentives by various kinds of Market marketplaces Market mechanisms now I'm not an expert in health I said health because we're living in an aging population there's going to be all sorts of increased expenditures in this area there's going to be greater calls for more efficiency and cost reduction and so using a mechanism designed tool might might
really help in some of these cases the idea of using mechanism designed to improve voting and I don't mean voting in National presidential elections but ways you could do it non-controversial demand Revelation mechanisms Glen Wilds quadratic voting what do you think of those ideas can we actually use them they're hardly ever used they seem to make good economic sense they haven't evolved right but we have seen things
like instant runoff voting which Australia has been doing for a 100 years we've got now Main doing the same mechanism Eric masin talked to me a few days ago he's working on a initiative to get Massachusetts to to adopt this uh this kind of system and I think he puts for forth some pretty compelling reasons but why are we so reluctant to incorporate preference intensity yeah again it doesn't have to be a national
election it could be the local bridge club you could have people do grow leard Clark they could do tullk they could do many other schemes never seems to evolve well other than a bunch of nerds doing it you know for kicks or research purposes yeah so this question of intensity there is one margin namely people who feel very strongly about a certain candidate or certain issues devote their own time energy volunteerism that's a measure of
intensity there so the if I can recruit another voter to my side then it's like I get two votes my own vote plus the person I recruited so there's a little intensity going on there as well why do people trade so much in financial markets it doesn't seem bisy and rational right oh you want to trade with me I'll take that offer back yeah trade volume is massive yeah your yours well people say it's massive but actually
it's usually a relatively small fraction of the total amount of the asset that's held so even on a very heavy trading day that might be a few percent of the total volume of the asset so it's not so big but you might think you only trade when your kids are about to go to college and you need to write a big check yeah so I agree I agree with your your point that there's more trading than uh than there
should be by any reasonable model part of it is because uh people really do have differences of opinion and are not fully basian so they may not find the other person's opinion credible and so it doesn't we don't really get the agreeing to disagree or I guess the converse we don't get this pushed into a model where you've got full agreement actually wrote did some work in this area several years years ago and it it
really came down to people do have a different model We can't agree on the model so if we don't agree on the model then we won't get the uniformity and we're also not meter rational across models right well that's we can keep going Turtles all the way down you know I don't trade by the way if you're curious to know well that's good I mean I would say uh yeah why why trade you should be trading we know that uh just
as an empirical fact here's an piece of yours that's not commonly associated with you but are psychological barriers in the Dow Jones index once it hits a certain level then it's broken through and you can predict future returns true or false ah it's very interesting you to raise that question what happened was back in the oh gosh when would this be in the 70s sometimes the Dow Jones approached 1,000 and then backed off and
they did it 23 times I believe I don't remember the exact number but it was multiple times and people were talking about the barrier the Thousand barrier Etc and I said hm I wonder what shows up historically and it turns out at this time Dow Jones had just published a book of all of its prices going way back to when it was founded and uh we did a little analysis of that to see if there were barriers so if Century marks was
that a barrier in the sense did the stock price behave in some unusual way so this was not a theory or hypothesis we were just looking the data to see what it uh what it said what we found out was that the uh price increases accelerated as they approach the century marks in most periods and that's true even after people know that well it's one of these things of course the index is totally arbitrary and uh as the I
would suspect as the Dow Jones has perhaps receded in importance compared to S&P or other other indices probably this pattern became dramatically weakened or or it was eliminated altogether now as you know some of your most frequently cited pieces are on the economics of envy and these are from the mid1 1970s and now you've lived for a while in Silicon Valley how have your thoughts on Envy changed since you wrote those articles
yeah well I think uh what's interesting is there are lots of cases where we're seeking some sort of fair division or something that we agree is Equitable Etc and if you look at that theory of uh of fairness that I worked on uh actually my thesis was on that topic everything seemed to work out nicely if you just have a fixed pot of goods and you wanted to divide them in Fairway like like for example uh
an estate there were a number of inheritors to estate and you wanted to make it both Equitable and also efficient so that problem we can solve the difficulty came when you brought production into it because people could contribute differently different amounts to the production and then how much should they be compensated for the contributions and there there seems to be a great variety of views in the world
