Ninety-Eight Years of Economic Wisdom (Replay)

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1:08Sometimes I make good choices. Like a few years back when I decided to reach out to economist Robert Solo. I didn't really expect to get a reply. How many 98-year-olds are still checking email? But he wrote me back right away and we had this wonderful conversation which first aired in June of 2023.

1:33My guest today, Robert Solow, is an absolute giant in the field of economics. He received the Nobel Prize in 1987 for his pioneering work on the topic of economic growth. When I first got interested in economic questions, the whole point was that the system appeared to be broken, and it was necessary to find ways to patch it together. Welcome to People I Mostly Admire with Steve Levitt. But Robert Solow is more than just a great researcher. He was one of the most inspiring teachers I ever had. And he's been a legendary mentor to generations of students at MIT, four of whom have themselves gone on to win Nobel Prizes.

2:19And at the age of 98, still as sharp as ever, He's a model for growing old gracefully.

2:28So you taught me macroeconomics almost 30 years ago. You know I'm no macroeconomist, but your class was the best class that I took at MIT. I remember I would read these macro papers ahead of class. I mean, I would spend hours and I would understand nothing about the paper. It was pure math to me, math I didn't understand. And then you would roll into class and you would describe these papers in the simplest terms. You would strip away all the math and you would show what was going on with a few words, with a few equations. And I really stood in awe of you being able to do that. That's the only way I can understand anything is to break it down into simplicities.

3:21I'm glad you liked it. Not only I liked it, but that is actually something that I carried with me. You gave me the belief that no matter how complex an author or a creator says something is, that deep down, it's really simple. you just have to find the simplicity you have to find the basic thing that's happening god may understand the rest of it but it's not given to us to do that all we can do is figure out you punch it here it reacts there why there's some chain of connections that's going on and by the way there's an element of illusion there steve if i couldn't do that i wouldn't try teaching it So you've spent a good part of your career studying economic growth.

4:17And to economists, economic growth is one of the most fundamental measures of an economy's health. But it seems more and more driven heavily by climate change. There's a rising chorus of voices arguing that economic growth shouldn't be an objective, even that economic growth is the enemy. What do you think of those arguments? First of all, the fact that I've spent much of my life studying the way growth occurs in modern industrial capitalist economies does not mean I'm an enthusiast for it. I could have spent my life studying the bacteria that cause tuberculosis. That doesn't mean I'm in favor of them.

5:04So I perfectly agree. I do not think that growth itself is or should be a particular objective for a modern economy. There are, however, a lot of people in the profession and outside the profession who think that a modern industrial capitalist economy cannot exist without growing. And I would like to start by talking about that question, okay? Great. So I want to imagine an economy like ours and think about what it would be like if it were stationary, if it were not growing and not shrinking, but just fixed at whatever size we're talking about. The first thing that would have to be true is that the population is constant.

6:03Okay. Now I want to make another assumption. Imagine that there's no innovation going on. There are no new products, no new industries, nothing like that. The economy is just stationary. It just repeats itself. Okay. Okay. I think the important thing to realize is that there is no law of economics, no principles of economics that say that such an economy could not exist and be healthy. It's not written anywhere that for a capitalist economy, it's grow or die. That's just not true. the one glitch that could occur in this stationary state is that the population wants to increase its wealth by saving, even though the economy is stationary.

7:09But we can't let that saving get into investment, because if the saving goes into building new factories, building new buildings whatever that moves us out of the stationary state into growth but there's an easy solution to that the government satisfies the public's wish to accumulate by running a deficit and selling them bonds and using the proceeds not to build new roads or build new anything but to put on beautiful fireworks displays, wonderful concerts, maybe annual dramatic festivals like the ancient Athenians. That situation could simply go on forever. Now I come to the rub that I don't think most people think about.

8:09This non-growing economy has, as I said, no new industries, no new products, nothing like that. That can't be good for social mobility. What I'm afraid of is that in such an economy, the same good jobs and high status occupations would repeat themselves year after year. And the people who have those jobs would groom their children to follow in their footsteps. And that kind of society would tend to be a hereditary oligarchy. and that's not good. So if I were trying to bring about for the sake of warding off climate change, for the sake of preserving the environment, a non-growth economy, what I would be thinking about is how you provide for social mobility, how you provide for the children of relatively poor parents to become relatively better off, while some of the children of relatively well-off parents fall in the income distribution.

9:36That's the hard part. There's nothing in my background to make me a specialist in how to do that, but I can see that it would be a really serious problem. But it's not a narrowly economic problem. It's a matter of organizing the society. If you didn't let the children of Yale graduates go to Yale, that would help. But in fact, everything we know about life says that Yale will make it easy for the children of Yale graduates to go to Yale. Now, in a nutshell, that's my attitude toward that's a hell of a big nutshell. But that's what I think about that question. I'm surprised by your answer because I thought you would say, well, there are two ways for an economy to grow.

