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Intro. [Recording date: March 12, 2019.]

Russ Roberts: My guest is economist and 2018 Nobel Laureate Paul Romer of New York University. This is his fourth appearance on EconTalk, the last being in March of 2015. Paul, welcome back.

Paul Romer: And, how many more times do I have to be on before I become the leader? You know?

Russ Roberts: I think only about 32.

Paul Romer: Okay. Well, let's get busy.

Russ Roberts: You're on your way. You're on your way. I want to start with your thoughts on growth, which we've talked about at length here. But I want to talk a recent formulation you gave which I really liked. You contrasted the economics of objects and the economics of ideas. What do you mean by that distinction?

Paul Romer: We have these fundamental units in our models, our economic models, that there's people--and we make some assumptions about people--but there's an external world which is usually characterized by physical objects. I think of that as kind of the world of Malthus. I think it was also the world that we evolved in as a species in, you know, the Pleistocene Era. So, there's scarce objects; we are rivals for the use of those objects. There's some food resources that one group of people can have or another group of people can have; and we're going to be fighting over it: there's a zero-sum game. And, I think the most important implication of that world of objects is if there's more people, it's worse for everybody on average, because with a fixed set of objects, there's fewer objects per person if you have more people. It's just like this iron law, inescapable. Now, the world we live in, especially since the Neolithic Revolution when we settled down and started discovering things is a world with both objects and ideas. Ideas are insights about how to rearrange the objects--to transform them to turn them from things that are less valuable to us into things that are more valuable to us. So, ideas let us get more value out of a fixed set of objects. And the really exciting implication about this to me is that, if there's more people--even more people that are remote from me: I don't know all of them, I don't like 'em--it may still be good to have them around because even though there's less total objects per person, they might discover something valuable. And this is where the difference between objects and ideas surely matters. If they discover something valuable, then I can use it; they can use it at the same time. So, for a smaller set of objects per person on earth, we might actually get more value per person because we're using a lot more ideas to extract value from the fixed set of objects. So, that's the fundamental difference between objects and ideas: this notion of everybody can share it or it's only one person who can use it. It does have this implication that if you keep discovering more ideas, you can keep getting more value, so we'd get growth. But I've recently gotten more excited about the, you know, the broader implications about this--about how we treat other people. So that we start to see other people as allies, at least, not as foes. And I think, in some ways, what's happening is we're learning to live in a world of ideas with a mentality that's carried over, you know, from the Malthusian Pleistocene. And that tension between us versus them and 'they're coming to get us,' versus, 'Wow--when people work together we can do these amazing things'--that tension I think shows up in all different parts of modern life.

Russ Roberts: Well, it's interesting: Jonathan Sacks, former Chief Rabbi of the United Kingdom talks about the dignity of difference and the importance of difference in trade--going back to Ricardo, which is a very narrow example of what you are talking about. The idea that if you are not quite the same as I am, there's opportunities for specialization and then for trade. But I really love the point you are making more generally, because I think so many people's common-sense view of the world is zero-sum; and one of the things that economics training does for you is it allows you to see the possibility of non-zero-sum. Which is radical. And you're pointing out that if another country does better, that doesn't make us poorer. And that's so hard for people to understand and accept. And it goes against how we're hardwired, probably, from those pre-Neolithic times.

Paul Romer: I think so. And what's really exciting me about ideas right now is that the difference in our endowments of physical objects--like, the Portuguese had land with more sun; the British had land with more grass--that could lead to differences in the agricultural products. And then we could show people this notion of gains from trade, a non-zero-sum world. But that was all derived from differences in the kind of endowments. And, the other thing that we were kind of embarrassed about so we didn't highlight, was that if the British could have killed the Portuguese and had the Portuguese land, they would have been even better off. So, it wasn't--they didn't want the Portuguese. They wanted the Portuguese land. They [?]. So, that Pleistocene mentality was very much, 'Let's go pillage and take their stuff. If their stuff is useful we could have it all.' This new insight about ideas says: You know, it's actually good to have the Portuguese around, because even if we all start out being similar, even if we could take away all of their land or they took our land from us, it would still be good to have other people out there discovering things because we're more likely to stumble onto something which is going to be better for everybody.