different people seem to have different opinions on that and it doesn't work out as cleanly as the as the first story does the typical American Envy more the billionaire or the nextdoor neighbor oh I think the nextdoor neighbor next door neighbor the billionaires it's interesting the billionaires are kind of like our our instance of royalty you know the people want to see what they're doing and where they're going out and
how they dress and all this kind of stuff but I don't think it's actually envy and by the way I know a few billionaires and there's a lot of cost to being a billionaire in the sense that you know you can't go out in public maybe you need bodyguards doing a trip here and there is a is a major undertaking because of the people that have to be informed so it's not it's much better to be a half a billionaire I
think than to be a billionaire do the billionaires envy each other more than poorer people Envy billionaires uh there seems to be something of a pecking order there it depends not so much in Tech I would say but maybe in finance Wall Street kinds of things there's a motivation that's different than that we see in the west coast a few questions about education you've written the most frequently used graduate economics text
for many years do we still need to teach Shepherd's Lemma and Duality and first year PhD micro oh absolutely why when I thought about what should go into that book I thought about what do you need to understand the journalist so take something like the American Economic Review and you'll thumb through the American Economic Review and come up with a list of topics and the two things you mentioned they're still mentioned in
the research literature so that's what you need to know to read the journals and that's what the textbook is supposed to teach you but if you look say at the a today so many pieces seem based on Standalone data sets there's much less of a model it's mostly not consumer expenditure Theory and if they don't know Shephard's Lema are they really at Sea well for example there's a big debate going on now about how margins
have changed over the years you may have followed this well it comes right from manipulating first order conditions throwing in a little bit of Duality so understanding how that model works is critical to understanding that particular literature now it may be that you know where to look it up and that may be good enough for some of these things but it's just the nature of a textbook it has to prepare you for
actually performing for actually doing and reading and understanding what's going on in the economics literature you've now worked at Google almost 20 years is that correct that is correct if you were writing the text again just from scratch with almost 20 years of knowledge at Google practical knowledge what would you change well I would say I have added some of the things that I learned at Google to my undergraduate textbook uh
which is more frequently revised and so there's a whole section on auctions the kinds of things we're talking about before what the ad auctions look like a lot of strategic considerations showing the student that hey this stuff is really relevant in practice it's used uh to trade billions of dollars worth of assets on you know using these algorithms so definitely that work has gone into the uh textbooks the one thing I would say is
that in the textbook both the undergraduate and The Graduate textbook there's more uh what should I say exactitude than might be necessary in real life you know there's this line that uh no battle plan has ever survived Encounter With the Enemy and when you look at how bit decisions are made in organizations they're often a lot messier than they are in the textbooks so we might think of the textbooks as
kind of an ideal case and what we want to allow is that there could be departures from that ideal case we want to look at robust issues so I would work on that and also by the way I I added a chapter to the undergraduate text on behavioral economics which I think is quite important in this respect ECT has working in the private sector made you more or less sympathetic to behavioral economics I would say more and which
behavioral distortions if one would call them that do you see as the important ones well you see a lot of things going on with consumer behavior in terms of saving in terms of self-control in terms of just understanding a certain amount of complexity it's the usual stuff shows up in behavior and when you're doing something like pricing you want to think about the textbook View and you want to think
about a behavioral View and maybe what you're going to end up with is some blend of the two I see the endowment effect a great deal in worker Behavior people think they have intrinsic rights to something they've been doing yeah when they actually don't yep has the economics profession moved too far away from Models so some people say there's been a dir of new and interesting Theory since the mid90s true or false well I
mean what's happened since mid 90s we've seen this great flourishing of empirical work with a lot of the um credibility revolution in terms of coming up with better econometric models and I will say a lot of the work that I've done at Google has been in the econometrics area that was one of my Fields as a graduate student and I I published articles in Journal of econometrics over time and just getting that being able to develop
coherent statistical reporting uh within an organization is critically important and you've published in your academic career some articles that at least to some people would count as I I wouldn't say obscure but highly theoretical so you have a 1982 econometric piece the non-parametric approach to demand analysis did doing that kind of work also help you at Google well believe it or not that very paper was the
