Speaker 1: This is Masters in Business with Very Ridholts on Bloomberg Radio.
Speaker 1: This week on the podcast, I have an extra extra
Speaker 1: special guest. His name is Michael Spence, and this is
Speaker 1: a conversation just filled with wonky goodness. He is the
Speaker 1: winner of the Nobel Prize and Economics from two thousand one,
Speaker 1: effectively on information theory, about how information impacts market structures.
Speaker 1: We talk about asymmetries and gaps and really how digital
Speaker 1: economies are just changing the entire world. Um Spence has
Speaker 1: had a number of really fascinating forecasts that have all
Speaker 1: turned out to be quite prescient. Uh. He's almost blase
Speaker 1: about it. He he describes them as all beevitable. Uh.
Speaker 1: This is really a fascinating conversation. If you're interested at
Speaker 1: all in information signaling, in how economies di elop and grow,
Speaker 1: about the impact of not just technology but government institutions
Speaker 1: and intellectual capital, you're going to find this to be
Speaker 1: an absolutely fascinating conversation. So, with no further ado, my
Speaker 1: interview with n y Us Michael Spence. This is Masters
Speaker 1: in Business with Barry Ridholts on Bloomberg Radio. My extra
Speaker 1: special guest this week is Michael Spence. He is the
Speaker 1: two thousand and one Nobel Prize winner in Economics for
Speaker 1: his work on the dynamics of information flows in markets.
Speaker 1: He is the former dean of the Stanford Graduate School
Speaker 1: of Business. He is currently a professor at n HYU Stern.
Speaker 1: He is a senior advisor at General Atlantic, a very
Speaker 1: large private equity firm which manages about thirty five billion dollars.
Speaker 1: Michael Spence, Welcome to Bloomberg. Thank you very It's great
Speaker 1: to be here. So I'm fascinated by the work you
Speaker 1: do um your Nobel Prize. I'm going to take what
Speaker 1: is normally a somewhat esoteric research area and see if
Speaker 1: I can make it understandable how people make decisions when
Speaker 1: critical information is hard to find. Is that a fair oversimplification, Yeah,
Speaker 1: it's certainly part of it. Yep. So so tell us
Speaker 1: about that. What how did you find your way into
Speaker 1: that space and what are the dynamics of information flows? Well,
Speaker 1: so I got I got interested in this when I
Speaker 1: was a graduate student, probably little color commentary. By the
Speaker 1: time I had finished my general exams, which is the
Speaker 1: first two years of a PhD program. I've been in
Speaker 1: school up through high school, thirteen years in Canada. UM.
Speaker 1: Then I had four years at Princeton, These were all
Speaker 1: wonderful experiences. And two years at Oxford UM a road scholar,
Speaker 1: A road scholar, yeah, doing mathematics eventually and UM, and
Speaker 1: then two years in the PhD program. And I've had
Speaker 1: about enough, and so I went to one of my advisors,
Speaker 1: he's a great friend, Dick Sauser at the Kennedy School,
Speaker 1: and I said, I think I'm gonna quit. And he said,
Speaker 1: what are you gonna do? And I said, well, I mean,
Speaker 1: you know, I'm tired of, you know, talking to myself
Speaker 1: and sitting in a library and stuff. So UM he said, uh.
Speaker 1: He said, the problem is you don't have enough human contact.
Speaker 1: You should teach. And so he did two things for me.
Speaker 1: He he gave me a little bit of his course
Speaker 1: on social choice theory, which I screwed up royally my
Speaker 1: first outing as a teacher. And the second thing he
Speaker 1: did is he made me what he called rapport tour
Speaker 1: of a faculty seminar in the then new, new, one
Speaker 1: year old Kennedy School. It was extraordinary group of people,
Speaker 1: you know. It was Francis Bathor and um Lestero came
Speaker 1: down to visit from m I T and Ken Arrow,
Speaker 1: Tom Shelling, Uh, just as a quite a run of
Speaker 1: Nobel laureates and that, oh no, it was pretty amazing.
Speaker 1: Not all of them have been recognized in that capacity then,
Speaker 1: And so that was fascinating. And my job was to
Speaker 1: turn what was a kind of general discussion you know
Speaker 1: how those go all over the place into nine pages
Speaker 1: that made it look like just brilliant you know, linear exposition.
Speaker 1: So I did that and I had a lot of
Speaker 1: fun doing it. And Kenn Arrow, to who is dying day,
Speaker 1: said that that was the thing he thought was my
Speaker 1: greatest skill, Rappert touring um. In the course of that,
Speaker 1: Lessera came down and started talking about what he called
Speaker 1: statistical discrimination. So I don't want to, you know, make
Speaker 1: this too nerdy, but basically, whenever you have okay, when
Speaker 1: when you have missing information, then basically you get people classified,
Speaker 1: you know, by what you can see or detect as
Speaker 1: opposed to what you don't see. Uh, and Less's idea,
Speaker 1: and that automatically produces discriminate nation. So what happens in
Speaker 1: any you know, economic or social context is that the
Speaker 1: members of a group who are otherwise indistinguishable from each
Speaker 1: other I mean, in in your world, think of asset classes, okay,
Speaker 1: um is a little bit like this. Things get lumped
Speaker 1: into an asset class because they're supposed to be sort
Speaker 1: of similar and the end telemarkets get deep informationally, you know,
Speaker 1: you don't see all the differences, so they tend to
Speaker 1: be averaged. Right When you average a bunch of diverse
Speaker 1: entities that are in one of these you know, silos
Speaker 1: that are distinguishable from other silos by what's visible or detectable,
Speaker 1: then you basically get the people at the upper end
Speaker 1: of some quality spectrum get treated as the average and
Speaker 1: that's not good. And at the lower end they get
Speaker 1: treated as the average and that's great for them. So
Speaker 1: you're discriminating against the high quality end of the spectrum
Speaker 1: and you're favoring the low quality. So this has to
Speaker 1: have huge implications for people looking at, let's say, making
Speaker 1: investments in either private or public companies. Absolutely, yeah, son,
Speaker 1: But then it gets complicated, I mean for sure, um
Speaker 1: So what so the phenomenon that this gives rise to
Speaker 1: in markets is the one George Jakerlof wrote about. Although
Speaker 1: the insurance people have known it for years, it's called
Speaker 1: adverse selection. And what happens in that in that context
Speaker 1: is basically have what I just described, this quality spectrum
Speaker 1: that has the unfortunate properties. You can't tell the difference
Speaker 1: between the the entities, think of them as things for
Speaker 1: sale and differing in quality. Used cars is the example
Speaker 1: he used. So what happens in a market like that
Speaker 1: is that the price reflects the average quality, and the
Speaker 1: people at the top end of the quality spectrum say
Speaker 1: that's not a very good price for me, right, and
Speaker 1: they take their product out of the market from the
Speaker 1: top end, and then the average quality falls and eventually
Speaker 1: people figure that out and the price goes down, and
Speaker 1: then the people at the top end of the remaining
Speaker 1: spectrum say that's not a very good price. I'll take
Speaker 1: mine out right. So that's that's the origin of the
Speaker 1: term adverse selection. People are selecting in and out of
Speaker 1: the market, and it's adverse because the top end of
Speaker 1: the quality spectrum leaves. First, let's talk about your book,
Speaker 1: The Next Convergence, because it's such a fascinating application of
Speaker 1: of information flows. Uh, there's a quote in the beginning
Speaker 1: that I just found absolutely mind boggling. From seventeen fifty
Speaker 1: to nineteen fifty, the average income of people living in
Speaker 1: countries that underwent the Industrial Revolution, so their incomes rise
Speaker 1: twenty to forty times versus the non industrialized countries. And
Speaker 1: this was only fifteen percent of the world's population. Is
Speaker 1: that about right X that's amazing. Yeah, So the growth
Speaker 1: rates weren't breathtaking, you know, probably on the neighborhood of
Speaker 1: two in real terms, are on a per capita basis,
Speaker 1: but if you if you do it for two hundred years,
Speaker 1: you get a fairly big ink magic of compounding exactly,
Speaker 1: so that that was basically it. Then then you know,
Speaker 1: the the other a living in countries that we now
Speaker 1: call emerging economies. Most of them some of them haven't
Speaker 1: emerged very much, but uh but there. But that's the
Speaker 1: other group, and they were held back by m essentially
Speaker 1: uh global economy that wasn't really open and the colonial
Speaker 1: structure that was the governance. So the rest of the
Speaker 1: book you basically say, well, seventeen fifty to nineteen fifty
Speaker 1: was the Industrial Revolution. The next hundred years, I think
Speaker 1: you referenced nine six of the world's population will join
Speaker 1: the affluent. That's a big, bold number. We're about halfway
Speaker 1: through that process. Our maybe a little more. How accurate
Speaker 1: was that forecast? And and how is this actually happening?
Speaker 1: So I think it's well underway. I mean, it may
Speaker 1: have been a bit optimistic, but you know, China looks
Speaker 1: like it's well on the way. It's a high middle
Speaker 1: income country with a very good chance of being, you know,
Speaker 1: a high income country, admittedly at the low end of
Speaker 1: the spectrum in another ten to fifteen years. India is
Speaker 1: a bit further behind, but there, you know, humming along.