Russ Roberts: Yeah, that's very deep. And of course--

Paul Romer: Let me push this one point, because some people kind of push me not to use--like they've told me in my Nobel speech, 'Don't use this story about the Portuguese,' or something. But the thing that's really interesting is we can value the Portuguese, not just Portugal. And the usual story about gains from trade says it's good that Portugal exists. The new insight is that 'It's good that the Portuguese exist.' And I think that somehow makes us better people, if we start to think of other people in that kind of light.

Russ Roberts: I couldn't agree more. I think that's fabulous. In fact, you argue that ideas are also about who we are. And I think that's partly getting at this point you just made.


Russ Roberts: I want to push you in a different direction and get your reaction to something I've been thinking about lately, which is that: I don't think economics--what you just said is profound; it does reduce, potentially the dichotomy between us and them--whoever 'them' are. But if we just think about daily life and the things that make our hearts sing, that bring joy, surely some of those things are interactions with other people. Our friendships, love, our families; the connections we make, the communities we belong to. It strikes me that economics has virtually nothing to say about that; and yet we purport to do what we call 'welfare economics,' which is: How do people feel about different policies? And all that stuff, that enormous corpus of economic theory just ignores that social aspect that I mentioned earlier. Do you think about that? Does that bother you?

Paul Romer: Yeah. Well, I always adopt the, kind of the glass half full interpretation of these things if I can. So, I think of it as, 'Oh. This is a way we could expand economics and make it much more useful.' And the way I would do it is by saying this thing we call the utility function, which leads to, you know, some kind of notion of some kind of wellbeing, or, you know, kind of quality of life--there are some things that go into that utility function that we ignore. Some inputs: consumption inputs. And one of the consumption inputs might be consuming the physical presence of another person, and consuming the interaction of the conversation with that person. So, we could include. as part of consumption in utility, social interaction. And I think if we keep pushing along those lines towards what--at one point I was calling 'extended preferences,' then I think we've got just an extension of our usual framework of analysis. We can still do things like welfare economics, talk about efficiency. But, I think we would have much better insight into all the different things that lead to an experience of wellbeing for people.

Russ Roberts: Yes. I don't think that works. I'll tell you why, and then you can see if you agree.

Paul Romer: Yeah. Okay.

Russ Roberts: We know somebody who did that. Gary Becker was really good at it, for an economist.

Paul Romer: Yep.

Russ Roberts: And in his hands it was a somewhat insightful framework, certainly more than it would have been in my hands. I try--

Paul Romer: But, like, which papers are you thinking of by Gary?

Russ Roberts: "A Theory of Social Interactions," which is directly out of an attempt, I would say--I didn't appreciate it at the time, because I didn't know much about Adam Smith, but it was an attempt to bring Smith's The Theory of Moral Sentiments into the framework of utility maximization. And in some ways I think that's trying to put a round peg into a square hole. I don't think it's made for that. Just, for example, an example I use on here sometimes: Smith is about propriety. It's about doing what's proper. Some of Smith--some of Smith. And, of course, that's part of human interaction. That's me not talking too much on this program. It's me not interrupting you too much--

Paul Romer: What are you talking about, Russ? I mean, what's the problem with interrupting?

Russ Roberts: Heh, heh. But it is--it is also, by the way, it's also me trying to make you look good. So, I might edit that part out where you made that interruption, in case people don't know it's a joke. Maybe people don't know that's a joke. And I'd say, 'Even though that made me look better than Paul, the right thing'--and you could say, 'Yeah, but that's in the long run; that's in your wellbeing also,' blah, blah, blah. But my point is, I think we fundamentally miss what's important, many things that are important about life. And why does that matter? It matters for a lot of reasons, but one of which is our obsession with efficiency and growth, both of which you and I care a lot about, but both of which we understand are not the only things that matter.

