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Property Rights and the UCLA School of Economics with David Henderson | Hoover Institution · The Capitalism and Freedom in the Twenty-First Century Podcast

• 0:09
  - This is the Capitalism and Freedom
• 0:10
  in the Twenty-First Century Podcast, an official podcast
• 0:13
  of the Hoover Institution Economic Policy Working group,
• 0:15
  where we talk about economics, markets, and public policy.
• 0:18
  I'm Jon Hartley, your host Today.
• 0:20
  My guest is David Henderson,
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  who is a research fellow at the Hoover Institution
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  and an emeritus professor
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  of Economics at the Naval Postgraduate School.
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  He's also an editor
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  of the Concise Encyclopedia Economics. Welcome, David.
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  - Thanks, John. - So great to have you on
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  and really wanna talk about your amazing career
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  in economics and in in communicating economics
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  to the public, which I think you do so well.
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  Thank you. And I wanna start with where you grew up,
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  like when you grew up in Canada,
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  you grew up in Manitoba, Canada.
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  - Yeah. - How did you first get interested in economics
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  and make your way to study at UCLA with Harold Deitz, who's,
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  you know, a legendary figure in study of property rights,
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  the Nirvana approach.
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  Tell us more about your, your early life
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  and how you got interested in economics.
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  - Oh, okay. So like you, I'm a Canadian.
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  I grew up in two small towns in Canada
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  that you've never heard of.
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  And I went to the University of Winnipeg.
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  I started when I was 16 because I'd skipped a grade
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  and my birthday's in November.
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  So I was about a year and a half of, ahead of most people.
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  And it was a three year degree in Canada.
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  And there's a reason that matters.
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  I was a math major and I was really good at it.
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  I ended up winning the gold medal in math at the University
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  of Winnipeg at graduation.
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  Math didn't grab me though in,
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  in any really fundamental way.
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  And so what, anyway, my first year I read The Fountainhead
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  by Ay Rand and it just, I was obnoxious for six months,
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  you know, kind
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  of thinking you should be self-interested about everything.
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  And my mother wants me to go get metaphor,
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  and I say, that's altruistic, you know?
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  But anyway, I got past that
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  and started reading more of what she was recommending.
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  People like La Van Mes and so on.
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  So I, while I was doing math part of the day,
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  I was educating myself in other parts,
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  reading Henry Haslet Economics in one lesson.
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  And I started feeling comfortable enough
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  with the economic reasoning that I got in arguments
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  with my calculus professor, my favorite professor there
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  who was a British socialist.
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  And I remember one time I kind
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  of backed him into a corner pleasantly,
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  but he said to me, David, you won this argument,
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  but I'm an eco, I'm a calculus professor.
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  Why don't you go to the economics department
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  and see how they handle your arguments?
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  And I thought, you know, you're absolutely right.
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  Now, this happened in my second year,
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  and as I said, it's a three-year degree.
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  So I didn't start an economics course until my third year.
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  And at University of Winnipeg,
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  it was the whole year you did one course starting in the
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  fall and writing your exam in May.
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  And I knew halfway through that whatever I wanted
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  to be in life.
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  It was not an economist because it was so boring.
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  We learned the Keynesian Cross model.
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  We learned about perfect competition
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  where everyone produces the same thing.
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  No advertising, no, no differentiation.
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  It just sounded perfect. Competition sounded boring to me.
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  And then my libertarian club that I joined had,
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  we used our whole annual budget on hiring someone from the
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  University of Chicago.
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  We tried to get Milton Freeman, we couldn't afford him,
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  and we were recommended to try Harold Descents.
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  And he gave three talks in two days.
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  And it just opened my eyes to what you could do
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  with economics and be at a good school,
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  namely University of Chicago.
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  So he had one talk, one talk in which he talked about
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  how property rights can help solve the problem of pollution.
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  He talked about how free markets raise the cost
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  of discriminating on racial grounds, making it expensive
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  to discriminate and
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  therefore causing less
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  of it than I than if you don't have free markets.
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  And this was just so exciting to me.
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  And I, I calculated, I must have spent between 10
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  and 15 hours with him, both in the talks at lunches,
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  driving him to the airport
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  and we drove him to the Winnipeg Airport and he turned to me
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  and said, you ought to come to Chicago
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  and get a PhD in economics or business.
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  And with my typical Canadian humility, which wasn't put on,
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  I said, I don't know if I'm good enough.
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  And he said, you're good enough.
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  And what I learned later was that if you didn't think,
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  if he didn't think you were good enough, he said that too.
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  I heard from other people.
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  So anyway, that's what got me kind of in that direction.
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  I went down to visit him af two weeks
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  after graduating in May of 1970.
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  He recommended that I get all the past issues at the Journal
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  of Law and Economics.
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  So I did, and I was gonna start at the University
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  of Western Ontario in the fall of 1970,
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  because that was recommended to me as the best kind
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  of undergraduate program.
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  I wasn't gonna get a degree just as a year of advanced
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  undergrad courses and maybe a, a grad course or two.
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  And then something pretty awful happened that summer.
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  My brother was 22, I was 19, and he committed suicide.
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  And I didn't want to go anywhere.
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  I just wanted to stay around my friends.
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  So I contacted the University of West Ontario,
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  explained the situation, could I come down a year later?