Speaker 1: You had them those two together, and you've got two
Speaker 1: point I think it's seven billion people, which is a
Speaker 1: significant fraction of the world seven right, Yeah, that's half
Speaker 1: of my sixty percent. You've got you know, the rest
Speaker 1: of Asia. That some of it came earlier, some of
Speaker 1: it came later, and so on. So it's it's I
Speaker 1: think this convergent process is going to be very hard
Speaker 1: to stop because people, because the structures are there to
Speaker 1: enable it, and because people have gotten the hang of
Speaker 1: it that it's actually possible. You discussed in the book
Speaker 1: that post World War Two Japan was a very unusual
Speaker 1: example compared to other so called developing nations. What what
Speaker 1: made Japan so unique, especially over that seventeen fifty to
Speaker 1: nineteen fifty era. Yeah, so Japan is a kind of hybrid.
Speaker 1: Um so most of Asia, by the way, and right
Speaker 1: after World War two, Asia was by far the poorest
Speaker 1: part of the world, worst in Africa, worst in Africa. Yeah,
Speaker 1: And they and the economists at the time, you know,
Speaker 1: when asked development economists, when I asked, you know, where
Speaker 1: was the real trouble going to be? They said Asia.
Speaker 1: Many of them said Asia, because Asia doesn't have natural
Speaker 1: resource wealth on balanced and Africa is by far the
Speaker 1: richest royal diamonds, you know, you name it um. And
Speaker 1: that turned out not to be a good guest, because
Speaker 1: that turns out that the kind of real capital that
Speaker 1: enables this growth as people provided they're educated and so on,
Speaker 1: and not not just uh, you know, mineral wealth. Yeah.
Speaker 1: So so basically, I think, you know, what the situation was,
Speaker 1: Japan was a hybrid because it had gotten to middle
Speaker 1: income status. And the reason it got there is that
Speaker 1: in eighteen sixty eight, the Meiji Restoration, it abandoned the
Speaker 1: policy of isolationism, embrace trade. Embrace trade, braced openness, and
Speaker 1: they had started to modernize. And then that, of course,
Speaker 1: World War two wasn't and they were an imperial power
Speaker 1: you know, all over Asia, you know, China, Korea, etcetera. Um,
Speaker 1: So that World War Two was a huge setback, but
Speaker 1: basically they got back on track. So over the same
Speaker 1: period that that post industrial period, pre war post industrial period,
Speaker 1: how come China fared so much worse than Japan. So
Speaker 1: there there's two kind of crucial ingredients. And in the
Speaker 1: post war growth that we've I've seen and by the way,
Speaker 1: this is growth that we've never seen before. I mean
Speaker 1: we're talking about extended periods like two and a half
Speaker 1: decades of five, six, seven growth even higher in China
Speaker 1: just never happened before. So one of the things I
Speaker 1: was trying to do in the book is explain how
Speaker 1: you could do that? Right? How could you have a
Speaker 1: max of two you know before that or two and
Speaker 1: a half? How could terms yeah in real terms, how
Speaker 1: could you have advanced countries growing at max three in
Speaker 1: real terms? And these people are growing at seven, eight
Speaker 1: and nine. And the answers they're catching up, right, all
Speaker 1: of that technology that you need to drive growth in
Speaker 1: the long run. You know, the the solo insight UH
Speaker 1: was already developed, so it just had to be brought
Speaker 1: in and adapted. In other words, this isn't one country
Speaker 1: amongst many that are all emerging at once. When you
Speaker 1: take an emerging economy and they're surrounded by developed economies,
Speaker 1: that's an accelerant provided they're open and provided their investing
Speaker 1: at high enough rates. So so well, clearly China is
Speaker 1: making massive investor. Do you consider them open enough to
Speaker 1: continue taking full advantage of what the rest of the
Speaker 1: globe can do for their growth at the moment? Yes,
Speaker 1: and certainly historically once they decided to open in ninety
Speaker 1: eight undergoing chapin Um. Now, is it logically possible that
Speaker 1: they could close themselves off enough to to put a
Speaker 1: major dent in their growth, Yes, it's it's it's unlikely,
Speaker 1: I think, but it's possible. You asked about the history
Speaker 1: of China. So China had a revolution in nine the
Speaker 1: Communists took over. The Communists, on the positive side, probably
Speaker 1: had the intention of making everybody better off. Right that,
Speaker 1: you can find a lot of governing structures in the
Speaker 1: developing world where the governing elite, whoever they are and
Speaker 1: however they got there, are doing something other than trying
Speaker 1: to make people better off. Lots of corruptions. There's mineral resources,
Speaker 1: royal all I kind of thing. So if they're doing that,
Speaker 1: nothing good is going to happen. The Chinese weren't doing that,
Speaker 1: and they did put a hell of a lot of resources,
Speaker 1: given the side the low levels of income in the
Speaker 1: economy into education. What they didn't do is run a
Speaker 1: market economy. So for the first twenty nine years they
Speaker 1: basically got nowhere, but they built assets that were useful.
Speaker 1: And when they changed the the development model a growth
Speaker 1: model to opening up and and using markets and initially selectively,
Speaker 1: then it just took off like a rocket. That was
Speaker 1: the post Knickson era. That was the post Knickson eira,
Speaker 1: So it was they date the Chinese date the reform
Speaker 1: process from Let's talk a little bit about job market signaling.
Speaker 1: We discussed some of that before. You've done a lot
Speaker 1: of work on this tell us about the origins of
Speaker 1: job market signaling and how it's evolved over time. So
Speaker 1: the origin of it was was that discussion that we
Speaker 1: had earlier that had to do with informational gaps, so
Speaker 1: that the adverse selection problem is basically what happens in
Speaker 1: markets if you can't close the gaps, and then we
Speaker 1: talked about brands as a way of closing it. What
Speaker 1: do markets do, They're going to try to close the gaps.
Speaker 1: That's one of the things that between buyers and biber
Speaker 1: doing buyers and sellers is the best way to think
Speaker 1: about it. The second thing is signaling the things that
Speaker 1: the the the sellers can do to convey actually accurate
Speaker 1: information in the market. Um uh. The third thing that
Speaker 1: we do collectively is regulate. Right, So financial markets have
Speaker 1: enormously large gaps, uh. In principle um So it isn't
Speaker 1: a great surprise that every set of financial markets in
Speaker 1: the world has disclosure requirements, and they're pretty stringent, and
Speaker 1: the penalties are pretty high for violating it, and and
Speaker 1: and and when those disclosure requirements are not there are
Speaker 1: not enforced, then you get bad misbehavior in the markets.
Speaker 1: So what you see in the developing world all the time.
Speaker 1: So there's there's that's interesting you bring that up because
Speaker 1: it makes me think of the way we approach regulation
Speaker 1: in some areas is to prevent a behavior, say this
Speaker 1: behavior we're not going to allow. There are other aspects
Speaker 1: where we say, well, we're gonna let you do what
Speaker 1: you want, but you have to make these disclosures, so
Speaker 1: buyers know, most people don't read the fine print. They're
Speaker 1: not reading the credit card disclosures, they're not reading their
Speaker 1: brokerage account disclosures. Given that, how does that information make
Speaker 1: its way into the marketplace? Is the signals still there?
Speaker 1: If of us don't read the disclosures, maybe it's of
Speaker 1: us don't read it. Yeah, no, the answer is no,
Speaker 1: it's not. And then you need if if it's important
Speaker 1: to close that informational gap, then you then and you
Speaker 1: can't close it, then you have to do do something else.
Speaker 1: So we do all kinds of things. So we assume
Speaker 1: that there are classes of investors who are not capable
Speaker 1: of understanding the risk characteristics of certain kind asset classes,
Speaker 1: and they're simply precluded from it. And you know, meaning
Speaker 1: if you're not a credit investor, go into a hedge fund,
Speaker 1: or don't have assets of a certain size, we assume
Speaker 1: you can't withstand the kind of risk characteristics of that
Speaker 1: asset class. So regulation in that sense has multiple avenues,
Speaker 1: and they've done properly. They tend to be pragmatic response
Speaker 1: to to real human behavior as opposed to some kind
Speaker 1: of theory about it. Yeah, quite interesting. What about the
Speaker 1: impact of technology on both signaling in the job market
Speaker 1: and and the impact of regulation. Yeah. So this this
Speaker 1: when I when when the Internet was sort of in
Speaker 1: its early stages, meaning a kind of public property, let's
Speaker 1: call it the mid nineties, people you know, had all
Speaker 1: kinds of theories about what its impact was going to be.
Speaker 1: And I got asked a lot of questions that the
Speaker 1: gist of which we're is this going to close informational gaps?
Speaker 1: And my answer then is the same now, but I
Speaker 1: underestimated something. So my answer was, it's not going to
Speaker 1: eliminate private information meaning information that I have because it's
Speaker 1: me that you know, you're only going to get if
Speaker 1: I somehow transmit it to you. Um. But but what
Speaker 1: the Internet does is it gives you so many access
Speaker 1: at very low cost of so much information that's correlated
Speaker 1: with this kind of thing that I actually think it
Speaker 1: does close informational gaps. And the best example of that,
Speaker 1: I think is, um, what we see now in fintech.