Paul Romer: Yeah. Yup. So, I think we're agreed about what life is like for us, as we live it. And then, of course, it's just how do we respond to the fact as economists that we are not capturing important parts of this. The reason I asked about which paper by Gary is that in this thinking about extended preferences, I was very influenced by his work on addiction. But, that addresses a different part of our preferences: which is not just that there's other things that influence whether we feel good or bad, but the history of our interactions can influence how we feel about something today. So, if I've, first time I taste beer, I might think beer tastes awful. Or coffee--pick coffee. First time you taste coffee, it's bitter, it's aversive[?], 'Why the hell would anybody drink this?' But then, over time, you can really develop a taste for it. So, I think that's another part of this aspect that we're trying to get at. And I agree: I'm adding, if I can mix my metaphors, I'm adding epicycles to this square peg that I'm trying to force through the hole. But, the way I'm thinking about it is that I have feelings, like utility, about something like--I'll give you an example. When I showed up in New York City from California, I'm standing on the sidewalk; the sign says 'Don't Walk,' and all these people start to walk. So, I have this feeling, which is, I have this itch, this urge to scold those people and tell them, 'You shouldn't do that. The sign says Don't Walk.' So, we can actually feel, like, moralistic about somebody else's behavior, and even feel this desire to scold them, even with some risk: You scold a New Yorker, you might get yelled at or punched. Now, fundamentally I was smart enough to hold my tongue and not say anything about the jaywalking. But, if you're willing to buy into the idea that we not only get utility out of interacting with people, but we can even have a kind of utility which is like a small desire to punish somebody when we think they are violating the rules, then I think even I start to understand why we do things, like scold each other for like not picking up after your dog, or jaywalking. And, if you'll bear with me, now let me bring it back to this history[?] dependence that Gary was talking about. When I came from California, I had developed a set of moral preferences that put crossing against the light in the 'that's bad behavior'-kind of category. So, I saw people doing bad things; I'd have this built-in tendency to want to scold them. After I'd lived in New York--and I paid attention because it was so different--after about 6 weeks, that desire to scold people had completely gone away. I looked at people crossing the street--I crossed the street--when it said 'Don't Walk.' And it was like, 'Yeah, of course. That's what everybody does.' So, my desire to punish people for crossing the street went away, because my preferences shifted--you know, walking against the light--from the bucket of 'That's a bad thing,' to 'Oh, that's just the normal, accepted thing.' So, you could say that when you make it so complicated, you've got preferences which are so flexible they don't really mean anything. But, my view is that they're actually kind of rich enough to describe this complicated behavior that explains why people sometimes want to scold each other, and why we can have like an equilibrium like in my neighborhood everybody picks up after their dog even though the police don't ever give anybody a ticket for doing it.


Russ Roberts: Well, I think you're getting at something else, I think maybe even more important, which is our human urge--also not in our models--to belong. To be part of something. A feeling of community. You happen to have picked something that's actually somewhat dangerous; and it's a dangerous habit that has benefits, because you don't sit and waste time standing on the corner if there's no traffic. So, we understand that. But your general impulse to go along with what's happening around you, whether it's wearing a certain type of clothing, whether it's your hairstyle, whether it's what you do on Sunday morning versus on Sunday night--those are really important tribal parts of our makeup that we neglect at our peril, and have failed to think about as economists. And we shouldn't fail. It's really important. And we assume that stuff compensates for that. So, if we have more stuff but less belonging, we sort of ignore the belonging because we can't measure it. But we can measure the stuff, so we count that. And I've become obsessed in the last few weeks that by looking where the light is, where the stuff we can measure is, we are missing a really important part of the human experience.

