Fri, 24 March 2017
Returning to the podcast is Vincent Geloso of Texas Tech University.
Our topic for this episode is anthropometric history, the study of history by means of measuring humans. Doing serious historical research into the distant past is difficult work, because the further you look back in time, the less information you can access. For the 20th century we have wonderful thing like chain-weighted real GDP. Going back further, we have some statistics, lots of surviving physical evidence, and loads of documents and writings. Going further than that, we're left with the odd scrap of thrice-copied surviving manuscripts and second-hand accounts from people who lived centuries after the events they describe. And going even further than that, we have just bones and dilapidated temples with the occasional inscription.
Anthropometric history allows us to look into the distant past at what economic historians like Vincent hope might be a good measure of different populations' health and standards of living: their heights. People who have healthy upbringings with lots of access to food tend to be taller than people who don't; that's why modern humans are much taller than they were a thousand or even a hundred years ago.
Vincent has contributed to this literature with his latest co-authored paper, The Heights of French-Canadian Convicts, 1780s to 1820s. The abstract reads as follows:
This paper uses a novel dataset of heights collected from the records of the Quebec City prison between 1813 and 1847 to survey the French-Canadian population of Quebec—which was then known either as Lower Canada or Canada East. Using a birth-cohort approach with 10 year birth cohorts from the 1780s to the 1820s, we find that French-Canadian prisoners grew shorter over the period. Through the whole sample period, they were short compared to Americans. However, French-Canadians were taller either than their cousins in France or the inhabitants of Latin America (except Argentinians). In addition to extending anthropometric data in Canada to the 1780s, we are able to extend comparisons between the Old and New Worlds as well as comparisons between North America and Latin America. We highlight the key structural economic changes and shocks and discuss their possible impact on the anthropometric data.
Listen to the full episode for our fascinating discussion of this branch of historical research, including the so-called "Antebellum puzzle," the anomalous observation that American heights decreased in the years prior to the Civil War even though the economy was apparently growing rapidly. We also discuss the heights of slaves in the American South, who were taller than their white counterparts despite being oppressed as slaves.
Fri, 17 March 2017
Today's guest is Kate Raworth, she is a senior visiting research associate at Oxford University’s Environmental Change Institute, a Senior Associate at the Cambridge Institute for Sustainability Leadership, and the author of Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist.
In this interesting and wide-ranging discussion, we discuss Kate's critiques of the standard models taught to economics undergraduates, as well as her views on development, economic growth, inequality, and the environment. You might think our viewpoints would be very different on these topics, but we find a surprising amount of common ground.
During our discussion of inequality and the patterns noticed in the 1950s by Simon Kuznets, I bring up Geloso and Magness' work on inequality in the early 20th century. You can hear my conversation with Vincent Geloso about that research here, as well as his comments on it here.
Fri, 10 March 2017
Today's guest is Akin Unver of Kadir Has University. He uses geospatial data to study political events such as the attempted coup in Turkey in 2016.
The coup was an attempt by certain rogue elements of the Turkish armed forces to oust President Erdogan. However, unlike past coups in 1960, 1971, 1980, and 1997, the Turkish people documented and coordinated their opposition to it on social media in real time, leaving a rich record of events as they unfolded.
Akin's research, which was featured in an extensive and detailed article for Foreign Affairs, shows how, when, and where the opposition to the coup occurred. He shows, for instance, the importance of mosque networks in coordinating resistance. And while the media put a lot of importance on Erdogan's personal appeals through FaceTime and Twitter in galvanizing support, the data show that resistance started organically almost as soon as the coup began, hours before Erdogan appeared on television to rally support.
The discussion delves deep into specific details of the coup and the resistance, while also touching on other areas of Akin's research. Towards the end, we discuss the technical side of working with geospatial data.
Fri, 3 March 2017
This episode features Anton Howes of Brown University. He is a historian of innovation, and in this conversation we discuss his work on the explosion of innovation that occurred in Britain between 1551 and 1851. You can check out his Medium blog for some of the articles we discuss.
Anton has collected a data set of over 1,000 British innovators who worked during this period. He has documented their education, their experience, and their relationships with one another. Some of the interesting patterns that emerge in his data are the large fraction of innovators who developed technologies in industries outside of their areas of expertise, as well as the high degree of interconnectedness between innovators.
Innovation, it seems, is a mindset; one that can be spread from person to person like a contagion. As far as Anton can tell, this mindset seems to have spread from Italy and the Low Countries during the Renaissance and taken hold in Britain to usher in its Industrial Revolution. With his view of innovation as a mindset, Anton's work complement's Deirdre McCloskey's work on the origins of modern economic growth.
Our conversation concludes with stories about some particularly interesting innovators, some of whom were also pirates!
Fri, 24 February 2017
What follows is an edited partial transcript of my conversation with Stephen M. Jones. He is an economist for the US Coast Guard. However, we are discussing his own research, so nothing in this conversation should be taken to represent the official views of the US Coast Guard.
Petersen: So Stephen, let's start just by defining regulatory discretion. What does that mean in this context?
Jones: Sure. So, I think first off, we should probably define regulation because when Congress writes a law, they pass the law on to regulatory agencies and it will say something to the effect of "agencies: issue a regulation." So, when we talk about regulations this point isn't always clear because people just aren't familiar with this process. The regulation is a statement that kind of clarifies existing congressional law or is written in direct response to congressional law. And this could be as specific as, say, Congress can direct an agency to set an exact amount of pollution that is permitted for an industry to as broad as saying something like "protect consumers from unreasonable risks." And then the agency has room to interpret that statement as wide as it wants to.
So, when I talk about agency discretion what I'm really talking about is Congress wrote a rule that gave the agency power to issue legally binding rules that may or may not trace directly back to Congress.
Petersen: Yes. So, in the example you use with the pollution, Congress has something fairly specific in mind---a specific type of pollution---but the agency might have to clarify and to say what counts as pollution and how much they're measuring it and maybe they might establish a quota system, they might have specific rules for specific firms. And in the other example you gave, which is just protecting consumers from unnecessary risk, in that case they can basically write rules as if they were their own legislator, they're essentially doing what Congress is ostensibly meant to do. Is that correct?
Jones: I'm not sure I would go that far. So, there are various theories of the purpose of the regulatory apparatus in the bureaucracy. Some people---I cite them in the paper---Baumgartner and Jones and Workman have one that is called 'The Politics of Information' and I forget what the other is called, it was written in 2015. And their theory instead is that Congress gives the agencies discretion because Congress doesn't know the problems it needs to solve and so the agency is kind of like the specialists that you subcontracted to figure out what Congress wants them to solve without actually knowing, say the relevant information to determine that.
That's one theory. You've got other people like Philip Hamburger notably, who has written a whole book on how administrative law, which is another word for regulation, is unlawful and so he goes through sort of the common-law tradition and cites numerous pieces of evidence to say, exactly in the way that you put it, that it's a deep legislative function and only Congress should be performing that.
And so, whether that's true I think depends on a number of different assumptions that aren't always discussed directly in the literature. That would be my interpretation if that makes sense.
Petersen: Right. And of course, we're approaching this from an economic standpoint so there are important public choice issues involved with this. The same rule whether it's written by a legislator or a bureaucracy---a regulatory agency--- it's the same rule and so in principle, there should be no difference. But the important thing is that the agency and the Congress may have different incentives and may write different rules. That's what I interpret as an important underlying theme in your paper.
Jones: That's most certainly true. So, that's actually one of the things that frustrate me greatly about reading a lot of these other, I think, great researchers who don't in my opinion sufficiently consider the role of incentives. To couch it in Baumgartner's or in Jones' and Workman's terms, okay, let's assume that the purpose of the bureaucracy is to create the information that's necessary to solve the national problems, whatever these supposed national problems are. Why would you assume that bureaucrats would supply the right amount of information in the right ways consistently throughout time?
And it's not clear to me that those incentive systems are ever worked out; or if you do work them out, I don't think it actually shows that bureaucrats are beholden directly to Congress. So the big terminal literature, which comes from McNollgast, which is McCubbins, Noll, and Weingast, in the 80s is called Congressional dominance. They basically say that because Congress writes the rules they structure all the incentives and have all the tools at their disposal to monitor and police agencies. And I'm just deeply skeptical that that works as well as they describe.
Petersen: Right. Your paper mentions the Administrative Procedure Act which is sort of an attempt by Congress to keep these agencies in check. Could you describe that act and what exactly it does?
Jones: Sure. So, the Administrative Procedure Act is the main document that governs how agencies regulate. It defines the process by which regulation is made. And the chief component is that it really says before an agency issues a regulation it has to go through notice-and-comment. And what that means is when it sends out a rule it issues it in the Federal Register, which is the government's journal of record, and then it allows everybody to comment on this rule, and literally anybody will comment on these rules, and the agency is legally required to respond to all comments.
So, the basic theory is this, it's kind of got a two-part mechanism here. On the one side, it's a sort of direct structural constraint and doesn't really affect agency decision making because all it's really saying is you have to send out all rules---if the fire alarm is triggered it acts like a fire alarm. So, if you get a whole bunch of comments it's a really easy way for Congress to tell, "oh there's a problem with this policy" or it's a contentious policy because all of these people commented it and it's really loud, it's like a fire alarm. But it doesn't necessarily mean that an agency, that an individual bureaucrat in that agency really feels that alarm. It's more like it'll just be triggered, make sure just do something that doesn't trigger that alarm and you should be okay.
The other way in which it might change agency behavior is that by forcing agencies to publish rules they reveal a lot of information and in the rule itself you have to describe, say, the cost of the benefits. You have to describe whether or not it has impacts on Native American tribes, or on the Federal structure, or various other executive orders that have been issued. So, one of the main ways in fact that notice-and-comment system has changed is executive orders that define how in a very practical sense these final rules will be constructed. And so, they're all today reviewed in an office inside of the OMB---the Organization for Management and Budget---and the office is called a wire at the Office of Information and Regulatory Affairs. And so, they're responsible for reviewing all regulation and they are an Office of the president. So, some people then conclude that the President has all this power, in effect, of rulemaking in general.
Petersen: I guess the idea of the President is that it's the executive branch and so it executes and it sort of makes sense that these agencies that are executing laws would ultimately be beholden to the President. It sort of fits. So, do you know quantitatively how many comments? Are these regulatory agencies writing regulations and getting hundreds of comments every time, or is it rare to get even one comment?
Jones: It depends on the agency and it depends on the rules. So EPA because many of its rules will have national effects, and then there are national environmental organizations that you can say are key stakeholders in the outcome of all these rules could very easily generate hundreds of thousands of comments. And so, they'll actually have computer programs that scrape the comments and kind of try to sort them in the boxes. You have other organizations, like FRA for instance, they might have a rule that only gets 30 comments.
Petersen: Sorry what does FRA stand for?
Jones: Sorry, that's the Federal Railroad Administration and that's one of the two main regulators of railroads in the United States. The other regulator, the Service and Transportation Board, is primarily focused on business practices, antitrust type issues, and FRA is focused primarily on health safety and welfare of anything railroad related. So that's everything from, say, the occupational safety of railroad workers to the safety of passengers on trains. And so, the Federal Railroad Administration might only get 30 to 40 comments on a normal rule, they might even get less than that. It really depends on the rule itself.
Petersen: And typically, this would be if a rule affects my business and I might pay attention to the new rules coming out in my industry and if one I thought was going to be detrimental to my bottom line if I work for or run a private business, then I would comment. Is that the typical thing that happens?
Jones: Probably. I really think the diversity of interaction is so high it's really hard to characterize exactly what normal public commenting looks like. Because it could be everything from "I'm a regulated businessman who wants this," there might be somebody on the other side who benefits directly because the new rule sets a standard and the standards organization writes in and says your standard isn't strict enough. It could be something like there's a proposed rule that the Federal Aviation Administration, which regulates commercial flying, or anything air related at all pretty much, and they have a rule on the use of cell phones on planes. They've got about 5,000 comments, 6,000 comments. It's quite a number. Once you get above 100 that's usually quite significant. And a lot of those could be something as simple as "we just think phones shouldn't be on planes" and just average citizens writing in upset at the very concept of a phone being on a plane. So, there's quite a diversity of interactions between the agency and public on that.
Petersen: So, getting into the main topic of your paper you discuss what you call channels of influence. So, what are those and why are they important?
Jones: Yes. The way I think about it is this. I think the chief question of the bureaucracy literature is who does this regulatory bureaucracy exist for? Does it exist for interest groups? Does it exist for Congress to ultimately provide information that Congress needs? Does it exist for the President to carry out the President's wishes and his policy? Or does it exist for the bureaucrats themselves which is the one I also like to emphasize because the literature on that one is not very common today. It was more common I think about 30 years ago but the framing of it is a little different.
And so, my point is to say each one of these separate groups should have an effect on the outcome itself of the final rule which changes say the regulatory set. Some rules may be demanded by bureaucrats, some rules are demanded by interest groups in Congress. If I were to put it in the econ speak---because I'm writing this paper probably more for a political science literature---but if I had to put it in an econ speak my I'm kind of saying you have four different demanders for this product and so who is the regulatory agency really supplying this for? It's I think really how I'm thinking about it.
For the full conversation, listen to the episode.
Fri, 17 February 2017
What follows is an edited transcript of my conversation with Maxime Bernier. If you like his ideas, I encourage you to go to his website to learn more about them.
Petersen: You're listening to Economics Detective Radio. Before we start let me give a quick disclaimer that although today's guest is a politician this show is nonpartisan and doesn't endorse any particular candidate for office. My guest and I are also Canadian so we'll be talking about some Canada-specific issues. I know I have an international audience but sometimes it's fun to learn about what's going on in other countries. So I hope you'll listen nonetheless. And now on to the episode.
My guest today is Maxime Bernier, he is the Member of Parliament for Beauce, Quebec and a contender for the Conservative Party leadership race. Maxime, welcome to Economics Detective Radio.
Bernier: Thank you very much for having me.