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  And since they weren't giving me money
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  or anything, that was fine.
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  And then I spent from eight to 12 every morning
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  working my way through back issues of the Journal
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  of Law and Economics.
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  And that was just eye-opening.
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  And every time I read an article
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  by someone I thought was really good,
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  I wrote the person's name and where the person was.
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  And five college universities kept coming up, Chicago, UCLA,
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  duke, university of Virginia,
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  and VPI, which is now Virginia Tech.
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  I applied at all of them, got accepted, all of them.
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  And UCLA gave me the best offer.
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  So I ended up going to UCLA.
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  By then, Demsetz had moved to UCLA.
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  Anyway, that's, that's how I got into it.
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  - Wow. And and Arm Alkin w was there at that time.
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  - Yeah. And I kept writing his name down.
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  So when I was in my second year at the University
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  of Winnipeg, I read this article he'd written called The
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  Economic and Social Impact of Zero Tuition.
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  And it was just so beautiful, just such good reasoning.
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  And he laid out how the
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  idea of subsidizing people to college to go
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  to college doesn't make sense when the fact that they can go
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  to college means they're already kind
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  of gonna be in the upper rungs of the income distribution.
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  And his analogy was, if some, if an oil,
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  if someone's sitting on a, if on a patch of oil
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  and doesn't have the money to drill you,
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  don't give him the money.
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  At worst you'll lend him the money
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  because he's gonna be a wealthy guy once he drills.
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  So your brain is like the patch of oil.
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  And I, and so there was this, there was this commission
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  to look into what they should do about university financing.
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  And I just wrote it out, not even using a typewriter,
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  just wrote out that argument, quoting him, also,
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  putting it in my own words
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  and submitting to this, this committee, why should they,
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  why they should be charging us higher tuition
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  and not subsidizing us.
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  So that was my first attempt
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  to kind lay out some economic reasoning.
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  - That's fascinating. I know at some level, UCLA has been,
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  in many respects, a home
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  for many Chicago School of Commerce.
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  At one point, I think they were calling it
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  Chicago West. Well,
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  - When Sam Peltzman, who I went
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  to visit when I first got there,
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  'cause I, he was there as last year
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  before he went back to Chicago,
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  he had a bumper sticker on his door, the University
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  of Chicago at Los Angeles.
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  - Oh, that's great. That's so funny.
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  - Yeah, yeah.
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  - Well, I'm, I'm curious, you know, like one,
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  I I know many other legends of economics legends have been
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  through there as well.
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  Certainly, you know, Hoover's very own John Hogan,
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  as well as now past John Ian and, and Eddie Lazier.
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  Eddie Lazier attended as, as an undergrad.
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  And John Ian and John Hogan were there for their PhDs.
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  Many Hoover, Hoover luminaries have, have been
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  through UCLA as well.
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  Yeah. So I'm just curious, what, if you could define, like,
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  you know, what did they mean, you know,
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  what were the ideas about property rights
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  that folks like Harold Demsetz
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  and Arm Elian we're coming up with?
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  Explain like what exactly, you know,
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  is the Nirvana approach?
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  Yeah. And, and and what exactly does that mean?
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  - I'll start with Elgin and then go to Demsetz.
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  So the way I once summarized Elgin's work is you tell me
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  the rules and I will predict behavior.
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  And so, you know,
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  you tell me the particular property rights regime
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  or absence of property rights, and I will predict behavior.
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  And one of the things that was so great about Elsin is that,
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  you know, the, the,
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  the profession had become pretty mathematical by then.
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  I went there in 72 and he didn't do that.
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  He could do math, he was good at it,
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  but he thought you could be rigorous with words.
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  And I learned that when, when he graded me, how I,
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  I would just use words very loosely
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  and he would kind of write in the margin, no, that's,
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  you know, you don't want to minimize this and maximize that
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  'cause you can't do those at the same time, you know,
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  stuff like, and, and so he just,
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  that was just a great thing to learn from him.
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  Dem sets was along the same lines.
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  Dem sets wrote a piece in the a ER papers and proceedings.
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  It would never be published now to called towards a theory
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  of property rights.
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  And it was, it's one of the most read articles in the a ER.
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  And you know, it's just all about
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  how in Canada when the various Indian tribes
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  were, were catching beaver.
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  And they didn't, you know, they,
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  they wanna make sure they didn't,
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  someone didn't encroach on them
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  and they had a kind of a kind of property rights set up.
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  So he did all of that stuff.
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  Also, I, there was this book on the UCLA economics school
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  that I did with a fellow economics,
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  a fellow graduate student at UCLA.
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  And it was published by Fraser Institute.
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  And I pointed out that if you look at the timing of the,
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  of this article he wrote where he, he talked about
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  what happens when you have things in common.
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  It proceeded by a year, the famous article, tragedy
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  of the Commons by his name's not coming to me,
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  it's the most read article in Science magazine ever.
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  And, and so anyway, he, he, he, he beat him by a year,
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  but he didn't come up with that term.
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  So it's just those kinds of insights that,
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  and so dem sets, it's the same thing.
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  You tell me the rules, you tell me the property rights,
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  and I will start predicting behavior.
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  - Garrett Harden's fascinating.
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  - Garrett Hardin was the author of the Peace and Science.