Paul Romer: Yeah. Oh, I think that's a very important insight. That, we can have a very rich analytical framework for doing economics, but if it uses as inputs measurements or data on certain kinds of things, we're almost inevitably going to over-attend to the measureable things and not pay attention to the things that are tougher to measure. But, I think what that suggests is that we need to work harder to try and measure those important but hard-to-measure things, rather than just say, 'Well, they're out of bounds. We're just not going to talk about them.' And I think we're actually pretty similar in our view of the world; then the kind of question is how best to get economics to relate to this. It could be that we kind of have a division of labor where other people think about something like norms and moral beliefs in a social context--

Russ Roberts: Community--

Paul Romer: and economists just, we could use, you know, kind of insights from that group. But, maybe it's forced, but I think if we can feed it into our existing apparatus, like a preference function, we could make much more effective use of that stuff. Those insights. And I think those insights are really important.


Russ Roberts: You said, uh, you quoted Faulkner, one of my favorite writers--you said

to be relevant, to offer practical policy advice, economists must embrace the full range of motivation that William Faulkner alluded to in his Nobel banquet speech: "love and honor, pity and pride, and compassion and sacrifice."
And I'm going to--we don't have to go much more on this, but I think--I disagree with you. I don't think we should be looking for better ways to measure those things--

Paul Romer: Okay?

Russ Roberts: I think that's a fool's game. I think that's scientism. I think those are things that don't lend themselves to measurement, don't lend themselves to cost-benefit analysis. They do lend themselves to tradeoffs--there's where I think the apparatus of economics has something to say. And scarcity. That matters. But, I don't think the human heart works that well in a maximization framework all the time. And I think our apparatus encourages us to think of anything we do in that area as scientific when often it's not.

Paul Romer: Yeah. Yep. Well, I hear you. But I think--this is such an important area. If you'll bear with me, I'd like to keep going on it for a second.

Russ Roberts: Sure.

Paul Romer: I spoke with Martin Wolf recently, who was trained as an economist, worked in development, now writes a column. Martin said that years ago he was thinking about writing a paper that he was going to call 'The Value of Values.' And what he was thinking of was that a society can develop certain values. Like, ones you were referring to before: like, courtesy, or propriety. Those might be very important values when you live in a dense, urban context. And, if we can accumulate more of those values, we might all be better off. So, however economists go about their work and what they measure and what statistics they consider and so forth, I think it would be good if we could at least allow for the possibility that makes sense to say, 'As a society, it would be good if we could invest in more values of this type.' Like, more courtesy. Or more value on a reputation for honesty. Now, it still leaves you with some practical questions, like: Can you actually change values in a social context? It's hard, but, you know, if one could--and historically I think societies have sometimes, it's important to be able to talk about the real benefits that could come from different sets of prevailing moral beliefs.

Russ Roberts: Well, I think they matter a ton. And I think all that's correct except for maybe the last part, which is the implication that maybe we can do something about it. I think it's--I think most people would agree that it's better to live in a world with trust than a world without trust, if people are generally honest about trusting each other. It's a little tricky, right--

Paul Romer: Yeah--

Russ Roberts: because cheaters can exploit that; and a world of trust is great for cheaters; and if there's too many cheaters then trust evaporates. But, I think most of us agree that those intrinsic motivations are often much more effective than extrinsic ones, whether, you know, it's prices or punishment or various types of costs and benefits that we might impose on each other. I think the challenge is, like you said: We don't really know how to get there from here. And we might disagree about what they are. And so, civilization, it seems to me, is just the attempt of what we would normally call market forces but they're not typical ones--they are norms and social pressures of various kinds--ideologies, movements, fiction. All kinds of stuff that affects how people look at the world. And then things emerge out of that. Some work better than others. The ones that work better tend to create better societies. But, it's a pretty blunt system. So, you could have a pretty dysfunctional society that works for a long time, where there's little trust; and people struggle and suffer--relative to a different equilibrium, right?--within that culture. But there's not much to do about it. It's pretty hard to change.