Speaker 1: You know, so you so in like and financial and
Speaker 1: for example, an Ali babbie, you have a massive amount
Speaker 1: of data because they basically they're half the mobile payment
Speaker 1: system in China. They can use that data to issue
Speaker 1: credit to little tiny businesses. There's there's a partially owned
Speaker 1: subsidiary called my Bank that just won an award for
Speaker 1: this using this data to make credit assessments and price
Speaker 1: and price the credit appropriately. And uh and this these
Speaker 1: people are otherwise blocked away. I mean, they can only
Speaker 1: borrow from family and friends. A bank can't either assess
Speaker 1: the risk and and or it's way too costly. So
Speaker 1: this day and this information effectively creates a whole new mark,
Speaker 1: creates a whole new market. I mean, and when we're
Speaker 1: talking about I mean this, my bank has seventeen million
Speaker 1: small business customers. Uh average number of employees five, no collateral, nothing.
Speaker 1: They just look at their credit history, their transaction history,
Speaker 1: transaction history, their payments history, you know, and and their
Speaker 1: online activity. So let's talk a little bit about growth
Speaker 1: and trade. And I want to start with the project
Speaker 1: you did for the World Bank. Tell us a little
Speaker 1: bit about that. It was quite fascinated. Yeah, so they
Speaker 1: they I kind of stumbled into this because I had
Speaker 1: not been a specialist in in um development growth related
Speaker 1: to developing economies, and so I around about two thousand,
Speaker 1: the early two thousands, I got a call um from
Speaker 1: uh some folks at the World Bank who become good friends,
Speaker 1: and they said, would you come and give a lecture
Speaker 1: on investment and growth at the one of the spring conferences,
Speaker 1: the Poverty Reduction and Economic Management? And I said why me?
Speaker 1: And they said, well, you sort of you know, kind
Speaker 1: of a microeconomic focus and pay attention to these things.
Speaker 1: And so I thought to myself, this is this is
Speaker 1: signaling or screening. I thought, okay, so here you meaning
Speaker 1: that yours. They saw the Nobel and said, oh, let's
Speaker 1: have him talk about this. Is that what you mean
Speaker 1: by signaling? No? No, no, no, no was the decision
Speaker 1: I made. So I made the following decision, Barry. I said,
Speaker 1: I'm gonna do this, and there there's one of two outcomes. Uh.
Speaker 1: Either it'll be a disaster and which I'll have learned
Speaker 1: something that I shouldn't be, you know, mucking around with
Speaker 1: the ten thousand people who are the experts in development
Speaker 1: in the world. Or it'll go okay, and then I'll
Speaker 1: learn something else. Right, So it was deliberately a screening device,
Speaker 1: and it seemed to go okay. And from that came
Speaker 1: a Commission on Growth and Development, and the idea behind
Speaker 1: that commission wasn't to do original research. It was approximately
Speaker 1: fifteen years since the Washington Consensus had been enunciated, UH,
Speaker 1: which was it's it came out of Washington. Uh. I've
Speaker 1: temporarily forgotten that John Williamson wrote it. It's been much
Speaker 1: maligned and unfairly to be honest with the Washington Consensus
Speaker 1: is perfectly sensible. Uh. Assessment of what it takes to
Speaker 1: kind of grow and developing and developing. What was that
Speaker 1: assessment said, well, there's a list of things. There's about
Speaker 1: thirteen things that are crucial components. Um. Some people interpreted
Speaker 1: as a kind of you know, uh, turnkey system. You
Speaker 1: can't do that. Every country has idiosyncratic characteristics. But the
Speaker 1: thing that gave the Washington and sense as a bad
Speaker 1: name is it was taken, especially in Latin America, and
Speaker 1: stripped down to liberalize, privatize, etcetera. And UH, and that
Speaker 1: gave rise to kind of accesses and you know, not
Speaker 1: terribly good results. UM. So we decided this it was
Speaker 1: a good time. We had a lot of experience that
Speaker 1: had been accumulated in countries like China and India and others.
Speaker 1: Brazil had started had come out of its um twenty
Speaker 1: five year funk and looked like it was starting to
Speaker 1: grow um, et cetera. It was a good time to
Speaker 1: kryd of figure out what research, what experience and so
Speaker 1: on had taught us about that was useful and could
Speaker 1: we kind of summarize it and give it back. So
Speaker 1: that was the exercise. We wrote a seventy five page
Speaker 1: report based on kind of two years of listening to
Speaker 1: people and uh been thinking about it, and it was
Speaker 1: meant to be an up and none of these things
Speaker 1: are ever kind of you know, definitive, right, it was
Speaker 1: an update. Right now we know this that we didn't
Speaker 1: know before. And the course of doing that work, we
Speaker 1: went and looked for countries that have grown for at
Speaker 1: seven percent or more for twenty five years or more,
Speaker 1: not every year, but on average. And there's thirteen countries. Really,
Speaker 1: because that's a giant number, seven percent. Seven you double
Speaker 1: every decade at se and uh, there's thirteen countries that
Speaker 1: have done that at various points. China's one. Brazil in
Speaker 1: the early post war period was one Korea. They won't
Speaker 1: be surprised you the Timewan easy economy. Japan was in
Speaker 1: that group. Uh, there were some surprises little Botswana. Really
Speaker 1: he was a member of that group. Yeah, uh so,
Speaker 1: different sizes, different government structures. It was it was pretty interesting.
Speaker 1: Were there any consistencies across all thirteen. Yeah, they're they're
Speaker 1: basically all the same growth model, which has come to
Speaker 1: be called the Asian growth model. So it's it's high
Speaker 1: levels of investment funded domestically, openness, including especially foreign direct investment,
Speaker 1: which is the one of the principal channels for technolog
Speaker 1: inbound technology transfer and leveraging the big global marketplace. If
Speaker 1: you try to do this on a standalone basis, it
Speaker 1: just doesn't work. I mean, you look at the demand
Speaker 1: in a country with a per capita income of five dollars,
Speaker 1: it's kind of food, shelter, energy, and not much else.
Speaker 1: So everything we know, specialization and the atom Smith sense,
Speaker 1: you know, taking advantage of comparative advantage. That none of
Speaker 1: that works on a standalone basis a bit. But you know,
Speaker 1: even a country the size of China in the early
Speaker 1: stages is small relative to the global economy. Small economy
Speaker 1: meaning yeah, small economy, not small number of people, but
Speaker 1: small economy, so they can they can grow at very
Speaker 1: high rates without really big coming a major presence in
Speaker 1: the market and starting to turn the prices against themselves.
Speaker 1: Um So in the book you write about China, and
Speaker 1: remember the book was two thousand two or two thousand
Speaker 1: three something like that. No, No, the book is two
Speaker 1: thousand ten or eleven, Okay, exactly. You wrote, Um, China
Speaker 1: is of U S or EU economy in ten to
Speaker 1: fifteen years, it will be the same or bigger. It
Speaker 1: looks like that's a very precedent forecast. Um where are
Speaker 1: we in the process of China passing the EU or
Speaker 1: the US in terms of their economy, not on a
Speaker 1: per capita basis, but just on a growth basis. Yeah,
Speaker 1: and grow. I think they're around sev now on a
Speaker 1: growth basis, maybe a little bit more so we're just
Speaker 1: a few years away. Yeah, it depends on I mean,
Speaker 1: you know, the trade war could put a dent in
Speaker 1: the kind of speed of the trajectory. Uh and and
Speaker 1: a and a natural slowdown is occurring in China too.
Speaker 1: I mean countries you know where they have per capita
Speaker 1: incomes in the team meaning thousands. Um, just don't grow
Speaker 1: at seven percent anymore. The catch up effect isn't as powerful.
Speaker 1: They're generating technology they're becoming like advanced economies, all of
Speaker 1: big numbers just starts to rear its exactly. Yeah, they're
Speaker 1: kind they're they're they're becoming part of the kind of
Speaker 1: global system that generates the technology that enables the growth
Speaker 1: for all of us. So they mature into more of
Speaker 1: a developed nation. So let's you mentioned the trade war.
Speaker 1: Let's let's talk about that. Is how much of the
Speaker 1: trade war and tariffs are heard in China? Is this
Speaker 1: really having a major effect and what is it doing
Speaker 1: here in the United States? Um? So in China, it's
Speaker 1: slowing them down because they still have some dependence on
Speaker 1: the export sector. Um And it's slowing everybody down through
Speaker 1: uh somewhat different channel, which is uncertainty, which means globally
Speaker 1: on globally. Yeah, So in other words, corporations are holding back,
Speaker 1: holding back and making capex and hiring decisions because of
Speaker 1: the uncertainty or know how this resolves? Yeah, where where
Speaker 1: are we supposed to put our supply chains? You know,
Speaker 1: we're just gonna gonna go away, right, There's some things
Speaker 1: that are happening pretty fast. So, for example, China was
Speaker 1: in the process of you know, basically moving the labor
Speaker 1: intensive process or manufacturing assembly, which was the early expert
Speaker 1: growth engine out And the reason has got nothing new
Speaker 1: with the trade war is just their incomes are too
Speaker 1: high to be the competitive place for that. They can
Speaker 1: replace it with a higher yielding They replace it with
Speaker 1: a higher yielding thing, and and they and the activity
Speaker 1: itself to the extented it's not cut off by automation.
Speaker 1: Digital technology goes to Vietnam, Bangladesh, Turkey, maybe Turkey, Ethiopia.