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  - That's fascinating. I know that this is sort of also a, a,
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  a big, really critical to what I would say is the, you know,
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  founding of of new institutional economics, which, you know,
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  folks like Drone Edge, Moog
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  and others are, are, I think part of, in just arguing,
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  you know, how much property rights,
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  having good property rights is, is essential
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  for economic growth.
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  Yeah. And it's interesting, you know, how many others I,
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  I guess, have gone through UCLA over the years,
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  whether it's, you know, Jerry Jordan who became president
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  of the Cleveland Fed, I think Bill Sharp,
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  you know, for the sharp ratio.
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  He, he went through UCLA,
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  - Walter Williams got his PhD a couple years ahead of me.
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  We didn't overlap.
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  He left just, you know, months before I got there.
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  So yeah, there were a lot of a, a lot of heavy hitters.
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  Could I get into the dem sets and the nva? Absolutely.
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  So, so he wrote an article in the Journal
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  of Law Economics called Information
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  and Efficiency, another Approach.
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  And what it was, was essentially a critique of this piece
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  by Kenneth Aero, where he basically was saying, you know,
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  Kenneth Aero is using what he called the Nirvana approach.
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  You look at problems with the free market and then you say,
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  therefore we need government,
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  but you don't examine how government works.
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  So people now call it the Nirvana fallacy,
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  but it was really Nirvana approach
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  and it consisted of three fallacies, according to dem sets,
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  the grasses greener fallacy,
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  the people could be different fallacy
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  and the free lunch fallacy.
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  And he laid out how Arrow did all of committed all
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  of those fallacies in, in his famous article.
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  So that was, that was huge.
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  And that was one of the ones that, that
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  we highlighted in our Fraser book on the UCLA school.
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  - That that's fascinating. It's amazing how at some level,
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  economists have been become so obsessed with market failure
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  and at some level kind of forgotten about
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  government failure.
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  Yeah. And, and I, I think at some level you have to sort
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  of balance those two up.
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  But I think it, in economics 1 0 1 classes, I think very,
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  very few actually teach any concept of government failure.
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  Or, you know, what if you overcorrect
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  for these externalities, what, what kinds of dangers?
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  What if you can't really measure social marginal costs?
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  What, what happens from the, the government intervention
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  that that's maybe overdoing it in, in response?
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  - And what happens if the government officials don't have
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  the right incentives?
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  And the way I've often put it,
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  and this is quite in line with dem sets, is okay,
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  you laid out how incentives in the free market can lead
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  to bad results.
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  When I'm not taking account on negative externalities,
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  I over pollute, et cetera, you forget to even look
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  at the incentives the government officials have.
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  And so it's just like, it, it it, it's just basic.
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  You know, George Stigler who picked up on,
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  he was a colleague of dem sets at Chicago
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  before Demes was at UCLA
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  and George Stigler said, you know,
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  when you're looking at free markets versus government, it,
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  it, most pe most economists are
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  kinda like the judge in a beauty contest
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  who sees contestant one and that's it.
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  And on that basis gives the award
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  to contestant two in words.
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  You aren't even examining the way, the way government works.
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  So that was a, a big thing with dem sets.
• 15:08
  - Well, well that's, that's quite something.
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  So, so I wanna, I wanna get back to some of your career
• 15:14
  and yeah, you, you were a professor at University
• 15:18
  of Rochester and you also were part
• 15:23
  of the Cato Institute very early on.
• 15:25
  I think a lot of people aren't, may not realize
• 15:28
  that the Cato Institute actually started in San Francisco
• 15:31
  on, on the West Coast.
• 15:32
  Yes. I mean, tell us about some of those early days and,
• 15:37
  and, and what it was like being an economist at, you know,
• 15:41
  at a time that was so before the Reagan revolution.
• 15:44
  Yes. You know, free markets, you know, wasn't totally
• 15:49
  something that I'd say was maybe fully embraced
• 15:51
  by the GOP at that point.
• 15:52
  I mean, the Nixon saw, you know, a lot
• 15:56
  of different things from price controls to you name it,
• 16:00
  you know, which is very, very different from sort the,
• 16:03
  I'd say free market policies of the, of,
• 16:06
  of the Reagan administration.
• 16:07
  I'm curious, what, what was that time like for you
• 16:10
  and you, you obviously also went
• 16:12
  to serve in the legendary Reagan CEA
• 16:14
  that many others had worked in, including
• 16:17
  Hoover's very own John Cochrane as well
• 16:19
  as Paul Friedman and Larry Summers.
• 16:21
  And, and Marty Feldstein was the chair for part of it
• 16:26
  as well as Bill Kin.
• 16:27
  And who, tell us about that sort of early career in,
• 16:32
  in economic policy for you.
• 16:34
  - Well, I want to start by talking about
• 16:37
  how I decided that I wanted to do more popular writing
• 16:41
  and less academic writing.
• 16:44
  I was at University of Rochester
• 16:47
  and I was doing academic articles
• 16:48
  and having trouble getting them published.
• 16:51
  'cause I was trying the top five journals.
• 16:53
  Shouldn't have done that. But anyway, I did.
• 16:56
  And I remember I was on a call with a friend of mine one day
• 16:59
  and I was talking about this article,
• 17:00
  this academic article I was working on.
• 17:03
  And then I told him about this piece I'd done on the minimum
• 17:07
  wage for Libertarian review.