Paul Romer: Yeah--

Russ Roberts: A better way to say it is: We don't understand that process very well. If we did, maybe we could do something about it.

Paul Romer: Yeah. Yup. Well, if I can draw a link to charter cities, for a minute, this was part of what was on my mind when I was thinking about charter cities. And let's--let me give you a specific example--

Russ Roberts: Tell people what they are--explain what they are for people who don't remember.

Paul Romer: Okay. But first let me set it up. So, let's imagine--take people in Greece after the midst of the Crisis [the Financial Crisis of 2008--Econlib Ed.]. It's quite possible that most people in Greece would say to themselves, 'I would rather live in a society where everybody feels like it's right to pay taxes.' And, they feel shame if they don't. And, if it is uncovered that somebody didn't pay taxes, there's social--you know--disregard: loss of status for that person. Now, a person living in Greece might say, 'But, I don't live in that society. If I just try and pay my taxes and people find out, they'll think I'm an idiot. And I don't know how to change them.' And so, they might say, 'Boy, there's just nothing we can do about the fact that everybody thinks you should pay your taxes and in Greece, they don't.' But, what we have to think about now is not so much competition within one of these equilibria, but competition between. People can move from Greece to Switzerland. We know that when you take somebody who had like the Greek values that pay--it's a kind of a game to cheat and everybody thinks you are cool if you cheat--you move that person to Switzerland, and pretty soon they are going to think it's bad to cheat on your taxes. And they're going to think you are supposed to wait for the light to say, 'Walk' before you cross the street. So, I think you need to start thinking about competition between different social groups, to think of these dynamics of norms. Now, so, what was the idea of charter cities? It was to basically create a sort of a blank sheet of paper on which one could build a new social group. So, imagine you had a bunch of Greeks, some of whom are in the tail, who really feel like it's important to pay taxes: They wish their fellow citizens agreed with them. Suppose a group of the moralistic, 'we should really contribute to the society,' 'we should bear taxes'--suppose a group of those Greeks moved to a brand new place. Instead of being in the minority, they are the majority population in this new city. And then, as other people move in and join them, they are going to assimilate to their values--like, everybody pays their taxes--just as they would assimilate to Swiss values. So, a new, startup society gives you an option for changing social norms by a breakaway group. And then, slow rate of immigration and assimilation to the new sets of norms. So, working back, what I was trying to think about was: What kinds of practical, legal, and social arrangements would it take to create opportunities for starting from nothing? Just empty land. The possibility of a new city growing up. Because I thought a new city was the smallest--like a city that could get to 10 million people. That was the smallest viable unit you could imagine trying to create in the modern world. But, I think it would be, give us an opportunity to change norms in a way that people living in societies they are unhappy with would really like to change them. So, this was really the motivation for that project.

Russ Roberts: Along with, I assume, the opportunity to have a legal and other extra-norm system of enforcement that might lead to good behavior, as well. Right?

Paul Romer: Well, yeah; but this is--and I wasn't totally explicit about this, because this was evolving in my mind. And I also thought it was going to be a hard, you know, slog to persuade people. But, I'll tell you where I came out. I started thinking about this at first the way economists do, saying, 'Okay. If we had a brand new place, we could start a new city, we could "impose law." A rule of law. And then people would come in, and we'd have the benefits of the rule of law. I think that analysis is just deeply flawed. Because, I think--if you look at places where somebody comes in and they pass laws, they set up courts--if those laws are not consistent with the norms in society--

