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Date: Thursday, 09 Oct 2014 14:00

(Photo: pinguino k)

(Photo: pinguino k)

It’s fundraising season again here at Freakonomics Radio. This episode is a rebroadcast of the first time that we asked listeners to donate to help keep our public-radio podcast going strong. This episode is called “How to Raise Money Without Killing a Kitten.” (You can download/subscribe at iTunes, get the RSS feed, or listen via the media player in the post. You can also read the transcript; it includes credits for the music you’ll hear in the episode.)

In this podcast you’ll hear the economist John List give us the gospel of fundraising — what works, what doesn’t, and why. List and economist Uri Gneezy write about the science of charitable giving in their book The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life.

List gives us a lot of ideas about how to successfully raise money — like using good old-fashioned guilt, for instance. Or that attaching a lottery or raffle to your fund-raising effort is a good idea. But our favorite way that List says you can raise more money: get an attractive person, preferably a woman, to do the asking for you. So we try out a few of List’s tips. We dare you not to donate once you hear from certified-attractive people like Savannah Saunders, a Swarthmore student, Wilhelmina model, and ardent Freakonomics fan. You’ll also hear Adrian Grenier, the actor and director best known for playing Vincent Chase on Entourage, turn on his good-looking mojo for the Freakonomics cause.

Freakonomics_Splash_Contest_300x225And if you are immune to the beauty effect, we have some swag to entice you: a Freakonomics Radio t-shirt, a mugsigned books, and — best of all — a chance to win a trip to New York City to hang out with Stephen Dubner and the whole Freakonomics Radio crew.  Just click the button on this page that says “donate now” and you’ll be entered to win. You don’t even have to make a donation to enter the contest, but of course we hope you will. If you do win, you’ll have lunch with Stephen Dubner, visit us at our home station, WNYC, and see how we put together our podcast. We’re excited to meet one lucky listener very soon! Oh, and one last thing: John List told us to tell you guys that if you don’t donate, the show might go away. But, as Dubner says:

DUBNER: I’m uncomfortable saying that. That feels like give us money or we’ll kill your kitten.

So we’ll say it here: Donate today and nobody hurts the kitten.*

*It’s been one year and still, no kittens were harmed or will be harmed in the making of this radio show.

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Date: Thursday, 02 Oct 2014 14:00

This is a transcript of the Freakonomics Radio podcast “Fixing the World, Bang-for-the-Buck Edition

[MUSIC:Vagabond Opera, “Hanumonsoon” (from Sing For Your Lives)]

Stephen J. DUBNER: Hey podcast listeners. The episode you’re about to hear is called “Fixing the World, Bang-for-the-Buck Edition.” In it, you’ll hear how a bunch of economists have teamed up to measure the ROI, or return on investment, for the development goals set by the United Nations. In other words: if you only have $100 — or, in the case of the UN, $100 billion let’s say — to fight something like global poverty, what’s the best way to spend that money? What’s the ROI on early education vs. job training vs. small-business subsidies?

We do this kind of thing a lot here at Freakonomics Radio — try to measure the ROI on things that aren’t so easy to measure. So let me turn this around and ask you a question: what is the ROI, for you, from Freakonomics Radio? Does the time you spend listening to the show make your life in any way better, more pleasurable, less bewildering?

If you believe it does — if the number you put on its value is anything at all north of zero — well, I hope then you’ll consider making a contribution to WNYC, the public-radio station here in New York that produces our show. Just go to Freakonomics.com and hit the “donate” button. Any and all contributions are appreciated, although you will find the rewards get better as you climb the dollar ladder. Freakonomics Radio t-shirts and mugs, autographed books, things like that. And if you decide that this program isn’t worth anything to you, not even 5 bucks — well, now we’ll know that too, and we’ll work harder in the future to make it worth more. But I do hope that you’ll go to Freakonomics.com to donate — thanks a million, or a billion, or $100 billion, whatever the case may be.

[MUSIC: Nasimiyu, “Dandelions” (from Rules Aren’t Real)]

Bjorn LOMBORG: My name Bjorn Lomborg. I’m a public intellectual, I guess you could say. And I run the Copenhagen Consensus Center, where we bring together lots of economists and seven Nobel Laureates to think about where do we spend money and do the most good per dollar spent.

DUBNER: Let’s say you want to “fix the world” – in some fashion, to some degree, as daunting and difficult as that may be. And let’s say that you have more than $100 billion a year to spend. This is not a fictional scenario. This is what really happens: development aid is a huge industry. So what kind of problems do we spend money on? And how are those problems chosen?

LOMBORG: We focus on a lot of different issues in the world, and many of them we focus on because they get lots of attention; they’re in the press they’re good stories, they have lots of crying kids, or cute animals. But of course in reality, what we need to do if we want to do good is to focus on where do we do the most good for every dollar spent. Now, a long time ago, I dabbled a little in this conversation and what should we be focusing on and I was pretty sure somebody must have looked at that. Surely somebody has given us the menu list, if you will, of society’s different choices and told us what are the bang for the buck for these different issues. It turns out that really nobody has, and for a fairly simple reason because if you’re working in any particular area, say if you work for education to small kids, or if you work for nutrition, or you work in global warming, or saving pandas, or whatever that thing is, you don’t really want to find out what’s the smartest thing because there’s a good chance that it’s not going to be your thing. But of course we want to find out as a society because we want to do the most good.

DUBNER: So that’s discouraging although obviously you provide an alternative to that. Let me ask you this: even within a realm, whether you’re saving pandas or thinking about poverty, famine, education – let’s say I’m focused on just the one realm and I’m not going to compare it to all the other projects. At least within my realm, don’t I want to be vigilant about measuring ROI, about seeing what I get for the money that we put into it?