Petersen: So, our topic today will be Canada's economy and its economic policy. There's a lot to get to on this topic but let's start with the positive. The Fraser Institute's Economic Freedom of the World Index ranks Canada as the fifth freest country in the world, actually tied for fifth. We're well ahead of our neighbors, the Americans, who come in at number 16. So, to start our discussion, Maxime, what is Canada doing right with respect to its economic policy?
Bernier: First of all, I think that this was the ranking that the Fraser Institute did a year ago, if I remember very well, and at that time we had a balanced budget when we were in government and also we were successful in lowering taxes for every Canadian. And I think that's a key when you speak about more freedom you must also have less government and a limited government in Ottawa. And I think that was the goal of the Conservative government when we were in government.
And also we have a lot of free trade. That's very important. We signed free-trade agreements with I think, if my memory is good, 45 countries. So, when you have more free trade like that, Canadians are able to buy goods from every country and they are able to also export products. So, that's helping also.
More free trade, less government, lower taxes and I think that's a big reason why we are there now.
Petersen: Yeah, there's a pretty general economic freedom, and you mentioned that that ranking came out last year and we have had a change of government recently so let's see if we can keep our high position.
But let's move on to some specific areas where we're not so free. Let's start with telecommunications. Canadians have some of the most expensive cell phone bills in the world. You personally did some work in deregulating the telecommunications sector when you were Industry Minister in 2006-2007. Can you talk a little bit about the changes that happened then and where we are now?
Bernier: Yeah, at that time we wanted to deregulate the telecom industry, mostly the regulation that was imposed by the CRTC. We were successful in doing that, and afterwards I think we had a little bit more competition in Canada in telecom.
But we didn't have time to also abolish the restriction on foreign investment in telecommunication. And so I think that would be the next step to take to have a bit more competition. And so that's why in my program I have a very strong platform about deregulating and also abolishing the prohibition on foreign investment in telecom and also in the aviation sector. So like that, corporations from outside Canada will be able to invest here in telecom and that will help Canadian consumers, who will have more choices and lower prices. But it was the deregulation that we did---that I did when I was Industry Minister---that was the first part of the deregulation. So now we must go ahead with abolishing the prohibition on foreign investment in telecom.
Petersen: Right. The vast majority of Canadians live right on the border with the United States and if you just step across the border suddenly you can buy a data plan for much less. One thing I was struck by when visiting the United States was that people just watch YouTube videos when they're on their mobile data. And you don't see that in Canada because it's so incredibly expensive. So, I wouldn't be surprised if we allow the American companies to sell to us if we wouldn't get exactly the same plan they're getting which would be great.
Bernier: Yes, I just want to add that Verizon, I think they wanted to come to Canada but they were not able to. They had created a Canadian corporation and all that and at the end, they decided not to come to Canada like their operations in the US. So, I think that will be a big step if we are successful in abolishing the restriction on foreign investments. That would make a difference for Canadian consumers.
Petersen: So, we have a similar issue with the airlines. It's very, very expensive to make a domestic flight within Canada, for instance, flying Vancouver to Toronto is about twice as much as flying L.A. to New York even though they are similar distances. So, do you want to comment on that situation? We only have the two airlines West-Jet and Air Canada. Could that be similarly fixed?
Bernier: Yes, you're absolutely right. If you want to fly from Canada to another country it is still competitive, but if you want to fly in Canada, inside the country, from example Montreal to Toronto, or other cities like that, it is very expensive. Because, like you said, we have only two main carriers in Canada: West-Jet and Air Canada. And we don't have like other countries a low-cost carrier.
So, we need to have one and I know that some business entrepreneurs want to create one low-cost carrier but their funding, their capital it's coming from the U.S. and from U.K. And you still have the same things in aviation, we have a restriction on foreign investment coming from other countries. So, that's why we must abolish that and like that we'll have a low-cost carrier and that will compete against Air Canada and West-Jet. That adds more competition, more choice and at the end lower prices.
So, I know that the Federal Government and the Minister of Transport, they're looking at it right now because these entrepreneurs want to create that corporation, a low-cost carrier. And they're ready for that. They're looking at it right now so, I hope they will abolish that but I'm not so sure. This is why for me, I have a platform that is based on more freedom and less government and it will be always good for Canadians. That is why I'm pushing that very hard, I wrote to the Minister about that to be sure that they will abolish foreign restriction in the investment in the aviation sector.
I don't know if they will do it but if not I will do it when I will be the leader of the party and Prime Minister.
Petersen: Yes, I hope you succeed in that. This one is a particularly important one because if airfare is expensive then more people drive and driving is statistically much more dangerous. So, you have more highway fatalities. I personally drove over 1,200 kilometers to visit family over Christmas. So, I'd really love to have an option to fly cheaply but it's just out of reach at our current airfare prices.
We also have a problem here in Canada, a similar related problem with cartels. We tend to create cartels in a lot of industries and we have one set of policies called Supply Management that applies to poultry, dairy products, even maple syrup (which is very quintessentially Canadian) keeping these prices artificially high. So, could you talk a bit about Supply Management for those who maybe haven't heard of it?
Bernier: Yes, Supply Management it is a legal cartel for dairy, poultry and eggs and the like. The producers on the Supply Management are able to fix high prices for these products and they are fixing the production also. That's why it's a cartel, they're fixing the production for the Canadian market and they are fixing the price, every year they increase the price of these products.
So, I am the only candidate for the leadership of the Conservative Party of Canada and also the only member of Parliament who's speaking for Canadian consumers and that wants them to save $2.6 billion every year. Because that's the cost of keeping that cartel and for a family the cost is $500 every year. I want them to be able to buy poultry, eggs, and milk from other countries---they want to export that---but because we have tariffs at the border of 300% on products coming from other countries to be sure that the dairy producer in Canada will be able to fix high prices for their products.
So, for me, if you believe in a free market you must abolish that and I don't want to do work for 19,000 farmers that are on Supply Management, I want to work with 35 million Canadians. And I think that's the most important for me and actually, the farmers just represent 10% of the farmers and all the other farmers in Canada, like the beef producers and all the other farmers are not on the Supply Management, they are operating in a free market. So, it is not fair and to be fair we need to abolish that but because as a special interest group they are very powerful and they're very well connected with the politicians, they were able to keep that privilege for a very long time and I think now it's time to speak for Canadian consumers and that's what I'm doing so I hope to be successful with that.
Petersen: Ironically Facebook has been serving me advertisements from the Canadian milk producers and their tagline or slogan is Canadian milk is worth crying over, or spilt Canadian milk is worth crying over, or something like that. And the irony is that if they supply too much milk, because of Supply Management they actually have to dump it to keep the price high. So it is really just wasting perfectly good milk and poultry.
Bernier: Yes. If they produce too much they cannot export their surplus because it's a subsidized milk. So that's why it's bad for them. They are producing good products, good milk, good dairy, good poultry, and eggs and I want them to be able to export their products to other countries and right now on Supply Management they can't because they have the responsibility and the obligation to produce only for the Canadian market.
Petersen: You mentioned the 300% border tariff on U.S. dairy. I think in the U.S. they have a different policy where they actually subsidize it and keep the price artificially low. But we had this strange situation a few years back where Canadian pizzerias were smuggling in black market mozzarella over the border and got caught. You shouldn't have to smuggle mozzarella cheese. If we had a free market, there would just be one price for mozzarella cheese and you wouldn't get a benefit by smuggling it.
You mentioned that you're really the only one calling for an end to this Supply Management policy and yet our Prime Minister for almost a decade, Stephen Harper, has a Master's degree in economics. He must have known that this policy was not good for Canadians. And most of the MPs are smart people, they must realize it, but is it as simple as the cartels themselves just making big donations and buying protection for this policy?
Bernier: First of all, you're right, when we were in government that was the policy of our government to keep that cartel, that Supply Management system. All the members of the Conservative Party of Canada voted in 2004 in a convention to protect these farmers and after that when we were in government in 2006-2007, that was the policy of the government, and that was the policy of the government until the end, until 2015.
And I think that at that time we didn't want to displease the cartel and that special interest group. And I tried to fight for that on the cabinet table but I wasn't successful. Most importantly, I think now I'm able to do it and I will ask---if I'm the leader of the Conservative Party---I will ask the members to decide on that and to review their policy statement that they did more than 12 years ago, and I hope the members will abolish that and they will believe in a free market also for producers on Supply Management.
Petersen: Have the supply managed industries been pushing back against you? Have they been taking out ads or funding your opponents? How are they trying to protect their cartel status?
Bernier: For sure. It's an important cartel in Quebec and in Ontario, they want to do everything for Maxime Bernier to not be elected. And so I think they are buying memberships to vote for the leadership of our party to be able to vote because, as you know, you need to be a member.
If you want to be a member and support my candidacy you can go on my website www.maximebernier.com and you'll be able to become a member for only $15. But, yes, the dairy producers are working to be sure that I won't be elected.
But there's more Canadians than dairy producers. So, I'm working hard to be sure to be successful because they want to keep their privilege and we'll see what will happen. And it's easy for them because I'm the only candidate who wants to abolish that and speaking for Canadian consumers, so they can vote for all the other candidates and they will have somebody who will support their special interest.
Petersen: I hope you succeed. And you're right there are more Canadians than supply managed firms or farmers that benefit from this particular policy. But you have this issue of the cost being dispersed and so although there are fewer farmers who benefit from the cartel and from Supply Management there may be a lot more motivated per capita. So, I hope you can succeed in getting over that, sort of, public choice hurdle. But my cynicism kind of says that it's an uphill battle.
Bernier: Absolutely. But also, I must say that the other farmers that are not on Supply Management, they have a huge interest also for that cartel to be abolished because it's not fair for them. Each time Canada is negotiating a free trade agreement with another country they have access, for example, Canadian beef will have access to the other country's market, but they won't have the full access because we're not giving full access to their milk, poultry, and eggs. So at the end, they are paying a little bit for that and they don't have the access that they would have otherwise. And they understand that. So the other farmers that are not on Supply Management have the interest to be sure that we have all these steps that can counterbalance the special interest group.
Petersen: I wonder about that because if beef and poultry are substitutes then you would think that the beef producers would want their competitor to have higher prices than they do so people would maybe buy more beef. But there is the issue of the international agreements.
You've called for the privatization of Canada Post and the removal of its monopoly on letter mail. That's another area where Canadians pay more, not just for letters but also parcels shipping to and from and within Canada is much more expensive than it is in the United States and other places. So could you talk about what the legal status of Canada Post is and what both parcel shipping and regular mail are, what the legal status of both of those is?
Bernier: Yes, you're absolutely right. Canada Post is a state-owned enterprise and I think in 2017 we must do like other countries and privatized that. They are charging at a huge cost because they are not competitive, they have huge expenses and they're not so efficient.
So, my thinking about that is, these are not services that Canadians need to be delivered by a government entity. We have a private sector for delivery and I think that it is not an essential service for Canadians any more. And they are using Canada Post less and less with emails and all that, and so we must do like in Belgium, like in U.K., like in France and privatized it.
Also, they're charging very high prices for their products. So, if we have more competition, that will help and at the end that's the solution. But they want to keep that and for me if you want to speak for Canadian consumers you must go ahead and do that reform, that's my proposal.
Petersen: Yes, it's such a big issue because in other countries that have much cheaper shipping, people are opened up to the whole global marketplace, you don't have to go to your local store to buy any particular good, you can buy it online and have it shipped to you. But for Canadians, you're adding $10-$15 to the price and so Canadians aren't really online buying things nearly as much as, for instance, our neighbors the Americans.
And when Canadians want to run online businesses and maybe ship things to other people to stay competitive they often have to drive across the border and ship from the United States because it is just so much cheaper.
And Canada Post has a legal monopoly on letter mail which is a little bit odd. Why should one particular government entity have the legal right to ship our mail? It's kind of an odd historical anomaly that we could be rid of.
Bernier: And you have to think the price also. It's not a free market. It is them who are fixing the price because, like you said, they have a legal monopoly. That's what I want to do, I want to be sure that we can have competition there.
Petersen: You've also called for reducing trade restrictions within Canada. This is one of those things that is so odd, is that we're one country, ten provinces, but we restrict many goods from being shipped within our own country across borders. So for instance alcohol. If you have a craft brewery or a winery in British Columbia it's very hard to ship it to even Alberta right next door. Can you talk about some of the internal trade restrictions that we have in Canada?
Bernier: Yes. We have a lot of them in these kinds of industries, but for me it is a bit of a shame that after 150 years we don't have an economy of exchange in Canada, because that was the goal of the Fathers of our Constitution. The fathers of our country, they wanted to have an economic union and we don't have that because of some restrictions, legislation, and regulation by provinces.
So, my goal is to be sure that we'll have an economic union. And to do that, it's against the Constitution and so I want to be sure to have a team in Ottawa of civil servants that will look at all the regulations and the legislations that are imposed by provinces and to bring provinces in front of the court when they don't respect the Constitution. Nobody has had the courage to do that and I think it's time to do it. And that will be the only solution because I cannot change the legislation or regulation at the provincial level and at the federal level we must respect the Constitution.
But I can assure Canadians that we'll do everything for the provinces to respect the Constitution. That's why we're going to bring the province in front of the court and the court will decide if it's constitutional or not. And I think it won't be because it's clear in the Constitution that we must be able to sell and buy goods from any province in Canada. That would be the solution. Because if you ask the provinces to do that, they have the problem and they cannot find the solution. So, that's why every year you have a meeting with the premier at the provincial level and they're saying, you know, we will abolish trade barriers and all that and it is not happening.
And they're the problem and they're not able to do that. They want to protect their own little market it is not good for Canadians, so we must do something at the federal level and that's what I want to do. I want to do a strong analysis of every regulation, legislation that provinces are imposing, legislations that are against free trade and after that bring them in court and the court will decide. And in the end I'm sure it will be unconstitutional and maybe when you do that, in five years after that, you have a real economic union in Canada like the fathers of our Constitution wanted.