Speaker 1: What about Mexico? Mexico is yeah, is there a little
Speaker 1: Mexico is a moving upscale a little bit. Yeah, it's
Speaker 1: a middle income country if you take an average, but
Speaker 1: there are pockets you know where where it's it's very
Speaker 1: lumpy distribution, it's not even so that's kind of yeah,
Speaker 1: that's kind of where we are. UM. I think probably
Speaker 1: for your listeners, the most important thing to understand is
Speaker 1: China would have been clawbered twenty years ago if something
Speaker 1: like this happened because they were dependent on the export
Speaker 1: sector for the demand that enabled the growth. Now they
Speaker 1: have this huge growing middle class with rising incomes like
Speaker 1: like the United States, Um, they can enable the growth
Speaker 1: with the domestic demand to much greater extent. That's interesting.
Speaker 1: My sense of China versus the way the United States
Speaker 1: has been approaching tariffs is that they play a much
Speaker 1: longer game than we do. We think in months and quarters,
Speaker 1: they seem to think in decades. The response to hit
Speaker 1: the soybean farmers and the heart of the Trump base
Speaker 1: seemed very, very calculated and not random at all. Uh,
Speaker 1: Are they just going to wait us out until the
Speaker 1: next president comes along? Or what's there? What's their approach
Speaker 1: from your perspective, Well, they're probably a little puzzled, because
Speaker 1: I think it's hard for them, as and and many
Speaker 1: of us to figure out what with any precision the
Speaker 1: current administration in the United States is really after. It
Speaker 1: seems to be a bit of a moving target. But no,
Speaker 1: I don't think they'll I don't think they'll just definitively
Speaker 1: wait it out. They'll see if they can make agreements
Speaker 1: where it looks like it's sensible from both mutually beneficial
Speaker 1: to make an agreement. We have been speaking with Michael Spence.
Speaker 1: He is a professor of economics at the n y
Speaker 1: U Stern School of Business. If you enjoy this conversation,
Speaker 1: we'll be sure and come back for the podcast. Extras
Speaker 1: where we keep the tape rolling and continue discussing all
Speaker 1: things information structure related. You can find that at iTunes,
Speaker 1: Google Podcasts. That's your Spotify, wherever your finer podcasts are own.
Speaker 1: We love your comments, feedback and suggestions right to us
Speaker 1: at m IB podcast at Bloomberg dot net. Give us
Speaker 1: a review on Apple iTunes. You could check out my
Speaker 1: weekly column on Bloomberg dot com. Sign up for my
Speaker 1: daily reads at Redholts dot com. I'm Barry Hults. You're
Speaker 1: listening to Masters and Business on Bloomberg Radio. Welcome to
Speaker 1: the podcast, Michael, Thank you so much for doing this.
Speaker 1: This is really fascinating stuff. I am absolutely intrigued and
Speaker 1: and when you talk about I don't want to get
Speaker 1: too wonking. No, no, these these listeners love going into
Speaker 1: the wonky weeds. Um. There's a couple of things, both
Speaker 1: from the book and some of your other writings that
Speaker 1: we didn't get to that I want to discuss. But
Speaker 1: first I was mentioning during the break that I thought
Speaker 1: the book really has has held up very well. It
Speaker 1: there's nothing in it that's outdated. What are you thinking
Speaker 1: about for your next book? Well, on the it takes
Speaker 1: about a decade to recover from writing a book. That's
Speaker 1: my experience. Ten years later, you're almost ready to almost
Speaker 1: ready to start. Yeah, no, I I mean on the
Speaker 1: development side, Verry, I would say the biggest potential shift
Speaker 1: is it does come from the digital technology side. So
Speaker 1: you know, you have we are either at or very
Speaker 1: close to the point where the digital technologies, which you
Speaker 1: know how kind of high fixed, very little variable cost
Speaker 1: technology software replication, zero marginal cost, etcetera, basically overtake the
Speaker 1: labor intensive ones replace. But that undercuts a very important
Speaker 1: part of the growth model that we saw being used
Speaker 1: essentially in every country that was really successful. Jobs. Yeah, jobs,
Speaker 1: what are you gonna do? What's so you've got to
Speaker 1: sell something, a good or a service to the global
Speaker 1: economy that that part hasn't gone away? The question is
Speaker 1: if it's not to ways and assembled electronics and stuff
Speaker 1: and shirts and uh, textiles and apparel is the starting
Speaker 1: point for most of these places, then what is it?
Speaker 1: And all that stuff has gone robotic? Now is going robotic?
Speaker 1: You know so? I mean it doesn't happen overnight, but um,
Speaker 1: but it's happening pretty fast. I mean, you know, so
Speaker 1: textiles is difficult because the materials soft and the robots
Speaker 1: have trouble kind of And we actually go talk to
Speaker 1: the people who are trying to automate this, they say,
Speaker 1: we're not quite there yet. Um, who can't sew the
Speaker 1: stitching straight on on your shirt yet? But it's not
Speaker 1: that far away. So so there's a real question about
Speaker 1: um this growth model. And one of the things that
Speaker 1: that part of the answer is probably going to turn
Speaker 1: out to be another aspect of digital technology, which is
Speaker 1: you can create ecosystems, platform centered ecosystems that enable entrepreneurs
Speaker 1: to create businesses and employee people poll and whatnot and
Speaker 1: and I'm sorry, And an international version of that would
Speaker 1: be moving in the direction of a partial substitute. So
Speaker 1: when we talk about inequality, we used to talk about
Speaker 1: developed world inequality versus emerging markets or undeveloped world. Now,
Speaker 1: thanks in part to digital even within developed worlds, there's
Speaker 1: inequality that has apparently risen to levels we haven't seen
Speaker 1: for a few generations. How much of this is based
Speaker 1: on information asymmetries and information gaps, and how much of
Speaker 1: this is just the nature of capital and a sort
Speaker 1: of winner take all system that seems to have been
Speaker 1: evolved over the past few decades. Yeah, I think it's
Speaker 1: more the latter. I mean, I think it's more a
Speaker 1: combination of globalization and the evolution of technology have since
Speaker 1: about the late seventies has based sickly reverse relatively benign
Speaker 1: growth patterns with respected distribution. So they the whole thing
Speaker 1: went started to go south, let's say around and you know,
Speaker 1: we have big changes in approach. I mean, that was
Speaker 1: the that was the Reagan Thatcher era, right, So we
Speaker 1: probably had some deregulation and other things that might have
Speaker 1: contributed to that. But but basically, you know, you've got
Speaker 1: something that's by most people's standards, just gotten out of control.
Speaker 1: And and of course the you know, because so income,
Speaker 1: if you have income rising income inequality for long enough,
Speaker 1: then it then it's on the wealth side, it's self perpetuating.
Speaker 1: Once you get to a critical mass of wealth, you
Speaker 1: should theoretically retain it. Yeah, in theory, unless you make
Speaker 1: big mistakes. Well that's the old shirt. What is it?
Speaker 1: Shorts leaves to shorts leaves in in three generations. So
Speaker 1: so that raises some really interesting questions. We've always had
Speaker 1: income inequality and wealth inequality. It seems to be inevitable
Speaker 1: um in capitalism. What what you're what I'm getting a
Speaker 1: sense that you're referring to is when they reach extremes
Speaker 1: to the point where, uh, it threatens the social order?
Speaker 1: Are we remotely close to that anywhere around the world.
Speaker 1: We look at the EU and the UK and the US.
Speaker 1: It seems there's some signs of unrest, but nothing like
Speaker 1: France before their revolution. No. I mean, we're probably not
Speaker 1: at that point yet, but we're pretty late in the
Speaker 1: game because I think that the people who have been
Speaker 1: sideswiped by the way our economies have evolved, it's a
Speaker 1: pretty large group and they're pretty angry, in part because
Speaker 1: it is my conjecture anyway, because we didn't do anything
Speaker 1: about it. Right, Well, what are we supposed to do
Speaker 1: about So let's back up a set, because that's a
Speaker 1: fascinating subject. We've had globalization for a long time. There's
Speaker 1: a reason why my iPhone is more powerful than what
Speaker 1: took us to the moon forty five years ago and
Speaker 1: plus thirty or forty a month. It's because of globalization.
Speaker 1: It's because of automation and technology. It's given us a
Speaker 1: higher standard of living on average. But there are clearly
Speaker 1: winners and losers from the decline of unions, the rise
Speaker 1: of globalization, and the increase of automation. What are we
Speaker 1: not doing to moderate the negative impacts of that? Well,
Speaker 1: I mean, you know, probably not using the potential for
Speaker 1: progressive taxation on that. I'm not suggesting that's the whole answer,
Speaker 1: but you know, but it probably needs to be part
Speaker 1: of the answer. You know, there's there's a I think
Speaker 1: one of the reasons is coming into focus now is
Speaker 1: there's a bunch of really good research, you know, with
Speaker 1: a long time arise and picket E Sayez you know Zookman,
Speaker 1: Chatty rad Chetty at Stanford, you know that are bringing
Speaker 1: out dimensions of this and you know, so it comes
Speaker 1: in cycles, right, uh So, in no ways this has
Speaker 1: been here for a while, but now we really understand
Speaker 1: it better. We understand it better and understand the history better,
Speaker 1: and and now are kind of rapp grappling with the responses. So,
Speaker 1: I mean, we haven't had a presidential primary season where
Speaker 1: people are talking about wealth taxes for a long time.
Speaker 1: Did we previously have this? This goes back post depression
Speaker 1: or around that era. Uh I don't know the history
Speaker 1: well enough to be able to answer that whether we
Speaker 1: had an actual discussion of wealth but this but it's
Speaker 1: it's new in the post war era. I guess that's
Speaker 1: the way I would say it. Um And but we're
Speaker 1: in the early stages of kind of thinking this through.