inspiration for the model I constructed of Google's ad auction because the equilibrium condition was basically a revealed preference condition it said I would rather be in the position I am in and paying the price I'm paying than to be in some other position so there's a little there's a little inequality there you manipulate this inequalities very much like the paper you described and here you get this nice formula for what
the price should look like but then you must think we're not doing enough Theory today or do you think it's simply exhausted for a while well one area theory that I've uh I've found very exciting is algorithmic mechanism design so with algorithmic mechanism design It's a combination of computer science and economics and the idea is you take the the economic model and you bring in computational cost or show me an
algorithm that actually solves that maximization problem uh and then on the uh on the other side the computer side you build incentives into the algorithm so if multiple people are using uh let's say some Communications protocol you want them all to all have the right incentives to have the efficient use of that protocol so that's a case where it it really has a very strong real world uh applications to doing this everything
from telecommunications to AdWords auctions you once throw it as advice to graduate students quote don't look at the literature too soon is that still true yes and why not because if you look at the literature you'll see this completely worked out problem and you'll you'll be captured by that person's Viewpoint whereas if you flounder around a little bit yourself who knows you might come across a completely different
uh phenomenon now you do have to look at the literature I I want to emphasize that but it's a good idea to wrestle with a problem a little bit on your own before you uh adopt the uh standard Viewpoint I'm sure you've been on hiring committees at Berkeley and earlier Michigan hiring economists at Google of course you've hired economists to work in your group you're always looking for smart hardworking people with good
values but what's the difference in how you choose the best applicants in those two settings ah well when you're hiring uh faculty members then what happens is they're all coming in as ass assistant professors but when you're hiring at a business you may have Senior People Junior people experienced people fresh out of school people and so on so there's a role that you've imagined for them and part of the issue is to match
up the applicant with that role so you might have a really outstanding candidate but they don't fit the particular position that you're recruiting for at that time but the Fresh Out people what would make someone good for Google but not so great for Berkeley well it's a question if you look at what would make them good for Google they should have better than average computer skills because they're
going to have to deal with the infrastructure we have there which is pretty powerful infrastructure but also quite complex and that would be a strong requirement not only only having the skills in let's say statistical analysis but also the skills in terms of uh computer operation in the United States how big a problem is internet congestion today well today I would say in the US it's pretty good because we've got quite
a bit of uh of fiber out there when we move to the Spectrum then I think there are issues where we're going to be encountering more and more congestion and 5G is hopefully going to come and come along and rescue us here how will 5G change my world basically you should think of 5G as Wi-Fi everywhere so that you've got high-speed communication without uh without having to go through any sort of Special Operations but will
it save me 7 Seconds a week or will it deliver some new and exciting product that I haven't thought of yet so when you look at Technologies like autonomous vehicles and things like that they're dealing with vast amounts of information it's often store manipulated locally but sometimes it needs to be shared and doing that kind of sharing will be easier if you have high bandwidth 5G sort of Technology but realistically
speaking for most of what you're going to be doing it will just save you a small amount of time why isn't there more spam it's striking to me I've always had spam but it's never been so much that I felt entirely defeated by it it stayed within a relatively narrow range and if I think about it theoretically I wouldn't expect that to be the equilibrium I would think of it as an arms race where for a long time it
might be no spam and then for a year it'd be spam so awful I almost couldn't use the internet but it stayed in this narrow band how do we think about that or how do we model it so there's a nice article in the Journal of economic perspectives on the economics of spam uh David Riley was one of the co-authors there were a couple other authors as uh as well and they had something of an opposite impression they said there was
a huge amount of spam it was quite costly and it was a major externality that we've never really been able to control effectively now companies like Google and other email providers have developed algorithms that identify spam quite well and normally it's not really a huge annoyance to people because we've been able to do these spam recognition Technologies but why is it you always win the arm race that to me is what's
surprising yeah there's never been a three-month period where you've lost the arms race and it's not just Google George Mason has a Microsoft based system it's not quite as good as Google arguably but it works fine for spam I waste 30 seconds a week fighting spam so I have my private account and I have my Google account my Google account basically there's no spam on it my private account my email address is here