Petersen: Yes. One wonders what is even the point of having a country if you're not going to have at least free trade within your borders? That seems to be the main benefit of all confederating and joining into one country instead of being 10 smaller countries.
Do you have any concluding thoughts, anything we didn't cover that you'd like to say?
Bernier: First of all I want to thank you for giving me that opportunity to speak with your people and if they want to know a little a bit more about our economic policy, they can go on my website www.maximebernier.com. Everything is there and I'm very proud of our platform. It's a platform that is based on individual freedom, personal responsibility, respect, and fairness and it is a platform that is based on real conservative values and the values of Western Civilization. So, if people like that they can become a member and they can vote for the leadership. I appreciate that you gave me this opportunity and maybe another time we can go on and speak about other economic issues.
Petersen: My guest today has been Maxime Bernier. Maxime, thanks for being part of Economics Detective Radio.
Bernier: Thank you very much and have a nice day.
Sun, 29 January 2017
What follows is an edited transcript of the first part of my conversation with Gret Glyer, creator of DonorSee. For the full conversation, listen to the episode.
Petersen: My guest today is Gret Glyer, he is the creator of a new app called DonorSee. Gret, welcome to Economics Detective Radio.
Glyer: Thank you for having me, Garrett. How are you?
Petersen: I am great! So, DonorSee is a charitable giving app with a very interesting twist which---we'll get to the app itself in a little bit---but first let's start with some background. Tell us a little bit about yourself and how you got involved with the nonprofit sector.
Glyer: Sure. So, I graduated from college in 2012 and immediately started working at a rental car company and did that for about a year and did really well. And I was promoted very quickly and I was told by upper management I was going to skyrocket through the ranks and that whole idea of being very successful having six or seven figure income, getting a company car, that kind of stuff, was just a depressing thought to me because I didn't want to wake up in twenty years and be really good at renting cars to people.
So I started looking at a bunch of different ways to find something more fulfilling, more around doing work that I cared about and I decided to go overseas for a year and I found an opportunity to go to Malawi, Africa. So I went over there, I spent a year as a math teacher and I really loved being over there. Teaching math wasn't exactly my vocation in life but being in a very impoverished area and being a part of helping those people, that was something that I found a lot of fulfillment and gratification in. So I spent another two years out there and then I came and I was out there, I did a whole bunch of different crowdfunding stuff and I got involved.
I started a charity and a few other things and then when I came back---about six months ago---that's when I started this new company DonorSee. It's kind of in the nonprofit sector, but I've also been telling people it's kind of like the anti-charity. There are so many negative connotations associated with what charity is, and how people understand it, and how effective it is, and how much they waste money that I almost don't want to be associated with non-profits or with charities, I'd almost rather be considered like the opposite end of the spectrum. So, in some ways it is in the nonprofit sector in some ways it's the farthest thing from it.
Petersen: Yeah, well I'm hesitant to describe it as the Tinder of charity but it's almost like that. So, you're not a tech person, you're not a computer programmer but you come from, well not charity, but from the helping others in poor countries angle. How did you get to this point where you can start a tech startup?
Glyer: Yes. So, basically, you can do anything you want as long as you have the resources to hire people who do the stuff that you can't do.
So, I came up with the idea back a year ago, actually in January, and I spent the next two months developing it and writing out a business plan for it and getting screens made to see how it would look, and what the flow would be like, and how people might use it. And then I paid a guy online who lives somewhere in Eastern Europe and he---I think it was Ukraine---and for a relatively small amount of money he made a basic very buggy first draft, like a prototype, and I used that.
And I took it to investors to show them what the app was like. And they believed in the idea, they believed in my vision for what the app could be and how it could disrupt the charity sector and so forth. And so they saw that and they decided to provide me with investment money and I was able to use that money to hire the tech people and hire a marketing team and all that kind of stuff. So, that was how I got from having no technical background to running a tech company myself.
Petersen: Yeah that's great! So many idea people are also sort of averse to hiring others. You know a lot of people have great ideas and flounder because they try to do everything themselves. I do something similar on a smaller scale, but I outsourced a lot of the things for the podcast so I can focus on the parts of it I like, the interviews, the sort of high-level thinking side and also so I can finish my Ph.D. which I promise I will eventually. And you know it's just good to hear you taking this smart approach.
Let's get into the app itself. I actually did, I went to your website and I installed the app. So if someone listening were to install the app and booted it up, what would they see?
Glyer: The app it looks most similar to---when someone opens it, it reminds most of them of Instagram when they open it up. So they open it up and then you see you can scroll through this list of pictures and descriptions underneath. I think the one thing that might look different is that each picture has a little circle at the bottom that shows the progress of how much money has been donated.
So, each picture is actually a project and that project could be providing a wheelchair for a kid in Malawi or providing hearing aids for a little girl in India or education or any number of things. And you see the picture, you see the description underneath and then you have the opportunity to donate to any of those things and the progress bar tells you how much has been donated. So, if there's 25$ left you can be the person to donate that final 25$ and get it out to that person who is usually in a very urgent or desperate situation.
They open it up, they see this list of projects and then they can pick where in the world they want to give to, what kind of project they want to give to, in what way they want to be involved and we have all sorts of different stuff from over 30 different countries. And when people give, the thing that is very---so far there's nothing special about it, this is pretty much like every other thing that you've ever heard of except for maybe it being on an app---the thing that makes us special is that when you give to one of our projects you will get relatively quickly a visual update at some point of how your money was being spent.
So, let's say you gave to that kid who needed the wheelchair. You actually get to see a picture of that boy being fitted for the wheelchair and getting his wheelchair and going out, how his life is improved because of that. Or the girl who needed hearing aids; you'll get a video of that girl hearing for the very first time. So, we provide very strong connective visual feedback on every single donation. That's what makes this different than anyone else that's out there.
Petersen: Right, and the great thing about doing it through an app is that you can get that warm fuzzy feeling in the feedback in the knowledge that you've had an impact, which is not always clear. With a lot of charities, you give them some money and it goes into their general revenue, you don't know if you actually gave that goat to that far-off person or if it went into marketing to get more money to---I mean hopefully---to buy more goats but maybe just to market some more.
And if we want to look at the distant end of the spectrum in terms of warm fuzzy feelings per dollar actually spent helping a poor person, we might look at something like Habitat for Humanity where they fly people with no building experience from the West at great expense to a poor country to build buildings that nobody wants that have to be torn down because they're so poorly built, just in order to get---I guess they pay some kind of fee---and eventually a little bit of money goes to the people in the country.
But there's just a lot more effort put into that warm fuzzy feeling. I think we as humans are a little flawed in needing it. We need that feeling in order to do good in the world. It's not enough to just abstractly know. Could you compare your charity to some of the others?
Glyer: Yes. So, I lived in Malawi for three years. So, most people have seen what charity is kind of like from the American side of things. They give five bucks to a charity and then that charity bugs them every week for the next year, asking them for more money and they never show where their money goes. And they promise they're constantly saying "Hey, we're doing all these amazing things, we're helping 10,000 kids here and 5,000 kids here," and they throw all these confusing numbers at you but they never show you anything. And they're responsible to no one.
And you can go to Charity Navigator and you can kind of see all of these percentages going here. But ultimately, you can make up all of those numbers, numerical transparency is a complete farce. So if you've ever given money to a really big charity, I'm sorry, but there's a good chance that it's been blown. There are a few charities I would highly recommend and they are doing really good work and in general that's like one in 50.
The vast majority of charities are blowing your money. I say that as someone who lived in a third world country for three years and was on the other side of the world when that money was supposedly being spent. So, I was there when the executives of these big charities were coming and staying in nice hotels, eating really nice meals. And I was there when I saw tons of shoes---I've seen in Malawi a warehouse full of shoes in boxes that were never distributed but they were reported as distributed. There's no accountability whatsoever, there's no transparency and anyone who tells you "oh, we have unprecedented transparency." Well, prove it, show us. In general, no one's doing that.
So, I think what we do differently is we really do show you visually. If you gave money to a lady who needs a sewing machine. You will get to see her using that sewing machine and there's a good chance you'll get updates months or even years down the road of how that sewing-machine has improved her life after that one-time donation because our model is just a superior model to what most charities are using.
Listen to the episode for the full conversation!
Fri, 20 January 2017
What follows is an edited partial transcript of my conversation with George Bragues of the University of Guelph-Humber. We discussed his new book, Money, Markets, and Democracy: Politically Skewed Financial Markets and How to Fix Them. This is his second appearance on this show, you can hear the first one here.
Petersen: So your book looks at the interaction between Democratic politics and financial markets. In your introduction, you quote the Greek Prime Minister Alexi Tsipras, who claimed that "democracy cannot be blackmailed." And this was in the context of the 2015 bailout referendum that would have helped pay some of the massive Greek debt but at a cost of forcing them to adopt fiscal austerity. So, can you talk a little bit about that situation and how it played out and also what it tells us generally about the relationship between democracy and finance?
Bragues: Yes, sure. That situation has its origins about a year or two after the financial crisis of 2008. The financial crisis of 2008 initially arose out of the subprime mortgage sector in the United States. It affected banks worldwide that were holding or otherwise exposed to the subprime mortgage assets.
But then as one of the spillovers of this crisis we had pressure on countries in southern Europe including Portugal, Spain, and Greece. And so it all came to a head in 2010 and back then it was Nicolas Sarkozy and Merkel, Germany's chancellor---who's still around---was a player, and they came up with a framework to bail out these countries including Greece.
So, as part of those bailouts, Greece had to comply with various conditions including the fiscal austerity measures that you mentioned, there was a privatization that had to be done but it didn't go so well and so in early 2015---if I remember these dates correctly---Tsipras is leading what was then a sort of outsider party, one of the two major parties in Greece. And so they thought that they would take a different approach to the previous Greek government which was to play ball with mainly Germany and instead of playing ball with Germany and trying to use measures to get their budget under control they thought that they would try to essentially threaten the breakdown of the financial system. a breakdown of the euro unless Greece were forgiven their debt or otherwise given more lenient measures.
The European establishment wasn't buying into that. So this is when Tsipras went to a vote, a referendum on a bailout package. He won that vote, that is to say, the Greek people voted resoundingly against the European establishment of the time, but that ended up not really mattering. The European establishment said basically we want our debt paid, we're willing to renegotiate the debt and you have to comply with these conditions.
And so that was a situation where democracy and the markets came into play. The Greek government was hoping that by creating a crisis in the markets through a democratic act, one of the most democratic acts you can imagine, which is a referendum---because in a referendum the people vote directly on a policy---that they were hoping that democracy would have its way---through the markets---would have its way. It didn't work out.
So, I start my book off with that event because it nicely and dramatically---the Greek situation is still ongoing---but it nicely illustrates how politics and the markets interact. And politics today in most of the developed world means democracy and this interaction between politics and markets, while known, while recognized, I don't think its full implications have been recognized and that's why I decided to write a book.
Petersen: So, with the bailout referendum---this is a massive debt---I believe it was 177% of Greece's GDP?
Bragues: That's correct, yes. It's probably different now. It's probably higher now, I haven't looked at the latest numbers.
Petersen: Even if they paid their entire output and didn't eat or consume anything, it would still take them almost two years to pay it off, which of course is unfeasible. And then they were trying to refuse to pay it off and I suppose they were hoping that markets would have a big reaction and then when they didn't their leverage was gone. They didn't have the bargaining power they thought they had.
Bragues: That's correct. The markets the next day---the referendum took place on a Sunday---and the next day the markets were down---not down significantly, specifically those in Europe, which would be more closely impacted---and the euro which was the key financial instrument in this entire drama barely reacted at all to the referendum result.
Now, part of that was because by this point---I mentioned before that this is a drama that had started back in 2010---the reason why the markets' reactions were muted by this time, much of the debt that the Greeks held were no longer held in private hands. In other words, they were not held by private market players, whether that be pension funds, commercial banks, hedge funds, and other institutional investors but they had been effectively transferred to the government, whether to taxpayers or to central banks who had started---even though this goes against the Maastricht Treaty that brought the euro into being---the Central Bank started buying European bonds, and I'm talking here specifically about the European Central Bank.
So, that's how it's played out. It's still currently playing out because Greece is back in the news because part of the deal that was made in the aftermath of the 2015 referendum is that Greece would still have to comply with various fiscal policy requirements and in order to get additional disbursements from the so-called troika, and the same party is in power, Tsipras continues to be in power and they still as you'd expect they would rather pay less debt or at least pay the debt on less onerous terms.
Petersen: The odd thing is that people keep lending them money when they're so resistant to paying back their loans.
Bragues: Yes, and that brings up the larger question I talk about in the book which is the role of the bond markets. The bond market is it is one of the biggest of the financial markets.
In the book I go through the main ones. These would include the stock market, the derivatives market, which has grown dramatically since the early 1970s, I go through the currency market, which is the biggest one, at least on a per-day trading rate. But the bond market is huge.
The bond market is a lot bigger than the stock market, it doesn't get as much public attention as the stock market does. It is not the subject of a cocktail party conversation the way the stock market is, but the bond market is huge. It is a major lifeline for governments---most governments today. It's hard to think of an exception among the democracies now---most governments today do not finance their expenditures, their infrastructure, their social programs through taxes. They run deficits and those deficits have effectively become perpetual.
If you go back to the early 1970s---and we can come back to the issue why the early 1970s is such a critical date---but you go back the early 1970s, you do find countries from time to time running fiscal surpluses, or running balanced budgets, but for the most part they're running deficits, and so as a result since then we've seen a sustained increase in the level of public debt as a percentage of GDP. And so we're getting close to levels that we haven't seen since World War Two among the OECD nations.
So, the bond market is a key player. I argue in the book that the bond market is an enabler of the worst fiscal habits of democratic states, that democratic political systems have an inherent tendency to overspend, and that the bond market becomes a very enticing place that politicians look to in order to finance the spending that helps them get them elected.