10:30One way is to use more inputs, to use more capital and more labor. And the other is to use the existing inputs more efficiently. and I thought you'd say historically most of our growth comes from using inputs more efficiently and nobody should worry about using inputs more efficiently. That's just great. Even if you're afraid of climate change, what could be better than using inputs more efficiently? What's wrong with that answer? That's perfectly compatible with what I've been saying. I'm for using all the natural resources that we can efficiently, but when you use up a natural resource, you use up a natural resource.

11:19When trying to draw this picture of a stationary economy, you know, this is an idea that goes back to John Stuart Mill. That economy can be run efficiently or inefficiently. And I'm for efficiency, which does not imply growth. It simply implies a higher level than an inefficient economy. I'm for the efficient economy, provided the efficiency we're talking about includes the things that are normally not priced in the market, the environmental things that tend to get worse over-exploited in a market economy. So let me ask you an empirical question. When we try to measure growth and the reasons why our economy has grown over the last 50 years, much of it seems to be because we've been more efficient.

12:21But do you think that much of that is just mismeasurement? Much of that has been degrading our natural resources? And because we aren't measuring that well, we are mistakenly thinking we're getting better? Of course, there must be mismeasurement. That's never going to come out perfectly. But the fact that the increases in real output per person over the last 50 years or 100 years has come mainly from higher productivity rather than from extensive growth. That's a fact. We also have very good reason to believe that the way we have done that is full, not of mismeasurements, but full of unpaid for damages to the planet, to the natural world.

13:17We still, for instance, when we measure our output, we don't charge ourselves for the depletion of natural resources. But of course, there are also good stories along this line. Over the last 50 years, the air quality, in this country at least, has improved, not deteriorated. So the gains in efficiency include some gains in environmental amenity. I want to avoid the word mismeasurement, Steve, because to mismeasure something suggests that you're actually measuring a different thing from what you think you're measuring. In our case, what we have done is decided not to measure certain things. The UN has a whole system of national accounts that will pay much fuller attention to the effects of human economic activity on the natural environment.

14:25And the UN has always wanted all the major countries to adopt this. I have always laughed at myself in this respect. I believe that this full system of national accounts that the UN has produced would be superior to what we have now. But I am so terribly worried that if we went over to it, we would lose the possibility of having long time series to study. So I would want the lousy measurements along with the good measurements. Wait, so you're telling me that you're in favor of our bad system of accounting so you can keep doing your research even at the cost of humanity's good outcomes? That's what I laugh at myself about, yes.

15:15I'm desperately worried. We have national accounts in the U.S. of reasonable quality going back to 1929. That is a century of national accounts. I would hate to end that. So I would be for keeping the bad numbers, have one office in the Department of Commerce keeping the bad numbers and another department keeping the good numbers. I thought you were saying you wanted to stand in the way of progress. You just want duplication of effort. That seems more reasonable. As long as I've been an economist, we economists have well recognized that our system of accounting leaves out a lot of important things.

16:02Is it surprising to you that there hasn't been the political will to make these changes? There just isn't much interest outside of a narrow group of people that includes you and me and is therefore not terribly influential. there's conversation about the GDP all the time in the press on TV and all that and most of the people who use the phrase think that the GDP is intended as a measure of economic well-being And it is not intended as a measure of economic well-being. It's intended as a measure of economic activity, not whether it is directed to the right goals, the right benchmarks.

17:08I know you're deeply troubled by the high and rising inequality in the United States. Yes. So what do you think is driving the inequality? From the beginning of the Second World War until some years after, the country was generally getting more equal. The distribution of income and, as far as we know, the distribution of wealth were becoming more equal. Sometime in the 1970s or early 80s, that changed and inequality began to worsen. Inequality of income, inequality of wealth. I think that's pretty awful. I don't care about absolute equality. I don't care if you make more money than I do. But the coexistence of extreme wealth and extreme poverty strikes me as immoral, to use an old-fashioned word.

18:14It's immoral because it's unnecessary. And it has bad consequences beyond itself. The great wealth attracts great political power, and a society which tolerates extremes inequality of wealth also tolerates extreme differences in political activity and political power. I deplore that. I think it's a blot on our society. And I have not seen any evidence or any reason to believe that we profit at all from that. So why does it happen? First of all, Steve, the answer to a question like that is almost never one thing. I think a lot of it actually is what I was already talking about. It's the interplay between economic inequality and political inequality.

19:24You start with some economic inequality. It generates political inequality. Well, the holders of political power, the beneficiaries of that political inequality are going to pass laws and cultivate customs that help themselves. I couldn't put numbers on this. I couldn't quantify it in any way. But it's almost certainly true that some of the worsening inequality in the past 40 years or so comes from deregulation, the willingness of the political process to allow unregulated activity that once it regulated. We know where the juice behind the movement for deregulation came from. You know, the obvious example of this is the concentration of wealth in the financial services industries.

20:30And the financial services have been in the process of deregulation ever since Ronald Reagan was president. The interplay between them operating through legislation and administration is bound to be part of it. Economists know how to undo inequality. It's not a hard economic problem. It's really a political problem. I agree with that. But what I was trying to focus on is that there's an interplay between them. It is a political problem, and the political forces then push the economy in the direction of greater inequality, and that in turn reinforces the political inequality. You're absolutely right to describe it as fundamentally a political problem in the sense that there would not be any substantial loss of economic efficiency if there were much less inequality.