• 17:09
  And he said, David, I wanna point something out to you.
• 17:13
  When you talked about your minimum wage article,
• 17:17
  you sounded like the young, vigorous excited David,
• 17:20
  I've come to know and love when you talked about your
• 17:23
  academic work.
• 17:25
  You sounded like an 80-year-old man who is about to die.
• 17:30
  And, and I sat with that for a week
• 17:32
  and thought, you know, he is right.
• 17:33
  And a friend of mine named Roy Childs, who was editor
• 17:36
  of Libertarian Review, we were talking on the phone then a
• 17:38
  week or two later, and he said there was an opening at the
• 17:41
  Cato Institute for a policy analyst.
• 17:44
  So I applied for it, I got it.
• 17:46
  I was not a very good bargainer.
• 17:49
  And that's a whole story about the wage i,
• 17:51
  the salary I accepted.
• 17:52
  But anyway, it got me writing every week
• 17:56
  for a general audience.
• 17:58
  And then I went back to kind of thinking about elsin.
• 18:01
  It's like, how do you write clearly
• 18:03
  and accurately for an general audience, even to under, even
• 18:08
  to explain kind of complicated points.
• 18:10
  And I got pretty good at that.
• 18:13
  And so I was writing, I was applying,
• 18:15
  I was every once in a while submitting things
• 18:17
  to the Wall Street Journal and not even hearing back from
• 18:20
  them or hearing back that it was a no, you know,
• 18:22
  that's when you sent things in letters.
• 18:23
  You remember letters tell, you sent them them Anyway.
• 18:29
  But also, I, I should go back to one other thing
• 18:31
  'cause this is all kind of setting the stage for
• 18:33
  how I decided to specialize in, in writing
• 18:36
  for a general audience.
• 18:37
  Fines Welch, who was this famous labor economist at UCLA,
• 18:41
  he's the one who John Cogan and John Razin studied under.
• 18:45
  I didn't, but I was sitting in his labor economics class
• 18:49
  and he one day asked us to guess the number of readers,
• 18:53
  number of average, the average number of readers
• 18:55
  of a journal article in an academic journal.
• 18:57
  And we started a hundred and worked our way down.
• 19:00
  And finally the answer was four.
• 19:03
  And I went home that night
• 19:04
  and said, do I want to spend my life writing articles
• 19:07
  that four people will read?
• 19:09
  Let's say I'm three times the average quality.
• 19:11
  So it's 12, let's say it's a non-linear relationship,
• 19:15
  so it's 30 like still.
• 19:17
  So that was actually when I started submitting articles
• 19:20
  to the Wall Street Journal when I was a graduate student.
• 19:22
  And I kept getting rejections.
• 19:24
  But anyway, that set the stage.
• 19:26
  So Reagan gets elected
• 19:28
  and there's a whole story there about, so, okay, when I was,
• 19:33
  when I was the editor of Policy analysis, I wrote a,
• 19:38
  a defense of all these deregulating economists,
• 19:42
  people like Murray Weidenbaum
• 19:45
  because the, the Village Voice had a really
• 19:48
  scurrilous attack on them.
• 19:49
  And I wrote a, my editorial was titled A Reply to the Voice.
• 19:53
  And I sent copies to every, every economist
• 19:57
  who was pushing deregulation just
• 20:00
  so they would know if someone was defending them.
• 20:02
  And Murray Weidenbaum wrote back a nice note.
• 20:05
  He was like, Mr. Deregulation at the time.
• 20:08
  So one day I'm driving home, I quit Cato
• 20:11
  and ended up work teaching at Santa Clara University.
• 20:14
  I'm driving home from San Santa Clara to, to San Francisco.
• 20:18
  And I find out on the radio that Wheaten Baum's just chose,
• 20:22
  been chosen as the chairman.
• 20:24
  So I get home, I call his office to remind him who I am.
• 20:28
  'cause I wanted to be a senior economist
• 20:30
  and they say he is gone home for the day.
• 20:33
  So I just called the the St.
• 20:35
  Louis phone book (314) 555-1212.
• 20:39
  And got his number at home called him.
• 20:41
  And this is funny, it funny in a funny kind of way.
• 20:45
  His wife answered, and I later kind of friends with her,
• 20:48
  but she answered
• 20:49
  and I said, I heard Murray's gonna be the
• 20:51
  chairman of the council.
• 20:52
  And she goes, he is.
• 20:55
  So he had, he'd accepted without telling her that's like,
• 21:00
  that wouldn't work in my marriage.
• 21:02
  But anyway, so he called me back
• 21:05
  and then he said, yeah, he'd be back in touch.
• 21:07
  And then they were dealing with the budget and tax policy.
• 21:11
  He had no time to be back in touch.
• 21:13
  Meanwhile, Kogan,
• 21:14
  John Kogan we talked about had become Assistant Secretary
• 21:17
  of Labor and he hired me to be one of his assistants.
• 21:21
  That's how I got closer to Kogan.
• 21:23
  It's also how I got closer to John Raisin,
• 21:25
  who became a very good friend when we,
• 21:28
  'cause we knew each other in graduate school,
• 21:29
  but he was a year ahead of me
• 21:31
  and, you know, we didn't know each other well anyway,
• 21:34
  so I went there
• 21:35
  and then once I was there, Weinbaum invited me over
• 21:39
  for an interview for Senior Economist, made me the offer
• 21:42
  and I was gonna be working under him.