And so then the question arises why do the bond markets keep on buying the bonds of these increasingly indebted states? I'm not sure I have the complete answer to that question. That was one of the questions that really got me thinking as I was writing the book. I think tentatively the factors are these: the key one is the desire for safety that seems to be very strong in the human psyche. So, I think we have to go into psychological explanations for this.
The thing about government bonds, unlike bonds that you would buy, say, from a corporation, which is the other major sector of the bond market, government bonds are backed by taxes and taxes have to be paid. They are coerced from people. You don't pay your taxes, you'll either get fined or in a worst case scenario you end up doing time. A corporation doesn't have the same ability to gather money. It has to rely on the voluntary decisions of the buyers of its products. So, if you buy a bond in General Motors, or you buy a bond in Bell Canada or something like that, your ability to get money from that bond---and a bond is effectively, by the way, a loan that an investor extends to an entity, a government or corporate entity---so you buy a bond from Bell Canada or from some other private company, you've got to rely on the fact that they're going to be able to get people to buy their goods and services voluntarily.
When you buy a government bond, you have the assurance that the entity who is supposed to pay you back the money has the power to force people to give it money and so that makes government bonds safer, in general, all else being equal than corporate bonds. And since people do crave safety, they do crave security---I don't want to get too much into the depths of human psychology here---but there's a deep-seated desire to avert risk and this is well known. Among financial academics we talk about it all the time, we talk about it in terms of risk aversion as being part of the model that we used to depict investor behavior.
So, this is such a powerful desire to have safety when you invest your money, to know that if you plunk 1,000 dollars now and you're promised 2% interest, you will get that money back and a 2% interest at some future point in time. So, I think that's the most powerful driver for the demand of government bonds and that demand is so strong that investors will overlook the fiscal health of the countries to which they are effectively lending to.
I think the other factor is legislation. There you look at the regulations specifically pension funds but also banks and so on have to operate under, if they're required to have a certain percentage what are deemed to be safe investments in their portfolios---by the way this also includes insurance companies---and safe investments invariably encompass and tend to get restricted to government bonds and so there's a built-in legislatively driven demand for government bonds and this plays out
significantly with the commercial banks because they have to show to regulators that they have a certain level of core equity in their balance sheets. You look at these regulations---these are the Basel regulations---they have traditionally incentivized banks to buy their country's bonds. So, you've got a situation where Greek commercial banks tend to own a disproportionate amount of Greek government bonds or Italian commercial banks own disproportion amount of Italian government bonds. So, you have the banking sector effectively forced through legislation to have to finance the country's debt.
Petersen: So just as a part of doing business, if you're a bank, you have to show that you're safe. There was this issue during the financial crisis of these AAA rated mortgage securities and if you think about it in terms of just supply and demand and all these things, it's not clear why the rating is so important. But then when you think about needing to prove to a third party that I am safe, then what others think that your assets are worth or how safe others think they are, becomes really important.
And at least there's sort of a perverse element here where if you're lending to Iceland or Greece you can maybe get a higher return while still maybe appearing safe because you say, "well I've got all these government bonds," but the fact that they're not safe is why they can give you that higher return. And if you're managing a bank you want to earn a high return but you still want to appear safe and if you lose money you want to lose money when everyone's losing money so that you can say "hey it's not my fault, not personally at least."
Bragues: That's another factor too that everyone---and John Maynard Keynes, I don't agree with everything he says, but he's pretty good on this point, on the behavior of investment managers. You have a huge incentive as an investment manager to go with the crowd because if you're right with the crowd you can bask in the general adulation that all investment managers are receiving at that point in time, you're generating nice returns for folks. But if things go awry, the crowd becomes more important as a kind of protection device against criticism because you can always say---as you point out---that this is a systemic issue, I couldn't do anything about it everybody else also was adversely affected.
And so that does tend to work in favor of government bonds and does tend to over inflate the level of demand for government bonds relative to what they should get if you had a truly free market, people were just free to buy whatever bonds they thought would fit their risk return preferences. I think that's a key factor as to why I believe that bond markets end up not being vigilantes.
There's this line Edward Danny, a well-known analyst on Wall Street, came up with this phrase 'bond market vigilantes'. I believe it was in the 1990s and it supposedly referred to this group of people in the bond market who were always on the lookout for countries that were running fiscal deficits, that were doing the wrong things economically, and that these bond market vigilantes would pick on these countries by selling their bonds, shorting their bonds, and then putting those countries in a bind supposedly by raising the interest rates that they would have to pay any time they issued bonds again.
But the reality is that the bond market vigilante---if it exists---it exists too late. You look at the history of the bond market---we're talking a couple centuries now the bond market is actually older than the stock market---you look at this market and the vigilantes only come up really late in the game when it's pretty obvious that the government in question cannot pay and so the bond market doesn't do---I would argue---the job that it advertises: namely, always keeping yields in line with risk. It does tend to underestimate the level of risk, specifically with when it comes to governments.
This is a partial transcript only. For our full conversation, listen to the episode.
Fri, 13 January 2017
What follows is an edited transcript of my discussion with Ray March about the economics of medicine and health insurance. We had a fascinating and far-reaching discussion about health care policy, both in the United States and Canada, as well as some cases of entrepreneurship in the medical sector.
This includes a slightly awkward discussion of the development of sexual pharmacology, the early experiments with nitrates and Viagra, and the, uhhh, "firmness" those drugs produce. Enjoy!
Petersen: My guest today is Ray March of Texas Tech University. Ray, welcome to Economics Detective Radio.
March: Thanks for having me.
Petersen: So our topic today is the economics of medicine. Ray's research concerns entrepreneurship and regulation in medicine. Let's start by talking about this idea of entrepreneurship in medicine.
The medical field isn't like Silicon Valley. You can't just launch a pharmaceutical company out of your parents' garage. In fact, the whole field is tightly regulated and controlled by the government both in the United States and Canada, other countries. So how do people in the medical field still manage to be entrepreneurial?
March: Entrepreneurship is fundamentally a question about how do I find resources I have now and put them towards their best use and that will help me turn a profit and therefore we have market signals. You're right to point out medicine is a much more regulated area compared to other service industries but what makes medicine entrepreneurial is that there's always a void to discover, there's always a need to find better uses and better cures or better ways to treat patients.
And because the government is usually behind the curve in terms of the advancement of science---and this is particularly true in health science and medicine---there's always opportunities for entrepreneurship. And a lot of my research explains or tries to explore what are these areas of medicine or of health just more broadly that the government is not involved in because they're not necessarily aware that this is an emerging field. And that leaves room for scientists and more broadly entrepreneurs to come and fill in gaps.
Petersen: Okay. So, when you say the government is behind the curve, a big part of that is the Food and Drug Administration, the FDA, in the United States. And of course it has its equivalent in other countries as well. So, tell me a little bit about the FDA. So, if I discovered a new drug, what kind of process would it take for me to bring it to market in the United States?
March: If you want to go through the FDA procedure usually takes between 12 and 20 years and somewhere around a billion dollars of investment. You bring it to the FDA, you go through initial screening which is "Is the drug effective?" "Can it actually do what you purport it can do?" That's phase one. Phase two is a little bit larger clinical trial so instead of 30 people you go through 1,000 people. And you have to report that it's also effective.
Then you get into safety which is what the FDA was originally intended to do was to eliminate the worry that they were going to be unsafe drugs on the market. Then you have to go through a clinical trial about typically 3,000 people to show that it doesn't hurt them. Beyond that, you've got phase four which is approval, you get your drug approved and even the drug is approved, you are not quite off the hook.
Yet you still have to have post surveillance. And post surveillance is, it's approved but if we find any problem outside on the market or we find that we didn't pick up with something in our very detailed clinical study, we find there is some kind of problem, then we can remove the drug and that typically lasts 14 to 16 years.
Petersen: Okay, so it's an extremely long process. Long and costly and we hear sort of horror stories about before there was an FDA---before there was regulation of medicine---you'd have people sell snake oil or tonics, miracle cures that really just made people sick. Doesn't it help to have a process in place to prevent the kind of things that might damage people's health?
March: Absolutely. I wouldn't deny that it's not helpful to have processes in place to weed out effective treatments from ineffective treatments. The question that I'd like to mention is who does the planning? Do we need to have the federal government with the FDA come in and say if you want to prescribe a drug legally or use a medical device legally you go through our process or does it make more sense to open it up broader and have competition? And that is where the entrepreneurs would find ways to treat elements and diseases and in effect, those are weeded out through the market process.
Petersen: Yeah so what I like in your research is that you've actually found cases of course of both kinds: of the FDA sort, of the public government regulation of drugs and also private regulation or private discovery of new uses of drugs. So, let's talk about your paper on entrepreneurship in off-label drug prescription. So, you look specifically at the off-label uses for three specific drugs: Aspirin, Viagra and---I might pronounce this wrong---Minoxidil?
March: No, perfect Minoxidil.
Petersen: Yeah, Minoxidil. Okay. So, first what is an off-label drug use? And why does it matter?
March: The off-label use of a drug is using a drug for a purpose that's not approved for by the FDA.
So, in the case of Aspirin, Aspirin is approved for pain relief or in the paper I say it's not just used for pain relief doctors also prescribe it to prevent myocardial infarction and other heart-related conditions.
So, in general, when you use a drug off-label, you are saying I'm prescribing it for use that hasn't gone through the rigors of the FDA's regulation. It hasn't gone through the four phases and the post surveillance, which in the United States is perfectly legal. But the reason that off-label becomes very important---and full disclosure, in the United States one out of four drugs is prescribed off-label, that is, one out of four pills you're taking is not for the approved FDA use---is that it allows doctors and pharmaceutical companies to be entrepreneurs, to find the best alternative use of medication, which the FDA in theory, could do, but because the process of approving drugs is so long and costly and often lags behind what medical professionals typically find 15-20 years ahead of the pace.
Petersen: Okay, but it seems contradictory that that would be legal because as you said the FDA is not just checking for safety, but for effectiveness. And if you're using Aspirin as a blood thinner, it hasn't been tested for that purpose. So isn't that a contradiction and shouldn't the FDA have some kind of interest in making sure these off-label drugs are effective?
March: So there's been put forth regulations on, or just people trying to get off-label drugs regulated so that you can't prescribe it for any use. And in some cases, there are instances where it is illegal to use a drug for off-label use. For example, if I'm a doctor, I can't prescribe you 40 Oxycontin in a bottle of liquor and then you can do physician-assisted suicide. I can't do that.
But the FDA, it does have some sort of an interest, from a public choice perspective, that they want to regulate all use of pharmaceuticals which it hasn't deemed safe. But I think this is where my research sort of comes into play here. The FDA is so far behind the curve, I don't think it's really aware of how these drugs are being prescribed.
And if we look at the case of Aspirin, Aspirin, the initial hypothesis put forth by Lawrence Craven---he was an entrepreneurial cardiologist---said that aspirin could be used to prevent heart attacks. This was in the 1940s. And a good period of 30 years went by before this really took off in the mainstream where this became a very common procedure to avoid heart attacks, or heart disease, other cardiovascular things. And the FDA only really got around to approving Aspirin in 1996---I believe this was the first year to approve it for preventative care. So, I think there is an interest on behalf of the FDA but I think it's also just the FDA is very slow. I don't think it's able to stay ahead of medicine or to regulate some of these uses.
Petersen: It's shocking to me that people would advocate to extend regulation to these off-label uses because if it's one in four pills in the United States, if you then banned those uses, wouldn't one in four patients then become sicker? Who's doing this advocating?
March: One of the key distinctions to keep in mind is keeping you safe is not helping necessarily, it's not curing you. And those are two distinct things a lot of people won't necessarily think through the implications of when they want to advocate the FDA should have more power.
Petersen: Okay, so that's one argument I've heard is that if the FDA approves a drug that then goes and poisons people and it turns out it wasn't safe after all then, it would be a huge political fiasco maybe the head of the FDA could get fired or definitely the people who were directly responsible for approving that drug. But if the FDA simply delays approving a drug and the same number of people die on account of not getting it---people whose lives would have been saved by it---then, the incentives are kind of asymmetrical. The error of omission is punished less harshly or not at all compared to the error of commission.
March: Absolutely. I mean that's the seen and the unseen. What's seen is that the FDA is keeping all these drugs going constrained or not, keeping them off the market because they want consumers to be safe and they want to run through these clinical tests again. But what you don't see is that people who are in dire situations that need this to feel better or to function or even save their lives. You don't necessarily account for that when you account for the cost of the FDA. So, it's one thing to say it's 20 years of approval and a billion dollars or 1.2 billion dollars to have the drug approved, but you also don't account for the lives that are waiting to get ahold of this drug.
Petersen: So, even though there's this huge process to sort of block, or to slow down drugs from reaching the market so that they can be tested and checked and made sure they're safe and effective. Still most drugs, when companies do develop drugs they earn most of their money in the U.S. market because of the strong patent system there. So, there's something to be said for having at least these incentives for the drug companies to develop these things and to keep technology marching along. Can you speak to some of the differences between the U.S. and other countries with respect to pharmaceutical development?
March: Well, in terms of IP---and you're absolutely right that IP is a critical component of a lot of pharmaceutical companies' balance sheets---because they're going to invest large sums of money and large sums of time. Then if they go and put their drug on the market and then a generic comes out four or five months later, then there goes the profit margin. So that's an important component of U.S. pharmaceutical companies, where certainly European and in some cases, the Canadian pharmaceutical come and try to get their stuff approved by the FDA so they can get stronger patent rights.
But a lot of that is somewhat misleading. So, for instance there's no real reason medically that you should have one drug or that one drug is necessarily going to treat a huge variety of patients. When drugs go generic, you don't see just a drug go generic and it becomes the same drug, you see generics vary in their chemical structure. This way it's not just the drug becomes cheaper because there's no patent preventing other people from making this pharmaceutical or engaging in this chemical composition, but they vary the composition so they can better suit other consumers. So, it's not necessarily the case that when drugs go generic they all become the same and just immediately the price drops. There's a better service towards the consumer market.