and there and so I do tend to get is uh more spam and there are all those mailing lists that somehow you got on and now find they're not that useful that shows up in my private inbox too I don't know a good answer to your question I think as as long as it's under control from the user's point of view uh then we don't see a big Uprising by the way we do see of course a lot of resistance to rooc calls which are much
more annoying than spam in my experience and uh likely there'll be some regulation trying to well there's been regulation but it hasn't worked right I'm on the Do Not Call list I get seven or eight Robo calls a day if I'm at home maybe more so there's so there's no Nomo Robo have you seen this this was a contest that the FCC sponsored or FTC I believe uh to come up with the best system for handling these Robo calls and
in fact I put it on our phones it seems to work pretty well so it's worth a try how should we improve the underlying governance and architecture of the internet oh well this is a very controversial issue of course one side says the US created the internet we've overseen it managed it in a way that's been valuable for the entire world but other countries say no no no we should have more control than we have now and
this goes back and forth over time and we've seen these examples of countries that really have cut off uh access to the outside world except under very specific conditions and so there's going to be some I I think it's quite clear there's going to be some fragmentation of the internet uh in the in the next several years how many fragments will it be will it be two or three or more the Saudis arguably are another fragment
yeah on the way I'm I'm thinking of a half dozen something like that and we can name some of the big examples but uh we don't have to we all know who they are yes will there be a killer app finally for blockchain chain other than gray and black market transactions yeah so I I would like to separate the blockchain from just cryptographic protocols in general there's a huge demand for various kinds of cryptography blockchain seems to be
by its nature relatively inefficient as an economist I don't like this proof of work business I don't like the fact that there's one version of the black blockchain that has to keep being updated I don't like the fact that it's uh so slow so there are lots of things that you could fix and I expect to see them fixed in the future but I would say crypto in general big deal blockchain not so much
when you say crypto big deal you mean cryptocurrency uh no I'm thinking about cryptography in general think about deep fakes well how do you deal with deep fakes you have to have cryptographically signed collections of bits so we can be assured that they really are created by Tyler Cohen or havarian and so that is almost certainly going to evolve and then there'll be other ways that you can do proof of identity that kind of thing
that are more secure more efficient than what we can do now Bitcoin is now at $6,000 again as you may know as an economist what's the most useful model for thinking about how that price is determined and one can say supply and demand but one needs more than that right it's sort of a currency of some kind that arguably could be worth zero yeah yeah well I would say Capital controls uh is what's going on you have
countries around the world where Capital controls have been biting and there are several places where people are very anxious about getting their money out of the country because of political instability or other things I think that is really what's driving the Bitcoin price changes recently so if every country were Denmark it would be worth much less I believe so now your book with Carl Shapiro information rules it
came out in 1999 it's now 20 years ago what in that book would you most want to update or revise other than just adding material but what have you changed your mind about Ah that's a good question one of the uh one of the interesting things as we used as as one of the Prime examples of indirect Network effects was operating systems right and so there was a natural tendency to move towards a single operating system we argued and
and I think there is a tendency to do that but nowadays we use daily five different operating systems easily there's iOS there's Mac OS there's Linux there's Windows there's Chrome OS and there's Android so here are all these operating systems they all seem to work pretty well together not as well as they would if it was designed from scratch but people have made ways for these systems to relate to each other the user
interface has become standardized so actually the importance of the operating system is retreated into the back ground compared to what it looked like 20 years ago is WeChat better than anything the West uses to organize its internet I don't really know the answer to that question because I don't use wehat but it is but that's endogenous right yeah sure and and what's happened is of course it evolved in a very specific
environment with a different regulatory structure and things like that and so you were able to get this kind of inner operation uh in a way that would be very hard to do in our economy in our country here's a science fiction question do you ever think about a zero marginal cost Society say there's a universal replicator with super cheap energy and in essence all wealth is held in the form of Ip would that just be crazy or