• 21:44
  And Bill Neon, bill Neon was one of the members.
• 21:48
  But then Murray quit in July of 82.
• 21:53
  I was coming in in August.
• 21:55
  So he and I overlapped for only a few weeks.
• 21:57
  That was another interesting story.
• 22:00
  I had left the labor department on a Friday.
• 22:03
  My wife to be had moved from Santa Clara where we'd met.
• 22:06
  She was a, an English composition lecturer.
• 22:09
  And we're planning out our, our next, our our week
• 22:13
  of vacation before I start that job.
• 22:16
  And I get a call from Murray
• 22:18
  and he says he's talked to Marty Feldstein his replacement,
• 22:21
  and Marty has asked him
• 22:22
  to invite all the people he's made offers to not to come.
• 22:27
  Well, I'd been a summer intern at the Council
• 22:29
  of Economic Advisors in, in 73 under Herb Stein
• 22:34
  and, and Nixon.
• 22:35
  And so I knew the kind of the, the rule,
• 22:37
  the gentleman's rules, which is the person making the offer.
• 22:41
  It's good no matter who comes in and replaces him.
• 22:44
  So I said to Murray, could you please tell Marty I
• 22:47
  respectfully declined his, his invite.
• 22:50
  I'm coming. So I got there and,
• 22:53
  and overlapped with Murray for two weeks
• 22:57
  and then Marty came in
• 22:59
  and so it, it kind of worked out well.
• 23:00
  That was another thing, like I, I looked around, I,
• 23:03
  I knew he was bringing in Paul Krugman,
• 23:06
  he was bringing in Larry Summers.
• 23:07
  And I thought, well, they're not health economists.
• 23:10
  And I looked around,
• 23:11
  there was no one doing health economics, it seemed to me.
• 23:14
  And I hadn't done it,
• 23:15
  but I'd read a lot of it and I liked it.
• 23:18
  So I spent two weeks just boning up on health economics
• 23:22
  to be ready to make my pitch to Marty.
• 23:25
  And so I would, you know, I'd, there was, you know,
• 23:29
  health Economist named Joe Newhouse, everyone's heard of.
• 23:32
  And I'd read his work
• 23:33
  and I'd call him up to ask him a question about it
• 23:37
  and he'd take my call.
• 23:38
  'cause I'm calling from the Council Economic Advisors.
• 23:40
  And I could tell by the way he answered
• 23:42
  that was not a dumb question.
• 23:45
  And so anyway, Marty, the day
• 23:48
  after Labor Day was his first day,
• 23:50
  and he had all of us in this little room,
• 23:52
  maybe these like 12, 15 senior economists,
• 23:55
  junior economists like John Cochran
• 23:59
  and Greg Manchu, I mean, you know, all these people
• 24:02
  that turned out to be heavy hitters.
• 24:05
  And Marty said, I want you to go around the table
• 24:09
  and say your name and where you came from.
• 24:11
  And I thought, you know what? I'm gonna,
• 24:13
  I'm gonna take a chance here.
• 24:14
  So when it got to me, I said,
• 24:16
  David Henderson labor department,
• 24:18
  and I'd like to be the health economist.
• 24:20
  And I see Larry and Paul just kind of whispering
• 24:24
  and laughing like, who the hell's this guy?
• 24:27
  I go back to my office an hour later, I get a call,
• 24:30
  the chairman would like to see you.
• 24:32
  It was his, it was Marty's secretary.
• 24:35
  And I went down there
• 24:37
  and Marty says, I hear you're somewhat
• 24:39
  of a health economist.
• 24:40
  And I thought, do not over promise.
• 24:43
  I said, well, two weeks worth, but I'm a fast learner.
• 24:46
  And he goes, you got it.
• 24:47
  So I was the health health economist under Very good.
• 24:51
  - Well what, I mean, what was it like, I guess you,
• 24:55
  you people like Paul Krugman, Larry Summers, I mean,
• 24:59
  I'm sure there were probably others
• 25:00
  around I maybe Greg Manchu came later and, and
• 25:03
  - No, he was there as a junior.
• 25:04
  Okay. He was there as a junior. Yeah.
• 25:07
  - And was it clear
• 25:09
  that these folks were all pretty ascendant, I guess,
• 25:12
  and in macroeconomics at the time and, and
• 25:14
  - Paul Crewman was already known for his thing
• 25:18
  that helped win him the Nobel Prize,
• 25:20
  which is the monopolistic competition thing.
• 25:22
  Like I, I think it kind of,
• 25:24
  the way I think he posed the question is why is it when we
• 25:27
  talk about specialization across countries, why is it
• 25:30
  that Sweden produces cars and United States produces cars
• 25:34
  and Japan produces cars?
• 25:35
  Like what's this specialization thing?
• 25:37
  And he had this whole model
• 25:39
  and that was, that was part of, of it.
• 25:41
  And people knew about it.
• 25:42
  And so I had a friend who was a,
• 25:45
  for a fellow UCLA graduate a couple years ahead of me,
• 25:48
  Ted Frack who visited me, and we were in the cafeteria
• 25:52
  and he looks over and he sees Paul
• 25:53
  and he gives me a nice summary of what Paul had written,
• 25:57
  you know, and so yeah,
• 25:59
  and everyone knew Larry was really sharp,
• 26:02
  very different personalities by the way.