Petersen: Yes. So, having these patents, on the one hand, they create the incentive to develop new things but on the other hand, they take away all the benefits of market competition which includes not only lower prices but also some of these sort of marginal improvements and developments in serving more niche markets and things like that.
So, where do we see competition in the drug market? You have a paper called "The Substance of Entrepreneurship and the Entrepreneurship of Substances" which is a wonderful title by the way, do you want to talk a little bit about the entrepreneurship of substances?
March: Sure what I tried to develop, or what me and my co-authors tried to develop in that paper is you have entrepreneurial theory which takes various forms whether you look at the Kirznerian theory or Baumol's theory and we try to adapt that for what I do is the market for pharmaceuticals.
In that paper I examine off-label drug prescription too, but I try to explain how does the entire process work. So, given we have severe, very stringent regulatory structure set forth by the FDA and we have these conflicting patent rights, how is it that we actually see entrepreneurship in treating people? And off-label, one, it creates alternative uses of resources which is what entrepreneurship is in a nutshell, is find the best use for scarce means and then when they find better uses for existing drugs---so Aspirin, Minoxidil, Viagra like I talked about in my other paper---these findings get distributed through medical journals which is the system of how do we figure out which drugs are safe to treat various illnesses that we previously weren't aware of.
Pharmaceutical sales representatives are going to also play a role in doing that, but they're not supposed to disclose too much information about off-label drug prescriptions, that's another regulation. But fundamentally what you have there is a system of feedback. So, without the FDA's involvement physicians and pharmaceutical companies are able to find alternative uses for their drugs.
So, instead of Viagra being used to reduce cholesterol essentially or to reduce congestion in the heart, it's better used for sexual performance in males. And a lot of this was found in clinical trials which then got introduced in the U.S. market through voluntary tests which then became part of medical journals, which then were introduced into specialized medical journals to make sure that this information was distributed to urologists, or doctors of various disciplines and then that's how the market emerged for sexual pharmacology, which was largely an entrepreneurial act by urologists saying "We think sexual performance is not, for lack of a better word, all in your head. We actually think there's a physiological problem here and we think we can use pharmaceuticals to solve this."
Petersen: So, you're saying that the main purpose of Viagra, the one that we've all heard of, that was not its original use?
March: Oh no. Viagra was developed for heart congestion.
Petersen: Wow, I did not know that.
March: When you think of a little blue pill you think of erectile dysfunction for sexual performance, but no originally it was for---I'll tell the entire story, hope this goes to a family friendly audience---the story was this is developed in Britain, they started sending out these pills in an early clinical trial, they send them out to 30 or 100 middle-aged men, people you would think would be suspect for heart congestion and they send out the pills and they phone and they say "Okay, how is it? You feel like you have less heart palpitations? We will run your blood and we'll see what your actual congestion is."
And it didn't seem to be very effective in that, this is about halfway through a 30 day trial, and they say "Okay, well send the pills back" and then nobody sent them back.
So they were questioning "Why has nobody sent the pills back?" and they started getting reports, "Well it was actually helping with this other thing."
And then they said "Well we need to develop this drug for sexual performance. This is going to be a blockbuster."
Petersen: And before that there wasn't an interest in, or doctors were interested maybe more in saving lives. So it's almost like the market for sexual performance enhancing drugs sort of came from the consumers themselves. Before this nobody said "Hey you know what would we be great? A pill that enhances things in the bedroom." So, it's interesting. So they learned from the customers what their customers wanted.
March: Yes, in this case directly. The field of what's called sexual pharmacology---so treating sexual problems with drugs---it largely emerges in the United States originally not Britain, and it's in the 1950s. And it's a group of, I believe, is about half a dozen to twenty urologists treating urological problems.
They come to the conclusion that sexual problems are not all in your head, so it's not a psychological problem why sexual performance is not up to par, you're having these issues in the bedroom. It can actually be a physiological problem, so there's a problem with your sexual organs. And so they start experimenting with what were essentially nitrates, so things that affect blood flow and they start injecting them originally in themselves. So in the urologists' actual selves they would test that then test firmness, for lack of a better word, then they would say "Okay, we think this can help our patients we're going to prescribe these off-label."
Patients would go, they would increase their sexual performance, this starts getting out in medical journals. And then over across the ocean, you have Britain which sort of serendipitously comes across Viagra and finds out this little blue pill can actually do this too. They enter the U.S. market. So it's an international competition but it all originally starts with an entrepreneurial idea saying, "No, we think we have a better way to treat sexual dysfunction."
Petersen: Right. And yet they had to get over the idea that it was all---I don't know, this with would have been before the days when people also maybe believed strongly in mental illness because---the idea of something being "all in your head" in the age where we're all very aware that mental illness is an illness and it is related to physical things in your brain; the fact that something's all in your head doesn't mean necessarily that it's not real but this was the 50's, when maybe people philosophically didn't see things that way.
March: Right the 1950s---there was some awareness of mental illness in the 1950s---the 1950s is when you start to have anti-psychotics, it's when they start to see we can help people that have previously been institutionalized by giving them these drugs which uptake into the brain, which can help you alleviate manias and depression, or anxiety.
But the predominant theory for sexual dysfunction---it wasn't even called that back then, but what we can call for this podcast sexual dysfunction---was that this is a psychological problem so, the male couldn't perform---this is also true for females but what we were focusing on here is males---if the male couldn't perform it was some form of anxiety, so he needed to undergo psychotherapy or some kind of sexual therapy. And then he would go through that again and again until the point where he was comfortable enough performing sexually and that would somehow dissipate the problem.
But entrepreneur urologists come in and say "No." There's alternative explanations. It's not just that he has anxiety. It could be there's something actually physiologically wrong. And this is sort of a new idea because that, one, it's a whole new idea to say no the sexual performance is not always linked to your mental state or your perceived anxiety, but that we can actually treat this with injections, or with nitrates or with drugs and drugs that already exist on the market because we believe this is a blood flow problem.
They had it tested on themselves so they were pretty confident in their theory. But then to go ahead and give it to patients and then give patients the ability to self-medicate. All of this progress was a period of 20 or 25 years for them to progress to that stage to where ED can be treated---be self-treated really---without the use of psychotherapy which was inconsistently effective. And then we get to the point where you can just inject an oral tablet, that's where Viagra comes in. All of this comes about because of an entrepreneurial awareness to say "No, we don't think that the medical professional is treating this condition correctly."
Petersen: So, one thing you talk about in your paper is the idea of superfluous entrepreneurship. What is that and how has it occurred in drug markets?
March: Superfluous entrepreneurship as we go about it in this paper is the idea, given you're an entrepreneur in a regulatory state which prohibits you from discovering more effective ways to distribute goods, what happens to the goods you distribute? Are you distributing as effectively as you could without said regulation?
And one of the ones we analyze in the paper is the development of insulin. I'm sure you and your viewers are aware of what insulin is, a diabetic who can't produce his insulin or doesn't produce enough, the Type-one and Type-two, needs to inject that when he eats carbs so he can manage his blood sugar and avoid diabetic complications. So, when insulin originally hits the market we've got to go back to, I want to say the 1920s, when they first started doing animal insulin. We have pig insulin and we have bovine insulin which saved thousands of diabetics' lives at the time, but they have side effects. As you can imagine, insulin is a hormone, if you inject animal hormones in you, there's going to be some side effects.
And so by the time you get around to the 1940s we start finding ways, medical science advances enough to where we can synthetically produce human hormones, which is what modern insulin is, a human insulin. But the fear of the regulators is now that we can synthetically make hormones we don't necessarily know what are the side effects of synthetic hormones. And so in 1941 Congress passes what's literally called "The Insulin Act" which is if you're going to prescribe, or you're going to try to create a life-saving medication, which is what insulin is to diabetics, to Type-one diabetics especially, it has to go through additional rigorous testing.
So what that means is the release of human insulin on the U.S. market is delayed, so diabetics who need to receive their insulin are still taking bovine and pig insulin, which is okay but when there was a clearly better alternative being human insulin available, you end up with superfluous discovery so instead of investing time---and this is what happens in the insulin market---you invest time and effort into finding ways to reduce complications from injecting bovine insulin, or find ways to change the what's called the duration event, so how long insulin last in your bloodstream trying to find ways to manipulate that or make that better. You have a better alternative which is to immediately bring in human insulin and treat diabetics using that and that doesn't become possible in the U.S. market because of these delayed regulations. Eventually insulin does get on the market but you have a prolonged period where people are noticeably getting worse treatment than what's available.
Petersen: Right, and that's a very long period. I read in your paper they didn't approve human insulin until 1983 and did you say 1940s was when they discovered it?
March: I believe 1941 was when it was first available for clinical testing and this was all done in Germany.
Petersen: So 42 years.
March: Right, of taking animal hormones.
Petersen: Yes. So, the superfluous element of entrepreneurship is we have some kind of problem, people are willing to pay to have that problem solved. We have a cheap way of providing this subjective benefit to people, but the cheapest, best way that people would do in a free market is somehow blocked or illegal and so people entrepreneurship around regulation. Is that correct?
March: You certainly see that in illicit drug markets, but yes that's also true in some pharmaceutical markets. I want to get this drug approved in the United States. I have human insulin which is better than cow and so I want to get approved in the United States. There's a big market for diabetics in the United States but the additional regulation makes it tough. So, I can find a way to circumvent that, either bring it on the black market, the illicit drug component, or I have to say no I can't compete in the United States because it is going to take too long, I'm just going to prescribe it over here in Germany or in Asia.
And what that does, that just limits the entrepreneurial aspect of bringing better cures to market. So it's a superfluous effort you could say, marketing this drug in Asia or different countries in Europe instead of the United States. Those are all resources that could have been diverted towards something, or towards marketing the drug in the United States where you could argue it would be the highest value of use.
Petersen: Right. And in your paper you also talk about delta nine THC found in marijuana, which is a treatment for nausea. Can you talk about that? That's illegal of course because it's from marijuana.
March: That's an example where there's tons of medications out there for nausea, but the one you find in the medical marijuana derivative has been shown as particularly effective in difficult cases. So take cases where the typical forms of treatment which would normally help people---now we have more difficult cases---we're no longer allowed to prescribe these drugs we have to find synthetic uses of these drugs. So any time you take a synthetic use you're necessarily making the complications which you would face when the drug interacts with your body, they become a little bit more widespread. So you open yourself up to the treatment being less effective, but you also get more of a probability of these tail effects, where things you wouldn't necessarily see happen occur in your body.
So, you make the drug. In some cases it's less effective, but you also can potentially make it more dangerous, which is the superfluous act. I am trying to use synthetic drugs to treat cases or treat illnesses when there's a better alternative in the background. So, I'm just trying to find a new and better way to make a potentially dangerous drug safer when there are already safer drugs available.
Petersen: So a previous guest of this show, Mark Thornton, who you cite in your paper has argued that in the case of illicit drug markets, what the entrepreneurs do is to make them easier to smuggle by making them more concentrated, have a stronger effect for a smaller mass so they can be hidden in places where they're smuggled across borders or from the place they're produced to the place where they're sold. One example would of course be moonshine, so during the depression they obviously weren't selling low-alcohol-content wine because it would be so costly to smuggle that to people. They instead got the super strong moonshine and it was actually very dangerous. So, I suppose that's kind of an example of superfluous entrepreneurship, getting around the burdens placed on you, when in legal markets, of course, you don't have to always make things more concentrated and easier to smuggle because you don't have to smuggle them.
March: Right exactly. Entrepreneurship is finding---I have my product, I eventually face competition because I'm making a profit, how do I make my product better? And so when you have to change the institutional setting to where now I have a product that I'm selling but it's technically illegal to sell this product, where can I put my efforts best for us to continue making a profit?
In illicit markets it can just be the concentration, right? You mentioned the moonshine and the nine THC is another great example which is the main content of marijuana which people used to get high, you see the potency of these get much higher because that's primarily what you're trying to do is to sell the THC content to potential marijuana users. So instead of trying to find appropriate levels of THC or finding what you call niche, just accessories towards consuming marijuana which would differentiate the markets and serve consumers better, that is no longer profitable revenue and that's no longer a profitable or viable way to compete with people that are selling marijuana. Now it's how do I smuggle? How do I become a better or more active smuggler? And that's to raise the content of THC.
Petersen: Or to get people onto drugs like cocaine that are significantly more potent per weight. I guess the great point made by Thornton is that by criminalizing these things, by criminalizing milder drugs in particular, you create a market for stronger ones.
March: Right. Because that's how you compete on the margin for things like that. Yes.
Petersen: So what other kinds of entrepreneurship do you see in the United States in medicine? I've heard about people sort of getting around the medical system, joining collectives where they pay directly to their doctor, trying to get away from the sort of hybrid insurance system that you have down there.
March: That has become an alternative. And I don't know if I want to say an alternative market. But there has emerged a need for people to get outside of the larger insurance---that's the word I'm looking for---to get outside of the mainstream insurance market and to niche themselves into more specialized markets.
So, with the passage of the Affordable Care Act right now, everybody has to have health insurance or you pay a massive penalty. You've standardized insurance, which in some cases maybe there's nothing wrong in having a standardized package of insurance. When you try to blanket that over the population of the United States you leave out specialized cases.
So to give you a specific example what you see now in the market for diabetic treatment is now that insurance has become standardized to treat diabetics, you see less prescriptions written for specialized forms of insulin or insulin that acts faster or insulin that has a longer duration period. Now you see just generic insulin is being prescribed. Which is fine because the majority of diabetics are type-two diabetics and that's what they typically use, but then that leaves out cases of people with pancreatic cancer or type-one diabetics who need specialized insulin in order to better suit their individual illnesses, and you don't see that specialized treatment. So that leaves the market open for specialized insurance, or people that are going to co-ops, private alternatives where you pay into essentially a fund and 50 or so people will contribute 100 dollars a month. If one of them gets sick, they'll use the money in that fund to help this person overcome an illness they've come down with or any injury that's kept them outside of work.