Russ Roberts: yep--

Paul Romer: nobody follows the laws. The system just collapses. Yeah. So, I think--I decided we had to start first with the norms; and then figure out a way to change the norms. Then on top of those norms, you could build, you know, some supporting laws; and you get a kind of a positive feedback loop between the norms and the laws. But I don't thinking moving first with the laws is likely to succeed. There may be rare cases when it does. But, generally, I think, you really have to figure out how to get motion, how to get things going on the norms. So, a lot of the attention to the Charter Cities turned to practical details. And it also got caught up in two very distinct applications. One could be within a country where they are trying to do an internal reform project by creating a new zone. I kind of refer to this, these days, now as kind of the Shenzhen approach under Deng Xiaoping in China. The other would be an external jurisdiction where somebody outside says, 'Here's a place people could move to if they want to. And if you want to leave the country, you are welcome to come.' And that's more the Hong Kong model. And especially that second model has gotten caught up in the very kind of fraught debate about how to respond to pressure from migration right now. But it was all grounded in a belief that we needed to think about how to give people a chance to actually help change the norms of the society, or choose the norms of the society in which they want to live.


Russ Roberts: And, is there any prospect of them actually happening? It's such an interesting and potentially transformational idea. And I know you've gotten close. But, where do we stand now?

Paul Romer: Yeah. So, I had a few conversations in Madagascar, and then Honduras, where the approach was a little bit like the Deng-Xiaoping tries internal reform with a special zone within a country. This is--even if this was likely to succeed in a few cases, you'd have to expect a fairly high failure rate. But having looked at these things up close, my sense is that a country which is at a low level of development and with low government capacity is going to have real trouble trying to set up a zone that is run differently. You know, in Honduras in particular I was pushing very hard to try and bring in an outside influence; and, you know, that was not in the interest of the actors who were pushing it domestically. So, I've kind of given up on, for most of the developing world, this internal Shenzhen model. I still think there's room for developed countries--like Britain, Germany, Canada--to look for places where they say, 'We're going to replicate the Hong Kong experience. We're going to acquire some land voluntarily'--you know, this, like, there's nothing about the historical experience taking land by force that you want to replicate; but there's ways to replicate, just to get a deal where you acquire some land. And then one of these countries could say, 'We're going to set this up as a jurisdiction that people could, you know, voluntarily move into.' And I think it would be good to think about that as a way to, you know, change norms about things like paying taxes. You know, also change broader norms about, you know, kind of the propriety and civility that we talked about before. Change norms on a bunch of dimensions, that might create societies that people would rather live in. And, I don't think--everybody else seems to think that this is a ridiculously infeasible prospect. I think it's just outside of our realm of comfort and familiarity. But I just don't see any reason why Canada couldn't create, you know, a 20x20, you know, square mile zone some place in the world and say, 'Let's try and create a place people could move to, live in, work in,' and see how it goes.

Russ Roberts: Yeah, it's just such a thought-provoking idea. I'm thinking about areas of the United States that are struggling economically. West Virginia, say. Or rural Ohio. Parts of Kentucky. Places that have lost, say, industries of coal-mining and other activities that used to be productive. The people who used to do those things, for reasons that we might talk about, stay, instead of leaving. And their opportunities are quite diminished as a result. They don't migrate to where there's more opportunity. So, it's not--but I don't think the problem is, is that they've got bad norms there. It's just that the people who are there[?] have low levels of skills and there's nothing there to enhance those skills. Now, Amazon has changed that a little bit. Amazon has put warehouses in low-density places because land is cheap and they've put some stuff in the middle of nowhere. Or, you could put a server farm in the middle of nowhere. But it's not Hong Kong.

Paul Romer: Yep. Well, I think one temptation that I have to resist and I think everybody should resist is this 'I have a hammer, I want to go find a nail'-kind of phenomenon. I don't think charter cities is the right way to think about any kind of policy response to West Virginia or other places where there is some distress. But, on the other hand, it is the case that there are hundreds of millions of people who say they want to leave this year, this society they currently live in. So, I think that is this demand worldwide we should think about trying to accommodate somehow. And, you know, there's obvious concerns about this charter city proposal. Reasonable people, I think, should have qualms, I think, about setting something like this up. But, I think we have to ask ourselves: What's the alternatives that would let us offer, in some humanitarian way, an option to people who want to leave the area? You know, very dysfunctional, dangerous environments? And I think it's very hard to come up with some feasible alternatives to this need.