Speaker 1: I think the other thing that we learned from a
Speaker 1: wide range of both developed and developing countries is that
Speaker 1: is that one of the things you want to So
Speaker 1: there's there's two there's two ways to think about inequality.
Speaker 1: There's what economists call x post that's what actually happened.
Speaker 1: And on that front, I think most people agree with
Speaker 1: what you just said, which is it's okay. People understand
Speaker 1: we're not going to all be you know, have the
Speaker 1: same incomes and stuff, but it can get out of hand.
Speaker 1: The extremes are not okay. And then there's what Americans
Speaker 1: call it quality of opportunity, which is exciting. That is,
Speaker 1: do you have a fair shot on a level playing
Speaker 1: field at whatever this distribution out there is. And people
Speaker 1: have been complaining that's been what's been contracted. They are
Speaker 1: and and it's connected. You know, if if the income
Speaker 1: in equality gets sufficiently extreme, then the lower end of
Speaker 1: the spectrum doesn't have the resources to invest in getting
Speaker 1: to that playing field, which is probably why this whole
Speaker 1: IVY league, um, you know, pay extra money to get
Speaker 1: your kids in, has has resonated so much and outrage
Speaker 1: people so much. Have they been under illusion that there's
Speaker 1: an equality of opportunity or was there genuinely equality of
Speaker 1: opportunity for for most of our history? No? I mean,
Speaker 1: relatively speaking, I think yes, but not perfect the quality
Speaker 1: of opportunity, because that's unachievable that you know, the this
Speaker 1: um gosh, we've got to get into USC or Harvard
Speaker 1: or whatever. Stanford puzzles me. I mean, I've always thought,
Speaker 1: you know, I grew up in Canada. Canada is more
Speaker 1: like other countries in that there's a most of the
Speaker 1: higher educational institutions are publicly largely publicly funded, and you know,
Speaker 1: and there's a few of them, and you know, it
Speaker 1: really matters if you get into the right ones. In America,
Speaker 1: we've got hundreds, We've got public and private institutions. We've
Speaker 1: got all kinds of really top flight colleges, and a
Speaker 1: lot of your friends of mine went to these colleges
Speaker 1: and whatnot. I went to a state school here in
Speaker 1: New York, and I don't quite understand what the kind
Speaker 1: of you know where where this you know self impost
Speaker 1: pressure to get into these you know eat institutions comes from.
Speaker 1: Because my sense is a kid going to anyone of
Speaker 1: a huge range of institutions has a pretty good running
Speaker 1: shot at a pretty well let me let me push
Speaker 1: back at you. You went to Princeton, you went to Oxford,
Speaker 1: you went to Harvard. There's not a slouch and that
Speaker 1: you talked toward a Stanford teach an n y U.
Speaker 1: You've been affiliated with fairly elite institutions. Are you suggesting
Speaker 1: that you could go to a I don't want to say,
Speaker 1: a lower to your school, but next to your school
Speaker 1: and still have the same sorts of opportunities that you
Speaker 1: would get at the best of the best of the best.
Speaker 1: Is that the concern from so many people, the snowplow
Speaker 1: parents want to remove every obstacle to their kids success.
Speaker 1: I think, what, let me, I'm gonna guess what they're thinking.
Speaker 1: So one of the benefits you get from going to
Speaker 1: these schools is the education and the signal the others
Speaker 1: the network of course, Okay, and so if you believe
Speaker 1: the net work is crucial, then and that that's the
Speaker 1: main thing. Then then I can start to understand. So
Speaker 1: you know that the Princeton network in New York or
Speaker 1: the Yale network in New York and Washington, maybe you
Speaker 1: know you're desperate somehow to make sure your kid is
Speaker 1: part of that, and the opportunities that that that opens up.
Speaker 1: That that's the part that that I think is um
Speaker 1: perhaps real, but it's also worrying, right, I mean, you
Speaker 1: don't want to think that, uh, if you're out of
Speaker 1: any of those networks or all of them, that the
Speaker 1: meritocracy has failed to a point where you know, you
Speaker 1: don't have access to the top government jobs or whatever.
Speaker 1: So to the extent that's true and that the parents
Speaker 1: are right, then I think we have to start worrying
Speaker 1: about about this dimension of equality of opportunity. So so
Speaker 1: on that note, let me ask you some questions that
Speaker 1: didn't get to that I think are relevant. One of
Speaker 1: the quotes in the book, um, and I don't want
Speaker 1: to mangle this adversity is a is surprisingly awesome in
Speaker 1: the birthplace of successful change. What what is it about
Speaker 1: adversity that leads to change? And you also talk about
Speaker 1: the change in dynamics during a crisis where the entrenched
Speaker 1: interests lose a lot of their hold on on power. Yeah,
Speaker 1: so it's not a sure thing that a crisis produces
Speaker 1: good results, but it does create at least an opportunity
Speaker 1: because it essentially weakens the vested interest power to maintain
Speaker 1: the status quo. And that's why you get routine statements
Speaker 1: like never waste a crisis, you know, etcetera um. And
Speaker 1: there are examples. I mean, you know, one of the
Speaker 1: members of that commission, what is a Turkish citizen at
Speaker 1: least at the World Bank and now elsewhere, you know,
Speaker 1: was finance minister when Turkey at a crisis and was
Speaker 1: able to put through some reforms that you know, arguably
Speaker 1: just you couldn't do in quote normal times. Well, a
Speaker 1: lot of the post Depression Great Crash era reforms we've
Speaker 1: never seen anything like before or since in the United States.
Speaker 1: One of one of my favorite comparisons in the book
Speaker 1: Singapore versus Cuba. Here are two countries relatively the same
Speaker 1: size to island nations, similar populations, enormous different in enormous
Speaker 1: differences in economic outcomes. What what explains those differences, Well,
Speaker 1: it's basically the choice of this It's the development strategy
Speaker 1: that that explains the difference. So um, I mean there's
Speaker 1: a kind of literature and you know that you know,
Speaker 1: goes back and forth between policies and institutions on the
Speaker 1: development literature, and I think the sensible sort of a
Speaker 1: set that his institutions do matter, but policies matter as well.
Speaker 1: Singapore basically was relatively autocratic. But they were pretty clever. Uh. Well,
Speaker 1: for example, you know, they figured out early on, first
Speaker 1: of all, they have a multi ethnic structure, so they
Speaker 1: have Malaise and Chinese and Indians, and they they probably leakwan.
Speaker 1: You figured out that if those people got at each
Speaker 1: other's throats that you know, would kind of they'd place apart.
Speaker 1: So they set out to get to make the growth
Speaker 1: patterns inclusive really from the get go, and anybody who
Speaker 1: was not on board and that was simply marginalized kicked
Speaker 1: out um. And they and they figured the most important
Speaker 1: part of that was housing. Really they went after housing. UM.
Speaker 1: So housing. The two critical elements were housing and education.
Speaker 1: So the education is stunningly good, um over a long
Speaker 1: period of time, and housing is subsidize so you don't
Speaker 1: really ever have a problem with you know, where you're
Speaker 1: going to live. And whether it's affordable and stuff like that. Huh.
Speaker 1: And then they left things like saving free your retirement
Speaker 1: up more or less up to you. So there's not
Speaker 1: a lot of pension big liabilities and pension funds. But
Speaker 1: they but that crucial piece they got right there. They
Speaker 1: did one other thing, which is I asked, uh a
Speaker 1: senior person who was a partner of Lee Kuan you
Speaker 1: in the early days of development. I said, well, it
Speaker 1: was the secret to success and in sing Pore. And
Speaker 1: he said, well, there were two things. He was a
Speaker 1: little this is a little tongue in cheek, but because
Speaker 1: there were a lot of things. But he said there
Speaker 1: were two things. One, we were really harsh on corruption.
Speaker 1: We basically stamped it out. Uh. So we we took
Speaker 1: care of that problem. Also, rule law really matters. Yeah,
Speaker 1: rule of law in the sense of you know that
Speaker 1: part that has to do with corruption, you know, a
Speaker 1: civil servant is it's just got to be clean. Um.
Speaker 1: And when and when there was a violation of that,
Speaker 1: we really stamped hard. And so I said, I understan
Speaker 1: and that part and and they said the second part
Speaker 1: was luck really yeah, they acknowledged that, And so I said,
Speaker 1: what do you mean and he said, well, uh, he said,
Speaker 1: this this isn't really luck. This is sort of pragmatic opportunism,
Speaker 1: you know, responding to things that you can't anticipate in advance,
Speaker 1: so which sometimes is indistinguishable from luck. It was indistinguishable.
Speaker 1: And in this case what it was was in the
Speaker 1: post war period and during the Cold War, UM, a
Speaker 1: system that came to be called the multi fiber agreement
Speaker 1: was set up. And what it was was an attempt
Speaker 1: to make sure that the textiles and apparel industry globally
Speaker 1: was spread out across a bunch of countries and because
Speaker 1: they wanted those countries to thrive and stay on quote
Speaker 1: our side, um, And so there were quotas basically, and
Speaker 1: an early major center of textile manufacturer was Hong Kong,
Speaker 1: and they hit the quota, and the entrepreneurs in Hong Kong,
Speaker 1: who are no slouches, started looking around the world, Hey
Speaker 1: let's go over there. Yeah, and Singapore went, well, well
Speaker 1: we'll do that. Um. That's what we meant by luck,
Speaker 1: you know. So, I mean you don't plan to have
Speaker 1: a multi fiber agreement where you know, the major player
Speaker 1: hits the quota and you're just about ready to take
Speaker 1: it on. But but it's but they're really not a
Speaker 1: big text style not manufacturer anymore. They very quickly morphed
Speaker 1: towards technology and another industry. So you don't see this
Speaker 1: much in Hong Kong. You don't see it much in Singapore.