• 26:04
  Like Paul kind of kept to himself. Larry was outgoing.
• 26:08
  If you wanted to go into his office
• 26:09
  and talk about something, he was very welcoming in a way
• 26:12
  that say Paul wasn't.
• 26:13
  But anyway, so it, it was an interesting group.
• 26:19
  One thing, by the way, Marty and Bill did not get along.
• 26:22
  And so the health economics was fine. That was Marty.
• 26:27
  But I, Marty made me an offer to stay a second year
• 26:32
  and I wanted to accept,
• 26:33
  because I could always say no, no,
• 26:35
  he didn't just inherit me.
• 26:36
  He wanted me. So I accepted.
• 26:39
  And then Ben Zeer had been the energy economist left, and I,
• 26:44
  and I asked if I could take on that portfolio
• 26:46
  'cause Energy was dialing down.
• 26:49
  Reagan had done the good thing by ending the price controls.
• 26:51
  And I felt like I can handle both.
• 26:53
  And Marty and Bill said yes.
• 26:55
  And it was on tho that issue
• 26:57
  where I was answering to both of them.
• 26:59
  And I had to learn how to do
• 27:02
  that without getting in the middle
• 27:04
  and getting both of them disliking me.
• 27:06
  And I, I think I ended up doing that pretty well.
• 27:09
  - That's fascinating. And
• 27:10
  and what a, what a time to be there during the,
• 27:12
  the Reagan CEA
• 27:13
  and Yeah, you know, through a, you know, there are a couple
• 27:17
  amazing tax reforms that, you know,
• 27:21
  brought marginal rates down substantially
• 27:23
  and was the one change
• 27:26
  to the business tax code really in, in 30 years.
• 27:29
  And, and it wasn't until the Tax, tax
• 27:31
  and jobs act of, of 2017 that
• 27:36
  the US was able to, to cut the corporate tax rate again.
• 27:39
  I wanna just talk a little bit about, you know,
• 27:42
  your interest in getting into, you know,
• 27:45
  communicating economics to the public.
• 27:46
  And I know we talked a little bit before about shifting
• 27:49
  from, you know, writing academic articles,
• 27:51
  which maybe a few people read to, you know, writing more,
• 27:55
  more for, for the public.
• 27:56
  I mean, I think you were very early in, you know,
• 27:59
  communicating to the public online and,
• 28:03
  and you know, you've been involved with Econ Log,
• 28:07
  you have a Substack now.
• 28:09
  Yes. You have the Concise Encyclopedia of economics,
• 28:12
  which you, you've been working on for, for a long time.
• 28:14
  I'm curious, you know, what piqued your interest in,
• 28:17
  in these various groups and and how did that all start?
• 28:22
  - So it really started with writing for Fortune.
• 28:26
  When I was at the Council of Economic Advisors,
• 28:29
  ed Meese was a, you know,
• 28:31
  major figure in the Reagan administration.
• 28:34
  And he asked either Bill Neon or,
• 28:38
  or Marty, I can't remember who as a favor, could,
• 28:41
  could he kind of assign one of his senior economists
• 28:44
  for a few hours to help him with this speech?
• 28:47
  He was making critical of industrial policy.
• 28:50
  And I thought, yeah, I'm very critical of industrial policy.
• 28:54
  And when I started researching it, I went, oh my God,
• 28:56
  like I've learned so much.
• 28:58
  And one of the big things was
• 29:00
  what I ended up calling the myth of meaty, that meaty,
• 29:04
  the Ministry of International Trade
• 29:05
  and Industry in Japan didn't plan the economy that much.
• 29:09
  And to the extent they tried, they failed.
• 29:12
  And so I wrote some of these things up for Ed Mesa's office
• 29:16
  and I thought this would be a great article.
• 29:18
  And meanwhile, I was talking to the Washington Bureau chief
• 29:21
  for Fortune, whom I'd met at a conference a few years
• 29:24
  earlier, and he'd said,
• 29:25
  when you get an idea right up a couple of paragraphs.
• 29:27
  And I did, he sent it up to New York
• 29:30
  and they said, yeah, let's get David, let's get Henderson
• 29:33
  to do this, this, this piece on it.
• 29:37
  And they offered me an amount of money I'd never heard of.
• 29:41
  This is in 1980 $3.
• 29:43
  They offered me three grand with a 10% kill fee, 300.
• 29:47
  So kill fee, meaning if they don't use it
• 29:49
  'cause they don't know who I am.
• 29:51
  And a two week deadline I thought,
• 29:53
  don't bargain about money, bargain about time.
• 29:55
  So I asked for three weeks and I just kept writing
• 29:58
  and rewriting and honing again.
• 30:00
  I got the economics, I got the facts.
• 30:03
  The whole thing was make this sucker sing.
• 30:06
  And the first two paragraphs were so powerful
• 30:10
  and I, I don't know, I don't think I can kind of quote them,
• 30:13
  but I can kind of, okay.
• 30:15
  In 1954,
• 30:17
  a small Japanese electronics firm asked the Ministry
• 30:21
  of International Trade and Industry meaty for permission
• 30:24
  to buy $25,000 in US dollars in order
• 30:28
  to buy technology from Western Electric Meaty.