Russ Roberts: Yeah: no. I'm with you. And of course when the United States had large swaths of undeveloped territory, it was the appropriate place to let people come and just push that western frontier out. And, you know, I like the idea of taking a forest that's owned by the government and not being very productive, either as a forest or as a beautiful place or as a place to grow trees of commercial value, but just let it--let some entrepreneur do something crazy and creative there, and let people come there. So, I love the idea of it. It's great science fiction. And it might be even feasible. Who knows?

Paul Romer: You know, I think--sometimes I try and put myself in the mindset of people in, like, 1730 or something. And, if, you know, if we'd been in a seminar room in 1730 and somebody came in--Thomas Jefferson came in--and said, 'I'm going to design a new country. We're going to have a constitution; we're going to have separation of powers. What do you guys think?' we'd laugh him out of the room. 'That'll never happen.' But, you know, sometimes these things happen. So, I think it's worth keeping that conversation alive, but recognizing that the dynamics are slow and the odds are not very high.

Russ Roberts: Before we leave this topic I just want to ask you: Now that you live more in New York than in California, besides jaywalking, do you walk more quickly from place to place?

Paul Romer: Oh, yeah; I think I do. I walk a lot more. And I think--I haven't quantified this precisely--but, my impression is that even distances that are the same, there was a kind of a habit about, I'd get in my car and drive to the coffee shop. Where here it's like, I walk out the door and I walk to the coffee shop. Even comparable distances I think I'm more likely to walk here than there. That's one of the things I really love about New York, is really freeing myself from my car. If you think about it, it's a kind of strange thing to say, because [?] the car didn't force me to drive it. But somehow an environment where I don't drive it so much makes me feel differently.

Russ Roberts: Yeah: no. I hear you.


Russ Roberts: Let's shift gears. I want to talk about a paper you wrote that got a lot of attention called "The Trouble with Macroeconomics." Without getting too deeply into the weeds of real business cycle theory and other arcana, what did you identify in that paper, in a philosophical sense, or a philosophy of science sense, that you thought was wrong with the state of academic macroeconomics?

Paul Romer: Yeah. Well, let me tell the story of how it emerged. I had written this paper about "Mathiness," which was specific to growth theory and how we used math to, you know, advocate for different growth models. I was critical of a paper that Ed Prescott had written. Somebody sent me an email describing an interaction with Ed in Minnesota where Ed was referring to these productivity shocks that were at the heart of these fluctuations in the real business cycle models. And, as the person described, someone asked, 'What are these productivity shocks? What hits the economy and then makes a lot of people unemployed, or makes output go down?' And the way he described it, Ed was kind of like sputtering for a minute, like couldn't come up with this, say; and he looked out at the traffic and said, 'The productivity shocks are like that congestion out there,' he said, 'the traffic congestion.' This had a very funny effect on me, because it sort of like hit me like a jolt of electricity. Which was: 'Yeah. What are these productivity shocks?' These things are just kind of like made up in the models. And so I started calling them in the paper, like, phlogiston. You know, phlogiston: it was like an imaginary thing that physicists referred to at some point. And, it made me realize that there was something really deeply wrong, I think, with the style of explanation there. And I felt responsible in some sense, as a macroeconomist. I didn't do business cycle theory, but I'm a macroeconomist: I have some responsibility for the profession. I think others of us should have been critical of the style of explanation long before the time when this issue was raised, for me. So, I shifted from my kind of critique that was specific to growth theory in math to a critique of how macroeconomists--kind of the default leading group of macroeconomists in the profession--were doing their work. [More to come, 38:42]

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