21:39We'll be right back with more of my conversation with economist Robert Solow after this short break.

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24:34So you grew up in the Great Depression. Yes. I was six years old in 1930. and I was 16 years old in 1940. So I grew up during the whole of the Depression. Now, we were not an impoverished family. My father always had work, although he had to take jobs he didn't like. On the other hand, from listening to my parents' conversation, it was clear to me that the general feeling of not knowing where the next dollar is coming from, the general feeling of insecurity was the dominant thing in their conversation. That's mostly what they talked about. One of their friends was a high school teacher of math, Mr.

25:32Ginsburg. before the depression, they all pitied Lou Ginsburg because he didn't earn very much money. By the 1930s, they envied him because he had a safe and secure job. So one of the things I got out of being a depression child was the importance of economic security. And it has made a difference because I've always balked at notions about the efficiency of the labor market, which amount to imposing uncertainty on workers. I think any understanding of the labor market has to take account of the fact that people really care. It's really important to them to have a feeling of safety, of security.

26:31I still think that. It doesn't fit so easily into standard economics textbooks. But it's one of the things I learned from growing up in the Depression. Was there a feeling in the depths of the Great Depression that this was it, that the market economy had failed and that this was a new name? Oh, come on. Absolutely. I come from a generation of people whose fundamental view was that the society had failed. My experience, say until I was 21, was of depression and war. The economy had failed the people and the society had failed the people. When the Great Recession happened in 2007 to 2009, I was struck by how fatalistic and demoralized people were.

27:29I mean, the mainstream media was fundamentally questioning whether the market economy was still a viable way to structure society. But knowing the facts that we'd had 60 or 70 years of GDP growth and that in the Great Recession, GDP fell by maybe 4 % and unemployment peaked at 10%, it hardly seemed to me at the time like a justification to abandon capitalism. In the Great Depression, what, GDP must have fell by 30 %? I don't think people today can even imagine what the Great Depression must have been like. I don't recall going back to 2007, 2009, that kind of fatalism or feeling that the system had broken down.

28:23There was much more of that in the 1930s. My whole contemporary generation, kids I knew in Brooklyn, in school, an awful lot of them ended up as communists or fellow travelers or Trotskyites. And that was because they really were driven to believe that the system had broken down. I'm curious, were you attracted to communism, to Trotskyism? Were you ever close to following that path? No, but that's purely accident. The most important person in my life in the 1930s was a school teacher, an English teacher. She got hold of me and taught me to read novels, serious novels, and to listen to music and to think about things.

29:22She and her husband kind of took me in and converted me into the intellectual you see now. But now the interesting thing is that in her youth, Mrs. Touster had been the secretary to Emma Goldman, the leading American anarchist. And she thought of herself as a philosophical anarchist, not a bomb thrower, but she believed that organized political power was a bad thing. And I acquired those ideas. And I had absolutely no interest in communism at all. To me, communism was a manifestation of organized political power and therefore a bad thing. So I went through that period of my life as a person definitely on the left, but never having the slightest inclination toward communism.

30:35I thought Trotskyites were as bad as Stalinists. Lenin was already the problem, not the solution. So I've long had a theory that the generation of economists who grew up during the Depression was the greatest generation of economists because the most talented young people, they looked around, people like you, and they could have done anything, but economic issues were the most pressing problem. And so the most talented people chose to be economists, whereas in other times, the most talented minds maybe gravitated towards physics at its heyday or engineering in the 1960s or maybe computer science later on.

31:21Do you think there's any truth to that theory? I do think that young people choosing occupations, choosing what to think about or to devote their energy to, do respond to what they see as the important problems. My contemporaries are no smarter than any other generation, but they were certainly more focused on the failures of the system and the importance of learning how to deal with the mechanics of the thing. So if the generation of economists that grew up in the depression of the 30s was especially good, it wasn't that they were especially good. It's that they were driven by their experience to think about the right things, to worry about the right things.

32:20People like Jim Tobin and Paul Samuelson and Franco Modigliani in Europe, they're certainly no smarter intrinsically than people today or yesterday, but their experience had focused them. No. One of the things that struck me is that your interests and your way of thinking, they're much broader than most eminent economists. What do you mean by broader? Milton Friedman and Gary Becker, they seem to me to be destined from birth to be economists. Every single thing they said or did was pervaded by an economic mindset. But your worldview seems more anchored in common sense than in economics per se.

33:13It almost seems to me like it's an accident that you're an economist, that you easily could have ended up being something very different. Is there any truth to that? I think that's probably true. People keep talking about you should learn to think like an economist. I'm not so sure that's a good idea. You should learn to think. Sometimes the question is economic and the answer may be economics. But I agree with you that the Gary Becker frame of mind that children are durable goods after all, that everything can be cast in economic terms has just never appealed to me. It doesn't seem right. It doesn't seem an accurate description of the way we actually think.