I think a lot of those entrepreneurial aspects are trying to get out of standardized medicine, standardized insurance but again because all of this is more or less dictated by the government you don't have the wiggle room to compete on the margins, what you have to do is go completely outside of a highly regulated market. That's what you're seeing marginally with insurance. You don't see as much of that in medicine.
Medicine is a little more tightly controlled than insurance, even in the insurance market even today, but it's interesting. So, I think in the future there's going to emerge especially a larger market for these different forms of health insurance. It will help to treat people who have religious affiliations when they don't want to have insurance that helps to cover birth control or abortions for people that are in their group or they are pooled in the same insurance group. But also just people that aren't getting the kind of treatment they want. And this allows them to actually have health insurance for lack of a better word. I need a specialized form of treatment or I actually come down with a rare illness that the standard treatment is not going to help me with, I need to have insurance as a means to cover it and I think that's what you're seeing in the market with what you describe.
Petersen: Right. So, I live in Canada and we have single payer, which ultimately is like post-Obamacare having private insurance companies but then having everyone legally required to get the insurance and then having those insurance companies having the government dictate what they provide and require them to take on people with preexisting conditions. It's almost like just some sort of weird way of replicating single payer just while maintaining the veneer of a private system but in Canada we have single payer officially.
And there are some myths about it. So, we don't have socialized medicine per se. Doctors are not public servants but they can only accept payment from the government on your behalf, so sort of like maybe a private prison in the United States where they're kind of private but the only customer they can legally take on is the government.
March: Which you wouldn't typically describe as a market. The market is to serve the consumers.
Petersen: When the consumer is like a private contractor, serving the government. But of course we also restrict---you're not allowed to buy healthcare or medical care outside of the single payer system. There have been some court cases recently with people trying to argue for a right to do this but the typical thing to do is to cross the border to the States or fly to Southeast Asia to get your unapproved---or in order to pay for your own medicine.
And the sort of justification for this is they don't want people competing up the prices of medical services, medical goods. I guess they like their monopsony status as the only buyer of medical services. But whenever I find myself arguing against the system or saying something to the effect of "Hey this is a pure private good, why don't we let the free market provide it the way we do with our food and shelter and other things that are very important for living?" I get really smart people arguing against me and some of the things they say are "Can you point to a country with free market healthcare that works?" and I have to say "Well there isn't a country with pure free market healthcare" Singapore is 50/50 and maybe that's as close as you get.
But I guess to get to my question, why does every country intervene so strongly in medicine? What is it about medicine that that makes people really want to control it and have it centrally planned or regulated?
March: Sure. I think that's the fundamental question of health economics. Analyzed from the perspective of an economist, how much is the market able to take care of the sick or those less able to take care of themselves and how much do you need state interference or government involvement to make a successful health company or healthcare system work? The way I'd like to think about health economics if we get outside of just focusing on insurance or treatment of rare illnesses or pre-existing conditions or asymmetric information and all these complex issues that people like to point and say, "See that's where the market fails in healthcare, that's why you have to have a government."
Fundamentally what we're looking at is how do you deal with uncertainty? We have more or less ways of assessing risk, where we know your risk increases of lung disease if you smoke a cigarette as a simplified example. But how do we purely deal with uncertainty? So, I'm an insurance company and I take you on as a client, I don't know your health status. Various regulations make it impossible for me to find that out. But I don't know your health status. I don't know if in five years you're going to develop cancer, if you're going to be healthy for the next 30 or 40 years. How is it ideal with that as an insurance provider or if I'm a doctor how do I know you're going to use this pharmaceutical responsibly or how do I know that these other clinical trials I've seen where this has helped the patient with your condition is going to help you because there's heterogeneity in how people respond to things.
But fundamentally this uncertainty both in the provision of healthcare and in medical science itself, these permeate medicine. We're never fully going to be able to reduce the uncertainty. There's always going to be that element of the simple fact that we don't know. And I think that provokes the idea in a lot of people's heads that with no centralized plan we're not able to address this uncertainty. So we need to have the government come in and say health premiums need to be this or guarantee a system where even if you don't have health insurance you'll be taken care of if you need to go to the emergency room. Or if you come down with a very rare illness there will be pharmaceutical stock up in the hospital.
I just think that in general, the uncertainty drives a lot of people to look toward centralization or to develop a centralized plan to try to mitigate that. But a lot of those efforts are somewhat short sighted because when you centralize things you don't take advantage of the uncertainty aspect of anything you just put all of the decision-making power within a federal bureau, the FDA or the federal government or even the USDA to some degree. At least in the United States, I know Canada has similar governmental bodies up there.
But when you do that you divorce decision-making from the knowledge and you also divorce it from the incentive, like when we talked about what if the FDA doesn't have an incentive to release potentially dangerous drugs? Or as a pharmaceutical company if they see profits, they absolutely would, even if it is somewhat risky. So, I think the motivation primarily in why we don't see free healthcare or a free market in health insurance or competing systems of determining whether drugs are safe or effective is that there's a primary fear with people how do we address this uncertainty.
Petersen: So there are various elements of the uncertainty. If I'm an insurance company I might worry that the people who come buying insurance, there's an adverse selection problem so the people who come to me for insurance are going to be the people who are the least healthy or the people who expect, for some reason that maybe I can't observe, to get sick. And that means based on the fact that only people likely to get sick are coming to me, I need to charge very high premiums for my insurance. And so it's the classic market for lemons problem: The very fact that someone's selling you their used car maybe tells you that the car is a lemon. And the fact that you think it's a lemon means you won't pay very much for it, meaning that anyone who doesn't have a lemon wouldn't be willing to sell.
So, at least with that, it seems that pooling everyone into the same pool helps. But on the other hand you do lose competitiveness. So, one example I've heard is the cost of rhinoplasty---the plastic surgery to make your nose look better---since that's not paid, since governments perhaps rightly see that as it's not life-threatening, it's not important and we're not going to pay for it, you pay for it yourself. And we see that the cost of a rhinoplasty has fallen dramatically over the years. And whereas life-saving surgery, you look at healthcare and housing and I guess university tuition, those are the three big things that consistently go up in cost over the years.
Do you know a lot about the market for plastic surgery?
March: Not a whole lot. I do know that because it's not regular you have means of competing and you have essentially competition to provide you with care to make your nose look better or for facial reconstructive surgery and similar things.
I do know that a lot of cases like when you get breast augmentation you have to replace the inserts or whatever they're called. You have to replace those every set amount of years and you get routine inspections to make sure there's nothing going on with the surgical procedure, nothing wrong with the implant and all of that is done privately. So, it's interesting because getting plastic surgery is not necessarily a simple procedure. Just because the FDA is not involved in the procedure because there's not federal guidelines about when or when not you can do this procedure, how the procedure should be performed, it doesn't mean that the procedure is simple.
As you pointed out, it's not life-saving but it's still surgery and there are still risks and complications. What we typically don't hear, with the exception of maybe a few TV shows, that sort of shock people, we don't hear about these horrible things going wrong on the surgical table when people get nose jobs. And I think a lot of that has to do with because they have to compete to make sure people are happy with the outcome but they also have to make sure, again if the procedure is safe and its efficacy. You look better when you're done and nothing happens to you or receive complications, you get infections from surgeries. So you do see that a lot in the United States.
I want to go just briefly back into the adverse selection problem which I think is broadly the main argument for why you need to have government involvement in health insurance. Because you have that selection problem where only sick people want insurance and then insurance companies only want to provide really minimal standard care so you have that sort of mismatch and that would be a bad scenario for all. But to the extent that's true, it's based upon how is the insurance company is able to segment the market.
So, if you're comparatively healthier than me and you just want to have catastrophic care, so something that if you were involved in a horrible accident and nobody could have planned for it, you need to have emergency care. You pay pretty low premiums and then the deductible is higher whereas someone like me I'm a type-one diabetic who needs to have consistent care throughout their life in order to maintain their health, their premiums should be a little bit higher but then the deductible should be a little bit lower since I have to keep taking insulin.
But the problem is if they're not able to segment the market, and I think the reason they can't segment the market is because it's illegal to segment the market. What you don't have, they are two different forms of insurance. You don't have the insurance for sickly Ray me, or healthy you.
You don't have means to compete on those margins, all you have is various plans. You buy into them, you have health insurance costs go up because there's less competition and the reasons we have explained before. So a lot of what you see with the adverse selection problem is a lack of marketing and the lack of marketing stems from the fact that it's illegal to do a lot of the research that health insurance companies want to do.
Petersen: So, because deep down it seems so unfair that you could have a huge cost throughout your life just because you got sick through no fault of your own, we want people to pay the same. But then in doing so we create the adverse selection problem and it's sort of the old lady who swallowed the fly. We have to swallow the spider to eat the fly and eventually we're swallowing a single-payer healthcare system to put everyone in the same risk pool to deal with the problems that our initial minor intervention to try to make insurance more fair caused.
March: Right. So what we would end up doing in that situation is that you would have to pay premiums, I would have to pay premiums we want to equal them out because it's unfair that you should have to be subsidized me for lack of a better word. Well, that means that you end up paying more in premiums than you actually wanted health insurance, I would end up paying less because we have to even out.
More fundamentally if you want to address the fairness question---I think a lot of people do approach this from the aspect of fairness---is, one, why is it somewhat unfair for me as someone with a chronic illness to not have access to healthcare on a competitive market where I can decide which program I want, where I can assess my own risk, and where I can decide based upon my medical needs how at best to treat my illness; whereas someone like you who doesn't have a chronic illness places a completely different set of incentives? So when they pool us all they end up doing is limiting both of our choices. I think a fundamental question to ask there is which one of those is more or less fair?
Petersen: Right. So, what sort of institutional changes, big or small---obviously some things are more politically feasible than others---but what institutional changes would you like to see to improve on our system?
March: By "our" you mean the US system?
Petersen: Yes, or in the systems worldwide that have similarly been adopted for similar reasons by many different countries.
March: Sure. If we segment along the lines of there's health insurance and there's actual health products or health services.
I would primarily start with the approval of pharmaceuticals. And I say that because a significant portion of the illnesses and conditions in the United States are treated with pharmaceuticals. So, if we're able to allow competing access to approval processes, that would drastically lower the cost of drugs. If you lower the cost of drugs, health insurance becomes less vital, certainly in my situation but in a lot of people's situations who need access to pharmaceuticals. The access to insurance becomes less important because there's less of a risk that you won't be able to afford the treatment if you need it.
And I think that would push back insurance into---for lack of a better word---a more appropriate role. Insurance is supposed to be, there's a potential down the road that something bad will happen or I will develop an illness, I'll get sick, I'll break something, whatever you want to call it. I don't know if that's going to happen but if it does I want to make sure my livelihood or my standard of living continues as best it can. That's what actual insurance is. There's a chance that you could crash your car someday. And if your car is totaled you want to have repairs, you want a new car, that's why you buy car insurance. But now when we have health insurance we say "oh no health insurance covers your routine doctor, it's going to cover some aspect of your drugs if you get a prescription, it's going to cover procedures from other people in this case because everything is pooled."
But you don't see your progressive car insurance company pay for your oil change. That's a different thing. That's routine care. And I think if you reduce the cost of entry into medical devices and pharmaceuticals, so you reduce back the power of the FDA, you would naturally see health insurance go back into the proper insurance role. You could make an argument on the other way too as if you let insurance companies compete, premiums would go down. People would self-select into consuming health care products or not consuming health care products more effectively. That would drive down the cost.
But I think the primary problem here is there's a restriction of access to medical devices and to pharmaceuticals and once you allow for a market and that health insurance no longer competes on those margins it would compete on margins of trying to ascertain risk of whether that would happen or not down the road.
Petersen: So when you talk about pooling or when you talk about making approval cheaper, is that the system where two or more countries agree that a drug only needs to be approved in one of the countries to be allowed in all of them?
March: That's one method. I was thinking more along the lines of within the United States could have private companies that would give you gold and silver standards of approval for pharmaceutical X and drug Y. And then people based on that would decide, okay I want to take this drug or I want to take that one, or physicians would have more access to information based on that than waiting for the FDA to approve. That's more what I was thinking about.
On an international level that gets interesting because developing a drug in Europe and in Canada is completely different than developing that in the United States. The difference in the rigors of the approval process is what drives a lot of those conflicts but in terms of how you agree that everyone is going to come up with the same approval process method, I'm less optimistic about that because I think there's a public choice story behind it. Pharmaceutical companies want the approval process to be tough. So, like you said you can't develop pharmaceuticals in your basement despite your chemical knowledge.
I do think there's more of a hope in the future though for less emphasis on FDA approval and more for private raters or private ratings to come in and say these drugs have been shown safe or for pharmaceutical companies to interact with private laboratories or clinical testing facilities to say, okay we passed these tests, and we communicate that our product is safe without the FDA
Petersen: Right. And at the very least you could remove the effectiveness criteria from the FDA. Just say that the president or Congress could just tell the FDA, your job is just to check safety. Now if people want to take an ineffective drug, as long as it's safe they can do that.
There's the idea of right to try. Have you heard of that?
March: I have a segment of that in one of my pieces. I think that's very interesting because that's completely illegal action but you have certain states that will say okay if a drug is within phase three---that's when we start to do the safety testing with the FDA---and you say someone has an illness, they're in an insufferable pain, we know they're going to die, let's give them a shot to take this drug. And whether or not that helps or not is kind of secondary but it's a circumvention like we talked about earlier of the going around the FDA, which is a federal governing body, you are not supposed to be able circumvent that at the state level.
But you go around and you give people access to potentially life-saving medication. But me being more of a market-oriented economist, I wonder what if you did that not just for life-saving drugs but for other drugs? And granted there are risks with every single drug, basically including water has certain risks to it. But given that there are risks associated with every drug, what would emerge in a freer market where you could better ascertain the safety of these drugs or the efficacy of these drugs?
Petersen: So do you have any closing thoughts, anything we didn't mention?