could it work somehow well there's this wonderful book favorite of mine called Midas world I don't know if you've ever read it but I would recommend it I think it's out of print now but it's about a world where basically robots have become so efficient produce so much stuff that people are assigned consumption quotas so you have to consume a certain amount number of shoes per month you have to consume a certain amount of food and a
certain amount of this and the poorer you are the bigger your consumption quota is which I think is a nice obviously satirical but it's a it's very entertaining uh book because they work through this premise of how this all goes I was about to tell you how it all worked out but I'm afraid it would be a spoiler so I'll leave that for your discover later on which feature of the 19th century do you think about or
admire the most often the 19th century yes well I have to say I've read a bit in that area there's a wonderful book called from the American system of manufacturer to mass production yes great book which uh which describes this development of interchangeable parts and of course the explosion of innovation that took place in the uh in the 19th century was truly remarkable so I'll tell you an expert my grandfather
who was a farmer in Ohio told me one time I was born when people got around on horse and Buggies and I lived to watch men walk in the moon and that was 70 years I mean it's amazing what happened during that that period now I grant you that's the 20th century but we could we also saw huge uh technological progress preceding that in the in the 19th century let's say you could be sent to the Past protected against disease
with whatever languages you would need any previous historical era and you would live there for six months and observe and learn where would you choose and why by the way I have to tell you that's a premise of another SCI fiction book that's a great the one I like very much great favorite of mine that's this less Darkness fall where the American several books yeah yes the the uh American Tourist is sent back to Rome
around 400 ad and he takes his mission the prevention of the sack of Rome and the uh basically destruction of civilization for a thousand years so what period would I like to see I guess I I I would I would like to I would be interested in that period because that that would no go ancient Rome the Republic the collapse of Rome yeah the collapse of Rome and try and again this idea what would you do how
would you acquire resources how could you put together a system that could prevent that collapse and it's a it's a clever story I've thought about it many times actually I think I would pick pre-conquest Mexico because we have so few written records we know a fair amount about Rome obviously yeah and much less about the Americas before Europeans came do we need to worry more about algorithmic price collusion not
done by humans possibly not intended as collusion in any way but nonetheless in a model sense being quite a bit like collusion and what should the law do yeah well you have these examples like rapid response uh equilibrium we have built in this assumption that the consumers move faster than the firms in our in our textbook models so what happens is you see a uh two gas stations competing with each other one gas station Cuts its
price all the consumers flow to the lower price station and we get this great competition but it could be a different model it could be a situation where the gas stations move more rapidly than the Consumer and one Cuts its price the other immediately matches the price so there's been no benefit from Price cutting and the consumers haven't had a chance to respond so there we end up with a equilibrium model where uh you can
sustain a super competitive price so I think there are situations where you can have algorithmic uh price uh discrimination so you could think about the um but not just collusion collusion say I build smart AI I just tell it maximize profits I don't intend anything illegal yeah and then it in essence colludes with the other smart AIS and they keep prices high for strict output I'm just there as an owner I don't even
know this is happening right so but again then there's somebody that's outside of that that little duopoly and there's a triopoly and a quadropole and so on so on it gets harder and harder to coordinate all of those activities especially if you've got an agent on the consumer side who's looking for the lowest price all the time so you've got to think of these markets where you may have active price setting on the
Viewpoint of the AIS but you've also got Active search and active choice on the part of view of the consumers so I I think it's an interesting area for for research for sure now you of course started off as an academic and Economist how did you acquire or learn the kind of managerial intelligence required to succeed at Google I'm not sure if I've ever learned the managerial intelligence there but because Google really started
out as an academic spin-off itself as you know the Google search engine page rank came out of a National Science Foundation digital libraries Grant and in fact when I was uh at Berkeley I worked on that digital libraries initiative it spawned three search engines Ink toy lyos and Google and there was a lot of uh of interest in that uh in that topic so Google when I joined when there were about 300 people
I don't know that there was a whole lot of management intelligence Larry something went right Larry and well Eric Schmidt came that was he he described his job as adult supervision and there's some truth to that but I will say that you just had a very creative group of people who uh were doing very interesting work and what was exciting about it was the intellectual environment there was so thrilling it's