• 30:32
  Turned it down, the company tried again, meaty,
• 30:36
  turned it down the third time it, it, it,
• 30:40
  it approved it.
• 30:43
  They bought the technology, it was the transistor
• 30:46
  and the company Sony went on to great, you know,
• 30:50
  great profits, something like that.
• 30:52
  And, and so I, I said it really well, but I real,
• 30:55
  and I remember when the fact checker couldn't find that,
• 30:58
  I went, oh my God, there goes my paragraph.
• 31:01
  So I tracked down the executive at Western Electric
• 31:05
  who was way beyond retirement, who had made the deal.
• 31:09
  And, and I showed her, no, he, here's
• 31:11
  what he said, and you can call him.
• 31:13
  And I saved that paragraph.
• 31:15
  And anyway, so that's what kind of led me there.
• 31:17
  And then we were moving out here
• 31:19
  to the Naval Postgraduate School
• 31:21
  and to be able to ever afford a house, I needed
• 31:24
  to write four to six book reviews
• 31:27
  or whatever for Fortune every, every year.
• 31:30
  And I made a deal with Dan Salman,
• 31:31
  he was a great, great editor.
• 31:34
  And, and so I did that for a few years.
• 31:37
  And then in 1990, time, time
• 31:42
  and Warner merged became Time Warner
• 31:44
  and they wanted to do a joint project, some kind
• 31:46
  of encyclopedia of economics.
• 31:49
  And they asked Dan Salman,
• 31:50
  he was very economically literate, very good writer.
• 31:54
  And he said, I can't do it. And they said, well, who can?
• 31:56
  He said, David Henderson. He, they said, who else?
• 31:59
  And he said, no one else.
• 32:01
  So they contacted me, he contacted me to tell me.
• 32:04
  So by the time the, the editor at Fortune
• 32:07
  Woman named Ann Morrison called me, I'd had two weeks
• 32:11
  to really think it out, an outline.
• 32:13
  And then when she called me, I just cord dumped.
• 32:15
  I just told her everything. She goes, well,
• 32:18
  we're looking at some one other proposal,
• 32:19
  but I think this is it.
• 32:21
  And so anyway, that's what led to, led to it.
• 32:24
  And I got really good people in there.
• 32:26
  I got Paul Krugman, I got Larry Summers, I got James Tobin.
• 32:31
  I, I, and, and I wanted it to be mainstream,
• 32:34
  even if it's a little bit of a free market kind
• 32:36
  of tint to it.
• 32:39
  It's the kind of things
• 32:40
  that economists across the board except sometimes in
• 32:44
  macro could agree to.
• 32:46
  And I think it was very successful in that respect.
• 32:49
  And then it, it sold really well for that kind of book,
• 32:52
  over 10,000 copies and closer to 15.
• 32:55
  But it, that's not the kind
• 32:57
  of book Warner Books should, should have.
• 32:59
  And so probably would've sold 30 if it
• 33:01
  had been the right publisher.
• 33:03
  Anyway, the rights reverted to me
• 33:05
  and then later on Liberty Fund came along
• 33:07
  and said, how about we put it online
• 33:12
  and then how about you do a second edition?
• 33:14
  So we called it the Concise Encyclopedia
• 33:17
  of Economics first edition,
• 33:19
  and then the new edition,
• 33:20
  which was way more work than I expected,
• 33:23
  was the second edition.
• 33:25
  So that's kind of how that worked out.
• 33:27
  - Well that's amazing. And you know, to your credit, I mean,
• 33:30
  working with people like Ed Ed me, it's amazing
• 33:34
  'cause he really transformed the consider of legal movement.
• 33:40
  He, the Reagan, DOJ in the OLP
• 33:44
  or when he was Attorney General, you know, he
• 33:46
  was really began this process of hiring or, or
• 33:51
  or appointing originalist judges.
• 33:54
  And I think that was a huge turning point, certainly
• 33:57
  for the conservative legal movement.
• 33:59
  And there's a great book, recent book called The,
• 34:02
  the Me Revolution by Gary Lawson
• 34:04
  and Steve Calabresi, that that documents
• 34:07
  and details all this.
• 34:08
  But that's really one that the conservative legal movement
• 34:11
  started to get into your and totally makes sense that,
• 34:12
  that he'd be interested in, in account like yourself helping
• 34:17
  to, to write a speech on, on industrial policy, which,
• 34:20
  which again is very timely and,
• 34:23
  and relevant again today.
• 34:26
  Well, I I really wanna thank, well,
• 34:27
  can I add one more thing about that?
• 34:29
  - Because I got going on industrial policy
• 34:31
  and I don't, I'm not, I don't want to take too much credit,
• 34:34
  but I do know that there was this discussion
• 34:36
  of whether we should have a chapter on industrial policy in
• 34:40
  the 19, in the 1984 economic report of the President,
• 34:43
  which was the major thing we put out.
• 34:46
  And I remember arguing strongly for it and, and,
• 34:50
  and we ended up doing it.
• 34:51
  And I wrote big hunks of that, of that chapter. Yeah,
• 34:57
  - That, that's fascinating.
• 34:58
  I, I I guess in terms of arguments against,
• 35:02
  I mean industrial policies obviously in the,
• 35:04
  the news again today,
• 35:05
  and I'm curious if you have any sort of thoughts.