March: I guess one last concluding thought with regards to health economics I just want to reiterate that health economics is fundamentally a question about which set of institutions is best able to deal with uncertainty. And uncertainty in the sense where we just don't have clearly defined answers. Who would be better able to protect the population of a country from an epidemic or who would be better able to take care of the mentally ill, which is a set of illnesses we don't know very much about, or who is better able to find alternative uses of pharmaceuticals given their potential potency to be able to help people, and the potential side effects?
And the debate is still very lively. It's to what level do we need centralization in order to answer these questions and to what level do the discovery processes of the market---for lack of a better word---how are we able to address these questions better? My research asks a question of if you don't have centralization what is the alternative? What are examples---not necessarily of entirely free health care systems---what are examples of private mechanisms working in the medical field and thus far I've found pretty convincing results that the private market is able to handle some pretty difficult situations, some pretty uncertain situations and when compared to the centralized alternative they fair fairly well.
Petersen: My guest today has been Ray March. Ray, thanks for being part of Economics Detective Radio.
March: Thanks for having me.
Fri, 23 December 2016
What follows is an edited transcript of my conversation with Judy Stephenson.
Petersen: You're listening to Economics Detective Radio. My guest today is Judy Stephenson of Oxford University's Wadham college. Judy, welcome to Economics Detective Radio.
Stephenson: Thank you very much. It's nice to be here.
Petersen: So, our topic for today is economic history. Specifically we’ll be looking at some interesting research Judy has done on wage rates in the early modern period in London. This period is particularly interesting because it's the start of the Industrial Revolution which leads to a dramatic increase in the growth living standards and of technology and that trend of course is what has shaped our modern world and made it different from the world of the past. So, it's very important of course to understand this period if we want to understand the world as it is now. So Judy, start by giving us historical background. What was the world like in the period you study?
Stephenson: Well, I work mostly on researching London, so urban environments. And London is very developed in this period between about 1600 and 1800. And London becomes the biggest city in the world during this period and as the biggest city in the world it's hugely vibrant, some of the largest merchant houses in the world are there, banking is advanced and developing. Most of the occupations of London are tertiary or service sector, even at this early date.
The river is a huge source of both transportation and work, the port is where much of the capital, both physical and financial, from around the world comes through the city, and the professions and bureaucracy are well established in London in this period. It's growing at all levels of society, from the very poorest to the very richest exponentially. So, if you look at the population growth overall in the U.K. in the late 17th century from 1500-1600 to 1700, that actually is pretty much stable or slightly declining. But the population of London grows by a third or something in that period.
London is this hugely vibrant commercial social and cultural center and it's pretty much overtaken Amsterdam, which has come to the end of its golden age in the mid 17th century, right at this period. So, although the world more generally and in a wider sense can be typified by pre-industrial or agrarian values, London is very commercial in this period.
Petersen: Okay, so, if I were to get in a time machine and go back in time, maybe London would be more familiar to me, would seem, feel more modern than almost any other place.
Stephenson: I think it would be very familiar to you the way of getting around would be a sedan chair or a carriage. You can hire them on the street, in fact you send your boy out to get one. It looks very like Uber, it's a gig economy.
And most people working in unskilled, or who didn't have a trade or didn't have a profession or skill probably didn't have steady jobs. They thought of themselves as having work that they could rely on, but it wasn't wholly reliable and they definitely didn't have a contract that would keep them going, they probably didn't have many rights either. And they probably worked at two or three things and everything---the traditional literature about London in this period is one of inequality. So the very very poor literally scavenging on the streets among the smut because the streets were the sewers in those days, and the very very rich living in these incredibly grand environments with retinues and servants.
It's a golden age for the aristocracy after they had a pretty rubbish time in the 16th century. It's a golden age for the aristocracy, it's a golden age for art, for architecture, for all these things but it is also a period of desperate poverty and mortality. The plague doesn't die out in London until the end of the 17th century, but still very very high infant mortality and living standards are nothing like they become in the later 19th century, after they sorted out all those things. But from a commercial point of view, you might well recognise it.
Petersen: It's very interesting---and of course the whole period is interesting---but it's particularly interesting for what it becomes, really. The rest of the world starts becoming more like London, starting in this period.
Petersen: And so you study wage rate of some of the day labourers and the workers in that period. How have economic historians gone about measuring things and getting data that far back in the past?
Stephenson: Well, data on wages and prices for this period was originally gathered by a guy---Thorold Rogers---who was a 19th century historian who started collecting wages and prices in the mid 19th century and finished 40 years later, literally a broken man. These are seven volumes from around England and he basically went into any long run institution where there was an archive or records, as they were called in those days, and just noted the quantities and prices found in the books.
But it was a huge project way before the days of even print noting, before the days of an efficient typewriter, let alone a computer. It was pretty haphazard as to what he was actually recording but it's very accurate. But he tended to take down labour costs or wages as day rates, and what he mostly found were builders because he was in big Oxford colleges and places like Westminster Abbey which had buildings from the 13th century and had required a lot of building maintenance and surprisingly he didn't find many other wages.
So this way of recording had a sort of half dependence. These day rates because they were the only ones that people could find it was assumed that wages---wage rates are very hard to find but there's always good ones for builders---and it was assumed that builders were the same everywhere in terms of skill levels so these could be comparative.
And Arthur Bowley---who is known as the father of modern statistics, an economist and statistician again working in the end of the 19th century and in the early 20th century---used builders in his first attempts to think statistically about an average wage, an average worker, and to establish a real wage. And Bowley’s work is absolutely seminal in the history of statistics, econometrics, and economic history. And he used Rogers' and others' wage rates of builders. And this tradition carried on as other historians gathered more rates, like Elizabeth Gilboy in the 1930s, and then Phelps Brown and Hopkins used all these people's data when they came up with the seminal Seven Centuries of Building Wages in 1955.
And what Phelps Brown and Hopkins had done was they took all those day rates from the builders, and then they took a series of wages and prices and they created a basket of goods and they offset the wages against the prices and they came up with an index of the real wage or living standards across the ages. And this has been the standard for measuring welfare since 1955. And because it's very difficult to find wage rates for the 18th century for some of the reasons I spoke about a minute ago---not many people have jobs, etc etc etc---the dependence on builders' wages continued until, with the most amazing econometric and advanced econometrics techniques that Greg Clarke and Robert Allen were using, they still use that data from the 1930s.
I think the latest good index Jeremy Boulton made in the early ‘90's, where he collected about 2,700 observations of wage rates. The key thing to remember here is all of these wage rates came from bills in the archives of the institutions. So they’re not really wages. In fact they are not wages at all. So, I don't know if you've ever worked for somebody and been charged out by the day, have you?
Petersen: I have not, but my wife is charged out, she works in data science and yes, she gets one wage and she's charged out to other firms at a different rate.
Stephenson: And what she's charged out is higher, right? So, when I worked in advertising, I cost my clients about 1,800 pounds a day, I saw about 350 of that. What a bloody enormous margin, actually. You got to look at how IPG were not making a really stonking profit on that but you know there's overhead and those kinds of things.
Well, in the 18th century everything, but particularly in the building trades, that's exactly how you dealt with masons or bricklayers or carpenters or labourers. And any economy that has to organize production---and the building they were organizing was pretty big, the Great Fire of London destroyed the old city and was completely rebuilt in about a decade---there's some serious organizational coordination mechanism problems of making all that stuff happen. And the 18th century way of doing it is contract it out. Firms are a series of sub-contracts and so the way wage rates have been collected were the sums that were paid to contractors and what those contractors pay their men were substantially lower than those wages that Phelps Brown and Hopkins had used, or Robert Allen had used and Rogers and people have recorded.
Petersen: Okay. In your paper you mention Robert Allen and he had a hypothesis that based on these faulty rage weights that high wages in London were a contributing factor in kicking off mechanization in the Industrial Revolution. So, can you talk a little bit about that hypothesis and how your new look at the data has, I suppose, called it into question?
Stephenson: Yeah. So, Allen has made the most seminal contribution to the study of the Industrial Revolution. So, the Industrial Revolution is the savored big debate in economic history really and it's a favorite big debate for lots of parts or disciplines within economic history. The history of technology people like it because of the gadgets, the history of macroeconomics and supply and demand people like it because of the factor prices, the history of the organizational people and sociological people like it because of the institutions in the factories.
So it has this broad appeal for everybody who's interested in the economics of the long run. Essentially, the core issue around the Industrial Revolution is it's unexplained. Why did it occur in England before anywhere else? It's this naughty problem that had never really been adequately explained until the early 2000s. Then there were two competing---well not two competing but two complementary---explanations by sort of giants of economic history in the same period.
So, Bob Allen explained it through England being a high-wage economy and Joel Mokyr explained it through a series of innovations and enlightenment and how that brings about sort of an intellectual enlightment in scientific innovation. Allen’s theory was the economists’ theory and still is. And essentially what he proposed is that the high wages of England incentivized the owners of production to substitute capital for labour.
Essentially because of the way series are constructed when you take all those comparative wage series of Amsterdam, London, Milan, Florence, Madrid, Antwerp, Strasbourg, when you sort of put them all together as a real wage series in the long run, the English wages looked substantially higher by comparison, particularly after 1650. It looked like the cost of labour for capital in England was much higher than it was in the rest of North Western Europe or Italy, where you had the traditional textile industries and banking, where there was some quite advanced commerce in places. Allen argued that the high wage economy first of all created those incentives but that also it had created higher human capital and skills, attracted capital to it, to prepare England for industrialization in the long run. But that the trigger was induced innovation through relative factor prices.
And part of his theory also was that coal was cheap and available in England, which is very hard to argue that it wasn't, the coal in China is in Mongolia, the Dutch don't have any they've got coal in the Ruhr, of course. But you know coal has been at the center of English energy requirements for a very long time as Tony Wrigley has written about in a very distinct way actually in a lovely book called Energy and the English Industrial Revolution, which is the kind of thing your children could read.
So the relative factor prices between energy and capital and labour were unique in England is Allen’s argument. So, obviously if you find out that the wages are 20% to 30% to even 40% lower than Allen thought, that presents a problem for that theory.
Petersen: I believe I heard once that Germany had coal but it had to be transported over land and so was as good as useless to them before the age of the steam engine and trucking. Coal is really important. And so Robert Allen felt that high wages in London and in England were important but it seems like this issue of measuring the contract rate instead of the wage rate casts doubt on that, or even---does it close the whole gap between London and the rest of Europe?
Stephenson: Good question. And that really depends on what sort of organizational form or coordination mechanism was in place in other countries.
So,I've looked into this with Amsterdam and Antwerp quite a bit already. I've done some work with Heidi Deneweth who works on the Low Countries on economy and building particularly. She's at Ghent. And we're finding in the way that building is organized in Amsterdam, in London, is that in London very much the state has completely outsourced everything. So, the city doesn't employ people directly, that's too much hassle. It seems like the cost of management to something is very high in England because they outsource everything: the navy, the supply, the whole thing. Bits of the navy are integrated into it, but a lot of it, particularly the supply to it, is outsourced and all building is outsourced. Whereas in Amsterdam the city still employs people who are digging dikes, and looking after canals, and doing maintenance work on public buildings. Whereas in London the comparable projects which would be stopping London Bridge from falling down, or wharfing the fleet ditch and making these canals and things. Those are given to large contractors and the contractors are solely responsible for labour.
Whereas there is some relationship between labour and the city, people are directly employed in Amsterdam, this is indicative only and we need to do a lot more work on comparing contracts in the same types of organizations. And then there's a guy called Luca Maccarelli, who is an established Italian historian of the building industry and industry in Milan generally and he has looked at some of the data for the wages for Florence and Milan particularly and he has shown that the day rate was only part of the wage there. In fact the contractors were throwing food, bonuses, cash savings, access to places to stay, and all sorts of perks at workers to try and induce them to work. So the wage in Italy was probably a little bit higher. In fact, Mark Reilly has said that we've understated Italy’s by 15-20% and then the person who's done the most work on France so far is Vincent Geloso, who's shown that the Strasbourg wages are probably problematic.
But all this comparative stuff is at a really early stage. And we need people to get out into the field, the way I've been in the field in London, and look at more the form of employment and the form of the wage in those places. And really understand, the figures that we've got are they real or have they got other sort of recording factors like I've shown in London? So it's too soon to say although we started work on that.
Petersen: So, for the modern era we have people collecting data and they're making a big effort to collect the same data across time and across place. Surveys asking the same survey question to everyone, or government data and making sure it's collected in the same way every year but when we're going back to the past, of course there was no one in the year 1700 collecting data on Italy, and London, and Amsterdam, and all these different places. And so we have to stitch it together from what is available and often that's very different datasets.
Stephenson: Exactly, and different types of records. So, it may be the case that all the records are a bit skewed and you know there'll be a new schema once we have all the new data together that does reproduce the Allen’s story. And remember that we need to take the prices of goods into account. It's a real wage calculation he's done not just a nominal wage calculation. But until we've done that, what we do know is the living standards in England were not what Allen thought at the moment but you've got to do the whole comparative thing to know.
Petersen: So, how do you distinguish the skilled from the unskilled? How do you make sure you're comparing the same kind of labour?
Stephenson: That's a good question. Traditionally pretty much everywhere in Europe we've gathered two types of wage: a skilled wage for what we call craftsmen and craftsman are people who have completed an apprenticeship, who are qualified, that's the idea. So, a mason who has studied seven years in England---doesn't seem to be as long anywhere else---or a carpenter who has studied in the long run. So, who has invested time in the development of the human capital and acquired skills and then we think about the unskilled person as a counterpoint as being the labourer.
And this is another important distinction because you know building labourers are actually of two kinds: there's the completely unskilled guy. Actually there are three kinds: there's the completely unskilled guy who's basically just handing them nails or wheeling a barrel around. But then there's the more skilled or semi-skilled assistant who actually is doing a lot more than that, who is preparing the work for the craftsman, who knows which tools go with which materials and who is fully assisting a craftsman and they couldn't really do the work without them. And you call that semi-skilled. And then there's a labourer who is hired really for their brawn. They've got a premium for being extremely strong and what you tend to see in building accounts is people who are actually hired by the load. They get 2 shillings and 8 to move a ton over a day or something---and probably need more than one man to do that---but so there's a brawn premium in these labourers or unskilled.