true that at some point Brennan pagee offered to sell the page rank algorithm to Yahoo for a million dollars I heard I think the story it was excite I've heard the story The the story about Yahoo but the most definitive story I've seen I think was excite and the claim in this Source was that Google they wanted to sell their algorithm they wanted to get back to graduate school and uh have the life of a graduate student plus a
million dollars but the trouble is they couldn't really reach an agreement with uh excite not so much on the price but on what kind of Technology would be used in the search engine and who showed them the algorithm was actually so valuable who showed them that the algorithm was valuable well back in those days when you looked at the results from the existing search engines plus the Google page rank it was immediately apparent
that the that the Google system was significantly better than the competition now Google has done many things that economists have advised or recommended how about the design of the accounting system have economists had any input into that or are we just worthless when it comes to accounting well which account just keeping the books oh keeping the books that's just ruled by regulation and law and
economists are useless well at one point there was some discussion about building our own accounting system and finally that was abandoned because one of the things that accounting systems do the commercial accounting systems is they keep being updated based on how the law that accounting practices or regulations and so on evolve so the system itself as a computer system is not really very complex it's just keeping up with the
regulatory environment that's provided by the accounting uh software provider so it we're deregulated or regulated more flexibly would there be a lot of mechanism design in accounting systems or do you think it would look more or less like how accounting is done today well the trouble is with accounting there are always these gray areas so what's a good and what's a service or things like that where there could be a
blending from one into another and there's considerable debate uh about how you uh how you should do this and then there'll be some kind of reconciliation where people agree yes that's a reasonable procedure but I don't think there's ground truth out there anywhere I think there are lots of choices that are made uh to resolve some particular situation that's that's come up let's say I've read all the usual magazine
articles about alphabet SLG gooogle what's the thing I'm least likely to know about its culture that matters or is interesting H what are you least likely to know about the culture so everyone knows about the playrooms right yeah everyone knows about the interview questions yep what am I least likely to know boy that's a good question everybody knows about the mini kitchens one thing that's that's happened in the uh in the cafeterias
everybody knows about the free food but uh one of the U recent complaints was that there was too much kale being served complaints from employees complaints from employees yes about uh about there's a little there's a bit of uh paternalism that goes on we only to give you snacks that are good for you and uh and food that's healthy well that's that's great but uh doesn't you know it can be opposed with a light hand
or a heavy hand and some people have argued maybe it's uh heavier than necessary is there a way to price privacy as a product or feature ah so I get how it works now it doesn't personally bother me very much but as you know this is an area of controversy well I think it's certainly possible to offer choice and if you for example don't like the default settings on Google for privacy you can go in and
change those default settings so let's take your interest for example there's something called interest based advertis iing you can go look at your interest uh you can edit them you can delete them you can add things you subtract things you can opt out entirely and that capability is completely under your control but it's a lot of binary choices there aren't markets there right right there are there are market and that seems strange
you could have some kind of mechanism designed in privacy features yeah we hardly ever see it with any company I don't just mean Google yeah well we we have seen it in the sense that uh you'll find some vector of attack that hadn't been thought of and then there'll be a way to control that Vector of attack for example few years ago there was this question about whether government agencies were tapping into various uh
data providers it turns out they were tapping into the Telecom infrastructure and once that was discovered all of the communication among data centers became encrypted and that was the response to that particular attack so there's going to continue to be things of that of that sort now users seem to like them both but if I just look at the critics why does it seem to me that Facebook is more hated than Google well you know I
actually don't use Facebook and I don't have any moral objection to it I just don't have the time to do it there are other things of this sort that could end up soaking up a substantial amount of time I think that one of the reasons and this is of course quite speculative uh I think that one of the reasons people are most worried about uh Facebook is they don't really understand the uh limits of what can be done at Facebook whereas at
Google I think we're pretty clear that we're showing you ads we're showing you ads that are targeted to one thing or another but that's how the information's used so we've got this specific application and in our case in Facebook's case it's more morphous I think wiester Ohio I believe you're from there is it economically inefficient should its population over time be reallocated to larger cities ah so it's