• 35:07
  I mean obviously a, you know, many economists are, are,
• 35:12
  are, are post-industrial policy, you know,
• 35:14
  because of these arguments about picking winners and losers.
• 35:17
  I mean, one I guess challenge that, that I sort of have
• 35:20
  with industrial policy is like c certainly, you know, one,
• 35:26
  and this is, this is less of a challenge, you know, the at,
• 35:29
  at some level if there's some sort of foreign
• 35:35
  foreign policy case
• 35:36
  or defense security case that trump's you know,
• 35:39
  economic concerns, you know, absolutely.
• 35:42
  I mean, there was a time when, you know,
• 35:43
  the US didn't trade much with the, with the USSR,
• 35:46
  that's why they called, you know,
• 35:49
  they called the SSR blocked the,
• 35:52
  they called it the second world.
• 35:54
  And you know, they called, you know, Africa, the poor world,
• 35:56
  the third world and, and you know,
• 35:58
  the free world was the first world and,
• 35:59
  and so they didn't really trade or communicate right.
• 36:03
  And of course, you know, that that might not be in the best
• 36:05
  interest, but there may be national security concerns, why,
• 36:09
  why one may wanna do that, why one may wanna
• 36:12
  use government subsidies to reshore chips and so forth.
• 36:16
  But, you know, apart from that, you know, I I, I think
• 36:20
  at some level, I, I think for, for the folks that,
• 36:21
  that wanna really get on industrial policy, I,
• 36:26
  I think one challenge there is
• 36:29
  that I don't think there's necessarily enough ideas
• 36:33
  that I think people have to, to even subsidize.
• 36:36
  Yeah. I mean, at, at some level, you know,
• 36:38
  one could make the case that
• 36:41
  industry subsidies would be superior to simply just tariffs
• 36:45
  for, for I think that there, there's some reasons why one
• 36:50
  might wanna do that just in the sense that you're,
• 36:52
  you're not increasing prices on, on your own,
• 36:55
  your own population.
• 36:58
  But I, I'm just curious, you know, I've always thought
• 37:00
  that maybe education policy is the,
• 37:02
  is the best industrial policy in capital policy,
• 37:04
  but I'm, I'm just curious what your thoughts are now, given
• 37:08
  that industrial policy is kind of reignited this, the,
• 37:13
  the interest of, of, of economic policy people.
• 37:17
  I'm curious where you stand on these sorts of arguments
• 37:19
  and what your, what your favorite arguments are.
• 37:22
  - So the industrial policy being pushed in the early
• 37:25
  eighties is very different.
• 37:27
  A very different motive from the policy being pushed down In
• 37:30
  the early eighties, there was this idea
• 37:32
  that the government could choose winners,
• 37:34
  that somehow they could make good decisions.
• 37:37
  And that's why the myth of media was
• 37:39
  so important in offsetting that view that it was a myth.
• 37:44
  So you had Mondale who'd made it a major part
• 37:46
  of his campaign in 1984 against Reagan.
• 37:49
  And I saw him, I saw Mondale coming,
• 37:52
  and that's another reason I was pushing
• 37:54
  for having this chapter.
• 37:55
  This is how we can help our president
• 37:57
  and be saying things that we believe and that are important.
• 38:01
  So now it's more 'cause,
• 38:04
  and it wasn't about national security, not really,
• 38:07
  now it's a different kind of argument.
• 38:09
  It's a messier argument that somehow we need to subsidize,
• 38:14
  as you say, say computer chips
• 38:16
  or whatever in order
• 38:17
  that we don't depend on certain supply chains that are,
• 38:20
  that could be at risk in a conflict.
• 38:22
  And that's a messier one.
• 38:24
  And it's, I still don't think the government has really good
• 38:28
  information or really good incentives.
• 38:30
  So I would still argue against that kind
• 38:33
  of industrial policy, but it's a different argument.
• 38:37
  I mean, the argument is the same,
• 38:39
  but I'm arguing against a different thing.
• 38:43
  - Yeah, absolutely.
• 38:44
  And, and that's, that's a, a, a great historical context to,
• 38:49
  to our, our comparison to draw on.
• 38:51
  Well David, I really wanna thank you for coming on.
• 38:54
  This is a real honor interviewing you,
• 38:55
  learning about the history of property rights,
• 38:58
  Harold Demsetz, arm akin there thinking that UCLA,
• 39:02
  what your journey has been like as a, an economist,
• 39:05
  as an academic, as a policy maker, as a a communicator.
• 39:09
  I really wanna thank you for coming on.
• 39:10
  This has been a real honor.
• 39:12
  - Well, you're welcome. Can I also just push for a minute,
• 39:14
  my substack Absolutely.
• 39:16
  David R. Henderson substack dot Substack
• 39:19
  and I call it I blog to differ.
• 39:21
  And anyway, so it's been a real riot doing that
• 39:24
  for about the last year and a half.
• 39:26
  - Well, thanks so much for David for coming on.
• 39:28
  - Thanks. - This is The Capitalism and Freedom
• 39:31
  in the 21st Century podcast, an official podcast
• 39:33
  of the Hoover Institution Economic Policy Working Group,
• 39:35
  where we talk about economics, markets, and public policy.
• 39:38
  I'm Jon Harley, your host. Thanks so much for joining us.