Speaker 1: You know, the the handoff process is interesting. So it went,
Speaker 1: it went to Korea, uh, and to some extent that Taiwan,
Speaker 1: and then their their incomes rose to the point and
Speaker 1: they had to move again, moved to China. Some of
Speaker 1: it was in Indonesia. Um for a while, Vietnam for sure. Um,
Speaker 1: now China is handing it off again. I mean this
Speaker 1: passing the baton is a natural part of the dynamics.
Speaker 1: I have a friend who used to be located in
Speaker 1: San Diego and ended up in Vietnam, and he said,
Speaker 1: Vietnam is today the wild West of capitalism, the just
Speaker 1: the purest expression of Uh. Let's try an I d
Speaker 1: and see where it goes. What do you see as
Speaker 1: Vietnam's future in terms of future convergence? Al Right, you
Speaker 1: know they haven't quite hit the seven percent club mark.
Speaker 1: But um, but it's basically they were, They're part of
Speaker 1: the process. They're on the way. I mean, if you
Speaker 1: wanted to be skeptical, what you would say, Well, the
Speaker 1: tensions in the South China Sea area are sufficiently high,
Speaker 1: they'll get in a fight with China and something bat
Speaker 1: will happen or something like that. But on at least
Speaker 1: on the economic grounds, I don't see any reason why, uh,
Speaker 1: you know, Vietnam won't be continue to become more and
Speaker 1: more prosperous. So you recently wrote about three mega trends
Speaker 1: driving structure rules shifts, uh, digital transformation, which we talked
Speaker 1: about growing em purchasing power, and then rising nationalism and popularism.
Speaker 1: How are these three all colliding? So I think that
Speaker 1: they're connected with each other. So you have so the
Speaker 1: digital I think we understand it. It's it's not one thing,
Speaker 1: it's many things. So it has um the potential to
Speaker 1: generate benign and highly inclusive growth patterns. But it but
Speaker 1: it will give rise to difficult transitions as people retrain
Speaker 1: to do some different things. So that that's kind of
Speaker 1: coming into focus. Um, and and we're just gonna have
Speaker 1: to sort of amplify the benign part and and deal
Speaker 1: as best we can with the other part. Second, the
Speaker 1: rise of these emerging economies means it powerful, which means
Speaker 1: that the governance structure of the global economy, which for
Speaker 1: many many years was essentially the G seven in terms
Speaker 1: of priorities, this isn't to work anymore. Now it's CLO's
Speaker 1: G twenty and the G twenty is more heterogy, heterogeneous
Speaker 1: and harder. It's harder for them to kind of reach
Speaker 1: conclusions that you know, aren't just milk toast um and stuff.
Speaker 1: And so we're getting we have a kind of the
Speaker 1: part of the consequence of the rise of the emerging
Speaker 1: economies and Asia is a kind of set of centrifugal
Speaker 1: forces with respect to governance and whatnot. Um and then
Speaker 1: and then you know this partly economic, partly social phenomenon
Speaker 1: that I think people are seriously studying, but I don't
Speaker 1: think it's perfectly understood, which is people are really aren't
Speaker 1: comfortable living in a world where where the unit is
Speaker 1: designed is called the global economy, right, They just aren't.
Speaker 1: And some of it's kind of they get sideswiped into
Speaker 1: economic terms, and some of it is culture, you know,
Speaker 1: I mean, we're not it's also history from all human
Speaker 1: history except the last half century. It was always local.
Speaker 1: Maybe it was regional at most, regional at most. So
Speaker 1: so you're getting so, you've got so you're getting a
Speaker 1: really powerful reaction again against the kind of post war
Speaker 1: kind of trends. And if it's strong enough, then it'll
Speaker 1: sort of dismantle. It's including some things that we don't
Speaker 1: want to dismantle, come from the benefits of an open
Speaker 1: global economy and specialization and all that kind of thing. So,
Speaker 1: I mean, nobody knows where that's going to take us.
Speaker 1: But this is this is this is a world I
Speaker 1: would say that has more centrifugal forces and more tensions
Speaker 1: than that I can remember for a long time. There's
Speaker 1: a quote in in the book that I was fascinated by, um,
Speaker 1: and I want to get your thoughts on it. Sustainable
Speaker 1: wealth creation is ultimately built on people, human capital and knowledge,
Speaker 1: on continuous structural change in the economy, and on systems
Speaker 1: of economic and political organization that permit the productive deployment
Speaker 1: of those assets. Now, when I read that today, that
Speaker 1: seems pretty obvious, pretty self evident. I get the sense
Speaker 1: when you wrote that that it wasn't quite as obvious. Um,
Speaker 1: what what's your key takeaway? Why is it human capital
Speaker 1: and not natural resources or oil or things that we
Speaker 1: used to think of as as so important to the
Speaker 1: economy or at least to the local wealth creation. Yeah,
Speaker 1: so you one doesn't want to overstate these things. So
Speaker 1: if you take an economy that's rich in human capital
Speaker 1: and take away its energy, it's not going to do
Speaker 1: very well. Right, So we're talking about complementary inputs, and
Speaker 1: probably that and and statements like are a bit of
Speaker 1: an overstatement. What I was doing. It was trying to counter,
Speaker 1: you know, this notion that you know, there's some source
Speaker 1: of wealth that's really important, of comparable importance to the
Speaker 1: kind of knowledge and technology based. So let me let
Speaker 1: me tell the way I used to think about them myself,
Speaker 1: and I sometimes do it in class. I say, so,
Speaker 1: I'll give you a choice that you know is completely hypothetical.
Speaker 1: You have an economy it's doing very well, it's quite advanced.
Speaker 1: And Choice one is you destroy essentially all the physical assets,
Speaker 1: or a substantial fraction of them, but everything that's in
Speaker 1: people's heads or in the libraries or in the scientific community,
Speaker 1: a huge range of stuff. All the traffic engineers still
Speaker 1: know how to run traffic and stuff like that. That's
Speaker 1: one and the two is everybody gets amnesia and you
Speaker 1: lose all that, and then I say which one would
Speaker 1: you take? And the students always take destroy the physical assets,
Speaker 1: and they're right there. It's hard to always rebuild that.
Speaker 1: You can rebuild that. And the other thing is centuries
Speaker 1: have accumulated knowledge and wisdom. So what do we think
Speaker 1: of certain countries? And we've seen this in i Ran
Speaker 1: as a good example, where they throw out half of
Speaker 1: their intellectual class. They throw out around the time of
Speaker 1: the revolution, they throw out all the educated professors and
Speaker 1: the doctors and the lawyers. And does does that set
Speaker 1: them back decades? It takes that long to recover? Yeah?
Speaker 1: I think so, Yeah, definitely, especially if you know it's
Speaker 1: an environment where it's it's hard to get people to
Speaker 1: come back. Uh. And some of these developing countries, you know,
Speaker 1: they export people in the early stages to go get
Speaker 1: an education and then they and people don't return then
Speaker 1: and for a while, I don't return. And then if
Speaker 1: you get lucky and went, you're further down the road,
Speaker 1: the opportunities start to to come and then they start
Speaker 1: to come back because the opportunities are there. That's China today.
Speaker 1: They used to send people here to get educated. They
Speaker 1: wouldn't go home. Now a big chunk seems to be
Speaker 1: I want to go back to Shen's in orspit. So
Speaker 1: that's I mean, that's a tough one to multi year
Speaker 1: thing to navigate through, but that's that's an example of that. Yeah,
Speaker 1: I mean Europe, you know, coming into World War two,
Speaker 1: export read an awful lot of talent. That was a
Speaker 1: pretty important part of the the advancement of the American
Speaker 1: I mean, well you look at our nuclear program from Germany,
Speaker 1: effect scientists, you know, engineering talent, Weinstein von Neumann and Morgenstern,
Speaker 1: game theory, I mean, what's on and on um. So, yeah,
Speaker 1: it's not a good idea to export talent, and it's
Speaker 1: not a good idea to underinvest in things that keep
Speaker 1: you know, that kind of person around. So I live
Speaker 1: in Italy part of the time, where in Italy malone
Speaker 1: on pretty well put together city. And but but you're
Speaker 1: but a general problem in Europe and they're falling behind.
Speaker 1: And this but especially in places like Italy, is that
Speaker 1: we don't invest enough to keep the top you know,
Speaker 1: biomedical scientists and whatnot. It's not that I mean they
Speaker 1: want to stay right, but you gotta have the the
Speaker 1: research funding, you have to have the programs and stuff,
Speaker 1: or they're gonna you know, these are the most mobile
Speaker 1: people in the world. You know, they're gonna end up
Speaker 1: in the United States and Britain or something like that.