funny you mention that because I grew up on a farm apple orchard outside of Worcester Ohio which is a town of about 20,000 people and they have a nice College there College of wer and it seems to be thriving so what happens when you look at these towns in the Upper Midwest if they have a hospital they'll probably survive if they don't have a hospital they're in big trouble Wester Ohio do you think the value of
Facebook and Google relative to per capita income is higher or lower than in same Midtown Manhattan well it we have actually done a little research into this question but only on one aspect namely looking at online shopping and I will tell you if you live on a farm in the midwest you love online shopping if you're living in Manhattan oh you've got a lot of opportunities to go shopping on the physical world so those rural
residents really like the internet for for just that reason the shopping access to content all sorts of things given how much the world has changed do our intuitions about antitrust in any way need to change the laws themselves haven't changed but obviously Court decisions evolve but compared to 20 or 30 years ago what more do we need to bring to that discussion well I think the existing legal infrastructure in
antitrust in the US is pretty good uh one of the things that's very useful here is that the doj and the FTC put out guidelines like the merger guidelines intellectual property guidelines and so on if you look at the situation in Europe it's a less mature system they don't provide you with those sorts of uh guidelines and so you're flying in the dark to a to a larger degree why has copyright enforcement run so smoothly
and this reminds me a bit of the spam problem so when Napster the first Napster comes out you think my goodness no one will ever sell music again and I understand the price of streaming is much lower in part that's due to competition from piracy yet it's striking to me how few young people get most of their music from piracy yes what did we fail to understand early on about nabster so as you know there are two
very nice recent books on this one is Joel W Fogle who wrote a book called the digital Renaissance which looks into exactly the question you were describing the other book by Michael D Smith is streaming sharing and something else stealing streaming sharing and stealing and I think what they found was that having a well organized high quality readily available complete access to music was much more attractive than
cobbling something together using using uh some sort of uh back doors and other things of that sort so I think that PE you know it's it's very clear that people are willing to pay $10 a month to be able to get U very smooth access to the content they want to listen to Will local news find a business model in the same way that is other than being owned by very wealthy people yeah this is a thing that uh surprises me that nobody
seems to be able to crack that nut yet but there's clearly a demand for local news uh in terms of just what happened at the high school basketball game or what special offers the supermarket has today Etc and people are experimenting with all sorts of different services and my guess is that something will catch on it's a little surprising it's taken so long for that to happen what's your view
of Robert nok's entitlement theory of Justice ah well I knew Robert nosic of mine and uh he was a I think a fantastic guy to talk with and debate with I would say it it was somewhat spec speculative I don't think it would necessarily work out as well as uh nosik argued it would work out there would still be a lot of uh problems with his with his theory in my view if you could make One reform to the economics profession what would it
be I would like to see shorter review periods for journals uh I'd like to see things get into print more quickly I'd like to I think the whole Journal Enterprise now has been really bogged down particularly compared to what goes on in other fields like computer science does tenure still make economic sense it doesn't seem to on paper right well I think it's going to get uh more and more difficult because there's now this big
push for enlarging educational access and so what does that mean that means you have to have more you have to have more capacity in the uh universities to handle a greater number of students and so you're going to see a situation where there'll be a variety of roles not just Professor tenured and Professor non- tenur but there might be people that are doing uh various kinds of intermediary
activities as well say tutors as an example last question let's say a very smart 18-year-old comes up to you and says they want to have a career in both economics and Tech but they're not exactly sure what they want to be and they want advice from you other than the obvious oh work hard go to a good school whatever what would you tell that person they said I want to be the next talarian in some manner yes well I would say get
the basic skills down maybe that's obvious get the coding down get the uh design down get the basic economics down but then you really want to give your exercise your creativity that is don't just take the uh first way of looking at something or the conventional way of looking at something maybe try to step back and see what the bigger picture is is now most of the time that'll be a big flop but every now and then you'll hit
something that's new and exciting and novel and of course that's a great feeling to be able to do that howari and thank you very much thank you thanks for listening to conversations with Tyler you can subscribe to the podcast in iTunes Stitcher or your favorite podcast app and if you like this podcast please consider rating it on iTunes and leaving a review this helps other people find the [Music] show