And actually from Phelps Brown and Hopkins onwards we've taken this semi-skilled or brawn wage to be the unskilled wage, but these people aren't unskilled. Whereas the unskilled, the guy wheeling the barrel, or just picking out nails was paid a lot less than those. So, if the rate for the semi-skilled guy was 18 pence a day in 1700, the rate for the unskilled guy was 12 to 14. So you can see there's a considerable premium in here. That's another thing that colours our understanding of welfare because usually it's the unskilled or subsistence wage that the macroeconomist is interested in. They relate unskilled and subsistence even though they maybe should not. It's that unskilled wage that is an indication of supply and demand in the labour market, and the draw of that. So taking building labour to a semi-skilled to be unskilled leads to some problems because it implies that unskilled people in London could afford four times the subsistence basket of welfare goods in 1700, when actually they could barely afford two.
So, if you're going to use a welfare basket these rates have a real issue and the distinction between skilled is…
Petersen: So, the reason maybe we care more about unskilled wages is because that's the wage that you'd expect to see in other places in the economy. For instance unskilled work in agriculture or working in a shop or things that we don't have data for we can sort of guess because presumably there's a labour market and people have mobility and if there was too big a gap between wages for different unskilled jobs then people would move, they’d arbitrage away that difference. So your paper, it has some sort of case studies. You have data from particular construction projects. I thought those might be interesting to go through. So, one of them is the reconstruction of St Paul's Cathedral after the Great Fire of London, which is a massive project, could you talk a little bit about that?
Stephenson: Well, yes it's a famous project because the old St. Paul’s had stood since I think the 14th century. It was this you know cultural and emotional symbol for Londoners apparently, and it had been redesigned---the front had been redesigned---by Indigo Jones, the kind of father of classical architecture in England. And it was completely destroyed by the fire and this was a sort of symbolic task to rebuild and so Christopher Wren hailed the King, came up with the design and you know Wren is pretty much the father of modern architecture and he's this enormous intellectual as well as architectural figure, he's very much part of the enlightenment.
So the project lasted about 35-40 years, so they declared it finished in 1711 and the Great Fire was 1666 and it's still there today, absolutely intact, it survived the Second World War. So it's this incredible and very emotive building. The interesting thing from a work point of view is it's very much a craftsman's building, it's not an artist's building. So there is sculpture there, there is painting but nothing like a European cathedral like St. Peter's, St. Paul’s is very much a display of English craftsmanship and baroque style and most of it is stone faced.
So, I have these wonderful papers, which are the day books of one of the Master Masons, one of the contracting masons who built the south west tower on the west front. His name was William Camster, his father was also a contracting mason on a separate contract and in the network of masons who served, ran and worked. We’d ran over 30 or 40 years and he was on site for about 10 years of the project from 1700 to 1709 or so and some after and I have his day books right, years of this, where he records every single man that was working for him and what they paid him. So, it's got an appeal because you can go and see what they did---which is very rare---working on the 18th century that you get some wage records and you can actually see the product as well. So, it's quite nice from that point of view.
So, from an economist's point of view the interesting thing is the way that they contracted the construction because they just started out one contract at a time and then if it worked, they’d go "Yes. We'll do that again." So, they had these repeated idiosyncratic contingent claims contracting going on and on and on and obviously disputes arise and they resolve them, or people drop out and they get new contractors. But the whole thing is basically on a rolling contingent claims contract what Oliver Hart and Holmström said could never happen. Oliver Williamson would have had his head in his hands.
But the other notable thing is that the contractors financed this really because the Crown didn't pay them. It did pay them but the Crown and the city, they leveraged the coal tax but mostly people waited two or three years on contracts to be paid. So, the cost of financing that was just swallowed up by the contractors, it was in the price. And that's one of the reasons why you see a margin on labour and materials. But the interest costs for St. Paul's were as a total of the entire bill over 35 years about 20%, and very little of that had been lent by citizens and the city, a lot of that had come from the contractors themselves through just rolling over bills.
Petersen: That's interesting. So, we know not only what they were paying their day labours, but also implicitly we know the interest rate for that time.
Stephenson: We do. Yes, 6% for to and from the cathedral. Six percent on an annualized basis. Stephen Quinn and Temin and Voth have found higher rates, above 8% for some private lending around the same time. And it is likely that these contractors will have had to have done some private borrowing or lending within their networks to keep rolling this finance over. Because they will have bought the stone, they will have paid the carter, they will have paid the labours who are working for the carter, they will have paid the craftsman, so they may have well have to borrow to do all those things but 6% is what they got from the cathedral.
But the real question is then, so these networks of supply chains are surviving on that kind of finance. So really big contracts essentially on a very high level of trust or a very high level of interest. We need to do more work to find out which, but it does seem like these networks---because they repeatedly contract---they have good information and it's more effective than you would imagine those types of contracts to be.
Petersen: And of course they're contracting---it's the government paying for it ultimately right?
Stephenson: Yes, and it's financed through the coal tax which is also interesting. Bearing in mind the price of coal is relevant to development at this time. The coal tax was levied at a shilling a cauldron after the Great Fire to rebuild the churches for the city and then it was maintained through and into the Georgian period by parliament who kept sort of either adding to it or continuing it and apparently it was detested and greatly avoided.
But we definitely need some more research on how this work, and how people avoided it, and and what it did to coal consumption. Because you find in the accounts that the coal tax, they're expecting this much per year from it and consistently about 10 to 15% less comes in. So they have to turn to the city or to commissioners and people who might have money to borrow from them and tide it over. So financing the thing was unconventional.
Petersen: So, we usually think of government debt as being highly safe at least in the modern period but back then it may not have been.
Stephenson: Yes, and I don't know what the connection to other Treasury things are and Bank of England and everything. At the time it looks like it's just private between St. Paul's and the commissioners for St. Paul’s and either citizens or contractors and that it wasn't actually securitized as a state promise, but there may have been connections. It's something I haven't delved into enough.
Petersen: So, another construction project, in this case it's a maintenance project, is the famous London Bridge which of course in the nursery rhyme "London Bridge is falling down" which apparently was true. Can you tell me a little bit about that?
Stephenson: So, well London Bridge was it was built the end of 13th century and it's 19 stone piers across the Thames. It must have been the most fascinating and amazing structure, it stood for pretty much 500 years, but by the end of the 16th century in the early 17th century it is falling down.
And the Thames because this sort of development further up river as well, the Thames is actually a very strongly flowing tidal river at this stage and the force of the water force through those 19 piers is wearing away. So they built wooden starlings, so they built a wooden constructions they look like boats around the piers, trying to guide the water through and these of course made the problem worse and they made the waters faster. So to pass under the bridge in a boat at high tide apparently you could drop 10 feet through the rushing rapids beneath. So you pay the shootsman who was contracted by the bridge to guide you through the piers. And it was really quite dangerous.
So, the bridge has a number of maintenance problems: the first is the starlings the mason repairs. The second is until the mid 18th century the bridge was covered in housing just like Ponte Vecchio in Florence as a proper living bridge the housing was also in a state of disrepair and some of it owned by the bridge and some of it owned privately. So the bridge tried to take over the property that isn't theirs and then get rid of the housing that isn't working, it's falling into disrepair over this period.
And there's a guy called Mark Leighton who's written a brilliant thesis at the University of Leicester all about how the bridge masters and the City of London get rid of the housing in the mid 18th century.
But essentially the bridge is the only crossing from side to side, from north to south or vice versa until 1750. There isn't another way to cross the Thames. There was a little wooden bridge up in Putney in 1729. London Bridge it's got all of the infrastructure of London basically. And so it's hugely congested and falling apart. So, the maintenance bills are are huge.
Oh yeah as well. So as well as the starlings you then have water wheels which are basically bringing the water from the New River Company and the Thames to give water to the city. So those are also in operation, these whole teams of little engineers looking after the water wheels. So it's a really busy bridge it's got people scrambling over it all the time looking after it, not before the shootsman or anybody else doing any work on it and those people were paid not very much.
The master craftsmen were paid for their contract and got a really good rate for looking after the contract, and then they hired others piecemeal so they'd hire well-known carpenters or masons. But they'd never have regular days or regular work and then the labourers were paid by the tide.
So at high tide you could work on the bridge or you could work on the upper bits of the bridge if you were in a boat; at low tide you could access all those damaged starlings and piers. So at low tide they worked in boats and that meant that in the winter you might only get four tides in the week depending on when the tide and the light coincided, in the summer you could maybe get 11 and then when they didn't need any work done you wouldn't get any tides at all.
So, there were quite a number of people. It varied from teams of 12 to teams of 80 or so who were employed in this fashion in a piecemeal just waiting for a little sort of bit of peace work on London Bridge. So, it's an interesting bit of contact with the sort of materiality of the world as well, everything was literally ruled by when the water came in.
Petersen: Right. And since it's such a long period of time, I suppose you can get a decent time series of that change in the wages over that period.
Stephenson: Yes, from a labour economist point of view, one of the fascinating things about the 18th century is this persistence of rates, particularly for labourers, it's a very monopsonistic market it's a classic monopsonistic market. It's a wage posting. One where employers basically will see who will come at this set wage and what happens is they don't change the wage.
The fluctuation happens around the number of days worked. So people don't turn up, or don't get work when there is less to do. The number of days fall away and when there is high demand, an upward-sloping curve, the number of days go up for everybody.
But a transaction cost analysis would suggest that the 18th century employer understood the costs of such information very well indeed because they weren't going to have any asymmetry of information. They were going to post ‘this is what you get,’ particularly the unskilled hand and the time or the amount of work that you got was how the fluctuations and the dispersion occurred.
So there's a lot more work to be done on that because nobody's really ever looked at this kind of market in those modern terms, understanding it as monopsonistic or having search or information costs.
And it's only with these levels of micro data that we can begin to understand that it might have worked like the labour market we know. Until about 20 years ago people thought---until much more recently actually, the last paper I can see about this is in 2007 by Leonard Schwartz---that essentially before 1840 it's a market dominated by custom not by market forces. But on a micro analysis it looks very much like there are just the kind of market forces at play that we understand today. So, wage posting at the lower level, a little bit of wage bargaining at the skills level, and supply and demand do actually equilibrate but not through the rate, through the number of days worked, which of course brings about the income.
Petersen: So, the third construction project you discuss is the Westminster Bridge, which I suppose is that that second bridge you mentioned earlier.
Stephenson: Yes, the second bridge, the cross rail of the 18th century.
Petersen: Is that interesting from an economic history point of view, we have a lot of data from that?
Stephenson: You get less data because I don't have anybody's nice little book saying who came in and on which day, so I don't have the number of days' work for Westminster Bridge.
The interesting thing about Westminster Bridge is the different kinds of contract. Everybody, they were making contracts for hundreds of thousands of pounds with the masons and engineers and they also had a contract with a guy who had a horse and three piles for 27 pounds for the year. So, you've got this variation in value or risk from a financial point of view which is quite dramatic.
But the key thing is that at Westminster Bridge you find the tide and the day model as well. So a much smaller number of days than you would expect that are actually billed to the institution, but this means of paying by the tide, which protects productivity from an employer's point of view. So that also occurs at Westminster Bridge.
And what you find is that people are doing quite advanced and quite dangerous work, but without the danger money. They were given gin instead. So they sank caissons, this is one of the earliest uses of caissons designed to create the piers. So these things are experimental to say the least, and they put people in diving gear into the caissons and it must have been terrifying, you know, what if the stuff gave way and they went under the Thames. In February, because that's the time you want to be in the Thames! You know, in 18th century diving gear. And got them to work on the masonry or on the carpentry on the bed of the river for the same rate as you could be having quite a nice comfy time carving out something simple, or doing some basic maintenance work on a couple of windows on some bridge houses. So, yes very dangerous work. There seemed to be a lot of skill available, ready to do that work at those kinds of rates.
Petersen: So, where do you see this research program going in the future?
Stephenson: There's obviously an issue about the rate of welfare, the real wage and welfare in the 18th century and to be honest if we're going to make a serious contribution to that, we need to start looking at people who aren't builders.
I've started a project with the Cambridge Group for the History of Population and Social Structure, where I spent a year before I went to Oxford, on London occupations. Because that Cambridge group, they are the masters of working on occupational structure in the long run in England and we are sampling institutions that bought goods and services widely. And the kind of bills and the kind of businesses that they deal with to understand what sort of people were employed where. So, to try and get some welfare and some wage data beyond builders that we can normalize and use properly.
I think the second direction for this research is to understand how labour markets worked. Was there such a thing as custom? Because one of the old things we believe about the Industrial Revolution, and this idea doesn't really stand up anymore, but it's something that's still emotionally alluring for a lot of people, we see the Industrial Revolution as that sort of capitalism thing and our version of capitalism got going.
But if people already understood transaction cost economics, and Christopher Wren writes like Oliver Williamson sometimes, then maybe the market didn't start then, maybe they already had a view of the market. And there are some organizational things that we need to be looking at from that point of view.
Essentially the 18th century will always be interesting because it is a free market. It is unregulated, there's no corporation tax and the finance is not state controlled at all. This is before the gold standard, this is before states get interested in managing money in a big way. There is monetary policy but it's not in the same way we conceive it now. And so labour and capital have a relationship that is unencumbered by the state, by government, by regulation.
So what is the outcome of that? Was it a race to the bottom, was there any equilibrium, what happened? So, there's a contribution to be made to studying that as a sort of a history of ideas thing as well. It's hugely rich but those are broadly the three things that are on my agenda right now.
Petersen: My guest today has been Judy Stephenson. Judy thanks for being a part of Economics Detective Radio.
Stephenson: Thank you very much. I very much enjoyed talking to you.