Speaker 1: So is it it's not just for career for money opportunities,
Speaker 1: it's for research opportit, research opportunities and everything the one
Speaker 1: that you love to do done, and so the top
Speaker 1: talent ends up leaving it. Is that strictly a problem
Speaker 1: in Europe or where else do we see that problem
Speaker 1: coming up? Well, I mean no, it's not, you know,
Speaker 1: confined to Europe. I mean I think Europe has, relative
Speaker 1: to the income levels a kind of problem and that
Speaker 1: they're falling behind, especially in the digital area. Maybe when
Speaker 1: you think about it, that really influential entities in this world,
Speaker 1: a subset of them, or the mega platforms they're all
Speaker 1: in the United States and China, mega platforms like Ali
Speaker 1: Bamba or Facebook or Google or go down the least
Speaker 1: Amazon or whatever. Yeah, and that's what's attracting all the
Speaker 1: intellectual capital. Well, it's certainly the kind of epicenter of
Speaker 1: a lot of you know, applied innovation. So Artificial intelligence
Speaker 1: in this modern form is a highly data intensive activity,
Speaker 1: tends to occur around lots of data, cloud computing power,
Speaker 1: and uh an ability to attract talent. I mean if
Speaker 1: if if you and I were talking ten years ago
Speaker 1: and and and I said to you, what, what's what
Speaker 1: are the odds of this? The autonomous vehicle? You know,
Speaker 1: business is going to be driven forward by you know, Google,
Speaker 1: you would have said, are you crazy? But you know
Speaker 1: a lot of that technology is coming out of Buy
Speaker 1: Do and Google, and it's data and engineering skills, data
Speaker 1: engineering skills and consulting car. Yeah. Quite interesting. Before I
Speaker 1: get to my favorite questions, I ask all my guests,
Speaker 1: I have to ask one question because I've had several
Speaker 1: previous Nobel Prize winners, and everybody seems to have a
Speaker 1: charming little story about that phone call they get and
Speaker 1: and we're in that time of year right now, what
Speaker 1: what was your experience? Like, I never got the call,
Speaker 1: So never got a phone call. No, no, they tried,
Speaker 1: but they phoned my home in California, and then we
Speaker 1: had taken a little trip to Hawaii, right So what
Speaker 1: happened was they couldn't get through and they can't wait forever.
Speaker 1: So then if some minutes later they post this on
Speaker 1: a website and I had I had a friend, actually
Speaker 1: more pro more than one who u A was up
Speaker 1: in the morning. This is probably on the West coast
Speaker 1: four thirty or five in the morning, so he saw
Speaker 1: a flash up on the screen and knew where I was.
Speaker 1: So the phone call I got was from a friend
Speaker 1: of mine. And how do you know, no one's really
Speaker 1: pulling your leg or by that point it's on the
Speaker 1: news and you by that point it's starting to get
Speaker 1: to be the news, so you can be I was
Speaker 1: not expecting it. I mean I was completely really yeah,
Speaker 1: well because it's not a lifetime achievement award, but you know,
Speaker 1: I had been an academic administration up until fifteen years,
Speaker 1: you know, not kind of yeah and whatnot. So I thought, well,
Speaker 1: that was a choice I made. I don't regret it,
Speaker 1: but I'm not going down that road anymore. So that
Speaker 1: came right out of the blue for me. Quite quite interesting.
Speaker 1: So let me jump to My favorite questions are are
Speaker 1: speed round? This is what I asked all of my guests.
Speaker 1: Sometimes it's revealing. Um, we'll start out easy. What was
Speaker 1: the first car you ever owned? Year making model. Uh
Speaker 1: so it was a Chevy Nova and I think the
Speaker 1: uh it was yellow. My parents bought up for me
Speaker 1: and I don't remember the exact year, but it's got
Speaker 1: to be nineteen sixty one or two. They're they're collectible now. Also,
Speaker 1: what's the most important thing people don't know about Michael Spence? Gee?
Speaker 1: I don't know, not much, I guess. I mean, I
Speaker 1: don't think of anything that uh I've been some people
Speaker 1: are you know, people don't know that they're about a
Speaker 1: secret hobby or something. You're you're an open book. I'm
Speaker 1: pretty open. But I mean there's probably lots of things
Speaker 1: that people don't know. Maybe I wanted to be a
Speaker 1: professional hockey player and stuff like that, But well, that's
Speaker 1: your from Canada. You already said that, so we just
Speaker 1: assumed that we did a merryment. Tell us about some
Speaker 1: of your early mentors who influenced your career and guided
Speaker 1: you early on. Wait a lot there were a lot
Speaker 1: of them, you know. I mean I went to a
Speaker 1: school it's like the Lab School at Chicago in Toronto,
Speaker 1: attached to the University of Toronto with a very uh
Speaker 1: charismatic and influential coach coached us in football and hockey
Speaker 1: and and other things. Just a guy who made a
Speaker 1: big difference in our lives, the values and the kind
Speaker 1: of way we went about doing things. Um, and I've
Speaker 1: been blessed with really wonderful teachers, but I think, you know,
Speaker 1: eas would be what I finally became, you know, an economist.
Speaker 1: I would say my thesis advisors, which or Dick Zak,
Speaker 1: how was your Canarrow? And Tom Shelling were just enormously
Speaker 1: They're not only influential, they were supportive. I mean, you know,
Speaker 1: so I can imagine thesis advisers telling a young person
Speaker 1: who was sort of mucking around with something that didn't
Speaker 1: sound like what other people were doing. You know, probably
Speaker 1: you should do that later. You know, that's a bit risky.
Speaker 1: Don't do that for your PhD. They never said that
Speaker 1: to me. They said, well, was it risky what we
Speaker 1: were doing? Well, it could have turned out to be nothing,
Speaker 1: So I guess in that sense, yes, But at that
Speaker 1: point I was prepared to quit. Uh oh really yeah, Well,
Speaker 1: to me, getting a PhD and going into academic life
Speaker 1: was an experiment, not a decision that I was going
Speaker 1: to stick with, you know, through thick and thin. I mean,
Speaker 1: it turned out to be an experiment with a great
Speaker 1: outcome from my point of view. But and and ken
Speaker 1: Arrow eventually himself wins the Nobel Prize and act well,
Speaker 1: he was well well before me. He was one of
Speaker 1: the early ones, the one, the one that was surprised.
Speaker 1: I don't know if Dick Zackhauser receive a Nobel Prize. Uh,
Speaker 1: he's very very smart. But Tom Shelling came after me,
Speaker 1: who was one of your advice was one of my advisors.
Speaker 1: So that was a bit odd. That's interesting. Um, let's
Speaker 1: talk about economics in an economists in general, who influenced
Speaker 1: the way you think about information theory? Same group of people, say,
Speaker 1: same guys. I mean, I would say I mentioned Lester Thorow,
Speaker 1: but Dick Zackheuser, for sure. I wrote things with him,
Speaker 1: Tom Shelling, because he had, um how do I say it,
Speaker 1: a really creative mind in a different way of thinking.
Speaker 1: So Shelling, as you know, was um responsible for a
Speaker 1: kind of branch of applied game theory in which you
Speaker 1: know that was really important in the Cold War in
Speaker 1: nuclear deterrence, very unconventional, kind of not not completely formal.
Speaker 1: And I spent a lot of time with him he
Speaker 1: that was a very big influence. Sermon. Let's talk about books.
Speaker 1: What are some of your favorite books. What what do
Speaker 1: you like to read when you're not writing your own books? Well,
Speaker 1: it's nice, it just read for relaxation. I started to like,
Speaker 1: you know, my kids, some of the kids books are
Speaker 1: kind of fun. Uh, you know, these sort of sagas,
Speaker 1: like give us an example. Well, there's a book, a
Speaker 1: series of books, you know, the last one is apparently
Speaker 1: coming out in the spring, written by S. D. Smith
Speaker 1: called Green Ember. It's about rabbits. Okay, it's everyone said,
Speaker 1: while there's a saga about rabbits that comes out, and
Speaker 1: so they're kind of fun. Green Ember. Yeah, my um.
Speaker 1: One of my favorite books when I was growing up
Speaker 1: was The Agony in the Ecstasy. It was it's the
Speaker 1: historical novel um about the life of Michelangelo. I just
Speaker 1: found that a fascinating and be aspiring and I've I've
Speaker 1: had a lifelong kind of fascination with the Renaissance, right,
Speaker 1: mainly because so many things blossomed at exactly the same time,
Speaker 1: you know, our architecture, sculpture, finance, banking, you know, it
Speaker 1: was just this explosion of innovation around that irving Stone.
Speaker 1: So in the next convergence you reference that era, you say,
Speaker 1: previous to seventeen fifty, there was a long period where
Speaker 1: not a lot happened. So I mean it's almost in
Speaker 1: passing you reference. UM. The book that I've found intriguing
Speaker 1: about that was I don't know if you're familiar with it,
Speaker 1: A world lit only by fire explains for years, other
Speaker 1: than the windmill, nothing was invented. It was just a
Speaker 1: dead period at least in Um Western civilization. China and
Speaker 1: parts of UM Muslim Turkestan area were but the Western
Speaker 1: world no forward progress. That's right, and to the extent
Speaker 1: the only modification of that is that there was probably
Speaker 1: in the latter part of that period some scientific progress
Speaker 1: that didn't translate into technology and economic outcomes. UM directly right,
Speaker 1: only with a lag, but that that's basically right. It's amazing.
Speaker 1: Any of the books you want to mention, no, that's it, okay. UM,
Speaker 1: Here's as always an interesting question, tell us about a
Speaker 1: time you failed and what you learned from the experience.
Speaker 1: It's hard to choose. It's very very long list. I mean, UM,
Speaker 1: and we we often find that failure can be more
Speaker 1: instructive than success, which is why I asked the question. Yeah, no,
Speaker 1: that's true. I mean, when you're doing research, you know,
Speaker 1: there's a lot of they're not big, you know, kind
Speaker 1: of eye catching failures, but there's a lot of dead
Speaker 1: ends and you do learn from those. So that I mean,
Speaker 1: in the in a sense when I kind of aggregate
Speaker 1: all those up, those are probably the most influential ones.
Speaker 1: In Silicon Valley, where I lived for quite a long time,
Speaker 1: I learned over time that a failure is something that
Speaker 1: is important and being, you know, a culture that penalizes
Speaker 1: it will kill entrepreneurship and innovation. And third, I learned
Speaker 1: that the venture capitalists like entrepreneurs that had a failure,
Speaker 1: provided it was the right kind of failure. So it's
Speaker 1: funny you bring that up. I've spoken to colleagues in
Speaker 1: Europe and elsewhere, and I've heard multiple times when we've
Speaker 1: discussed the difference between the United States and Europe, they've said,
Speaker 1: the United States is the country that not only doesn't
Speaker 1: penalize failure, but practically rewards it, and that's very different
Speaker 1: than Europe. Yes, that's correct, and a lot of other places.
Speaker 1: I mean, this is it's really it's a little fuzzy,
Speaker 1: but it's really important. Uh yeah, so that's pretty deeply
Speaker 1: embedded in our call uture and it makes it, it
Speaker 1: makes us, I think, more dynamic. I totally agree. So
Speaker 1: what do you do for fun? Well, when you get older,
Speaker 1: you have sort of changes. So, um, I grew up
Speaker 1: playing sports hockey, hockey in particular. Um, that's that's the
Speaker 1: reason I ended up at Princeton to play hockey. Yeah, right,
Speaker 1: they well, they made a mistake, but I think they're
Speaker 1: okay with that decision. They were with Yeah but they wait,
Speaker 1: so I mean you made a mistake because you turned
Speaker 1: out not to be a great hockey player. Well, there
Speaker 1: were a bunch of us, you know, so I think
Speaker 1: they thought they were gonna have a great hockey team.
Speaker 1: But we weren't quite as good as they had hoped for.
Speaker 1: We were we were the Saturday night entertainment. Uh what
Speaker 1: But the joke about us was we could we we
Speaker 1: routinely um snatched defeat from the jaws of victory, and
Speaker 1: uh but we were fun to watch hockey anymore. No,
Speaker 1: I played it for a while and then you know,
Speaker 1: when the kids skated, you know, and for a while,
Speaker 1: but at some point it's uh, I don't like the
Speaker 1: way the professional game has gone. You know, when we
Speaker 1: when I started playing hockey, this is not necessarily a
Speaker 1: good thing, we didn't wear helmets, and then we wore
Speaker 1: these helmes, you know, small helmets just to protect you,
Speaker 1: and we were pretty careful. But where sticks went and
Speaker 1: what we did. Um, Now these guys are dressed up
Speaker 1: like you know, warriors and go to war and go
Speaker 1: to war. And I just I I like the International Games.
Speaker 1: Bigger rink, you know, more premium on you know, skating
Speaker 1: of the type that you saw with Bobby or and
Speaker 1: Wayne Ring, Wayne Gretzky. I mean, it's just a prettier game.
Speaker 1: The Um it's funny you mentioned that because I there's
Speaker 1: an and I think it's an information issue. Every time
Speaker 1: we add a safety device to cars, the the accident
Speaker 1: rate doesn't go down because as people think, oh, I
Speaker 1: have an air bag and a crumple zone and a
Speaker 1: BS and a three point safety belt, I could drive faster,
Speaker 1: and so we end up with safer cars, but no
Speaker 1: decrease in automobile deaths at all. Yeah, that's a general principle.
Speaker 1: I mean it's sort of like Martha's right, maas said
Speaker 1: every time we you know, our income score or productivity
Speaker 1: goes up, we'll have more people to use it all up.
Speaker 1: And we no, no, he didn't adjust for inflation. That
Speaker 1: was his his big prop um. So let's talk a
Speaker 1: little bit about these information gaps and structures and markets.
Speaker 1: What are you most optimistic about regarding uh, information gaps
Speaker 1: and asymmetries, and what are you most pessimistic about these days?
Speaker 1: Basically your work and how it applies. So I think
Speaker 1: on the optimistic side, I think, you know, properly deployed,
Speaker 1: that this digital technology does close gaps in a sort
Speaker 1: of start legally important and inclusive way. So it's a
Speaker 1: huge opportunity, and it seems to be happening. I mean,
Speaker 1: this digital divide sort of semi vanished. Uh. The the
Speaker 1: mobile internet, the mobile phone and mobile internet is kind
Speaker 1: of taken over the world everything. I mean, it just
Speaker 1: looks like, uh, it's just a huge winner um on.
Speaker 1: But on the same score, I mean, there are these
Speaker 1: informational gaps and and powerful tools like these can be
Speaker 1: used to exploit the vulnerable as well. Uh, so you've
Speaker 1: got more ways to cheat you know, sort of grandmothers
Speaker 1: out of their savings than you used to you used
Speaker 1: to have to actually go to the front door and knock.
Speaker 1: So so there's a like most things, there's a kind
Speaker 1: of flip side to all these coins. But but I
Speaker 1: think that's not an impossible problem to deal with. And uh,
Speaker 1: if a recent college grad came up to you and
Speaker 1: said they were interested in a career in either academia
Speaker 1: or economics, what sort of advice would you give them. Well,
Speaker 1: I mean, I'd say try it, you know, I mean,
Speaker 1: I think that people are very different from each other,
Speaker 1: so and you just don't know, so you've got to experiment.
Speaker 1: I would experiment and without kind of pre determining what
Speaker 1: the outcome is. Um and the other advice that I
Speaker 1: tend to give it and it's not necessarily what everybody
Speaker 1: else would give, which is I think planning one's career
Speaker 1: beyond a certain point is not really a good idea.
Speaker 1: I think a certain amount of you know, following one's nose,
Speaker 1: you know, going to the next thing that's really interesting.
Speaker 1: But I think the most important thing people do. Happy
Speaker 1: people are not you know, not achieving some goal, but
Speaker 1: enjoying the process of getting there, doing something they love
Speaker 1: every morning. You know, to me, that's uh, you know
Speaker 1: your family life and and not a career so much
Speaker 1: as UM a vocation. Right, it makes a lot of sense.
Speaker 1: And final question, what do you know about the world
Speaker 1: of economics and information theory today that you wish you
Speaker 1: knew forty or so years ago? Well, I wished I
Speaker 1: knew on forty years ago what the coming digital revolution.
Speaker 1: I think that's the thing I would have UM. I
Speaker 1: would have liked to see a snapshot of not for
Speaker 1: two reasons. One it it would just be fun and
Speaker 1: interesting to know this is coming and to kind of
Speaker 1: get ready for it, um. But the other but the
Speaker 1: other is um, maybe even accelerate it. But the other
Speaker 1: one is that it it brings into relief some things.
Speaker 1: Let me put it this way. Very economic theory always
Speaker 1: involves simplification, right, And so what what you do in
Speaker 1: good economic theory is you sort of throw out a
Speaker 1: bunch of stuff and focus on the things that are important.
Speaker 1: What What what happens in the course of that is
Speaker 1: that there are sort of embedded implicit parameters that are
Speaker 1: never made explicit. You know, things like transaction costs and
Speaker 1: whatnot that don't change very much. And then every once
Speaker 1: in a while something comes along and changes them, and
Speaker 1: then the models aren't okay because the parameters aren't visible, right.
Speaker 1: I think that's what's happening to us now. You know,
Speaker 1: we have network structures in economies that are only barely
Speaker 1: starting to be modeled in the sense that, you know,
Speaker 1: you capture the essence of the way the economy from
Speaker 1: We're still ignorant about these changes were yet we're mostly
Speaker 1: mostly we're in the process of trying to you know, build,
Speaker 1: build the conceptual structures that allow us to think carefully
Speaker 1: about these things. Quite quite fascinating. Thank you, Michael for
Speaker 1: being so generous with your time. We have been speaking
Speaker 1: with Michael Spence. He is a professor of economics at
Speaker 1: n y U Starned School of Business and senior advisor
Speaker 1: at General Atlantic Partners, a giant private equity firm. If
Speaker 1: you enjoy this conversation, well look up an entry down
Speaker 1: an Inch on Apple iTunes and you could see any
Speaker 1: of our previous three hundred or so such conversations we've
Speaker 1: had over the past five years. We love your comments, feedback,
Speaker 1: in suggestions. Write to us at m IB podcast at
Speaker 1: Bloomberg dot net, Go to Apple iTunes and give us
Speaker 1: a review. Be sure and check out my weekly column
Speaker 1: on Bloomberg dot com. Follow me on Twitter at rid Halts.
Speaker 1: I would be remiss if I did not thank the
Speaker 1: crack staff that helps put together these conversations each week.
Speaker 1: Colin O'Brien is our audio engineer, Michael Boyle is our booker.
Speaker 1: Slash producer Atico val Bron is our project director. Michael
Speaker 1: Batnick is my head of research. I'm Barry Retults. You've
Speaker 1: been listening to Masters in Business on Bloomberg Radio