LOMBORG: And there is definitely more of that if you look for instance at disease, the World Health Organization has a disease priorities project where they’ve actually looked at what’s the bang for the buck for more than 300 different diseases. But when you’re a doctor, and you’re out there, and you’re confronted with a specific type of patients at your place, so you see malaria, or you see schistosomiasis, or you see some other disease, it’s really hard to say well maybe I should be somewhere else on the planet doing something else. You’re going to say, ‘I want to cure this disease.’ But there’s a lot more we can do for this amount of money. Just to give you one example, you can probably save one person from dying from malaria for about $1,000. You can probably save one person from dying from HIV/AIDs for about $10,000. Now, both are good deals, but you have to ask yourself, ‘Don’t we want to first save 10 people from malaria before you save one person from HIV?’

[THEME]

ANNOUNCER: From WNYC, This is FREAKONOMICS RADIO, the podcast that explores the hidden side of everything. Here’s your host, Stephen Dubner.

[MUSIC: The Jaguars, “Taco Taco” (from The Jaguars)]

DUBNER: Bjorn Lomborg runs the Copenhagen Consensus Center. What it tries to do is tell governments and other non-profits the best way to spend money to solve problems around the world. The “best” as in the most useful, most rational way – as opposed to just attacking the noisiest problems, or the most politically appealing ones.

LOMBORG: We are a very small organization, we are really just the guys who commission all the smart economists around the world to write the papers that actually estimate what are the costs and benefits. So we are seven full-time employees. Most of us are based in Budapest. I live in Prague. Our deputy lives in Sweden. We have one guy working in Australia, one in the U.S., but mostly we just make sure we find the smartest people on the planet. The smartest economists doing education or doing health or doing global warming, and then asking them, ‘What can you do, how much will that cost and how much good will it do?’ We have a number of Nobel laureates that look at across all these different areas and basically say overall what’s the smartest thing to do, what’s the next smartest thing to do, the third, and so on, essentially rank all the great outcomes that we can look at.

DUBNER: Do you pay the economists for this analysis?

LOMBORG: Oh yes.

DUBNER: Okay, where does the money come from? How much do you spend in a given year and where does the money come from?

LOMBORG: We used to be funded by the Danish government, from 2004 until 2012. One of the things that the Danish government did not like was that we said, ‘Yes global warming is real, it is a challenge, but the typical way that we solve it turns out to be a pretty poor investment of resources.’ When there was a change of governments here we went from a center right to a center left government, they actually cut off our funding. And we moved to the U.S. where we get funding from private individuals and we’re trying to find a long-term solution for actually getting finding. So we’re a 501(c)(3) or a nonprofit in the U.S. We used to have a budget of about $2 million a year. Right now, we probably have a budget of a little more than $1 million a year. And we get it from private donations.

DUBNER: And for those who want to get under the hood of where those donations come from, since the current climate suspects that every donation comes with an agenda attached, describe for me the provenance of that money and if there are strings attached.

LOMBORG: There’s no strings attached. We’re very clear on saying we take no money from fossil fuels, and we do not let anyone direct what we’re going to do. So we have only taken money from private individuals and foundations that have accepted that. With that said, almost all of them have wanted to remain anonymous. There are a few like the Kaufman Foundation for instance who have accepted to say that they’ve given money to us. We’ve also got money from New Ventures Foundation, from the Randolph Foundation and from Rush Foundation.

DUBNER: Talk for a minute Bjorn, let’s go back to your… The book that put you on the map at least here and I assume there as well, The Skeptical Environmentalist which made a lot of environmentalists skeptical about you to say the least. Talk to me about why you came to the problem of climate change at all. You trained as a political scientist, yes?

LOMBORG: Yes, yes.

DUBNER: Why you came to the problem at all, what you conclusions were then in that book and where they’ve gotten to today 13 years later.

LOMBORG: So fundamentally, my book, The Skeptical Environmentalist, was really a result of my own personal journey. I read an interview with an American economist called Julian Simon back in Wired Magazine in 1997. And he said, ‘Listen you think everything is getting worse with the environment, but actually most things are getting better.’ My immediate sort of reaction was, ‘Oh, right-wing American propaganda.’ But he said one thing that really stuck with me, he said, ‘Go check the data.’ And so I decided yeah, okay I’m going to check his data, I’m going to, you know, get some of my smartest students together, we’re going to have a fun half year and prove him wrong. But as it turned out, and if you also think about it of course in many of the obvious parameters, air pollution, water pollution has come down dramatically, we’re better fed, we have higher incomes, we live longer, we have better education, so most of the things in the world are actually going in the right direction, especially if you live in the rich part of the world. And so we realized, oh wait there is actually improvement. This does not mean that there are no problems. There are still lots of problems in the world. But it suddenly means, instead of saying that the world is coming to an end, we can start having a sensible conversation of alright, so which of the many remaining problems should we be most focused on. Now, there’s no doubt that global warming is real and it is a problem, but if you implemented the Kyoto protocol which back then was sort of the gold standard of what we were trying to do with climate, we could see that it would have a huge cost. The economic estimate was about $180 billion a year, and it would have a fairly small benefit; we would postpone global warming, somewhere between two and five years by the end of the century. So I was merely comparing the fact that it was an interesting fact, you could actually give clean drinking water and sanitation to every single person on the planet for $180 billion once. Isn’t it curious to say that we could either spend $180 billion every year and do fairly little about global warming, or just spend it once and do an amazing amount of good for more than a billion people? That was the start of my point of saying, well we should compare different priorities. And of course, I thought somebody else must have made this prioritization list. Somebody else must have looked at that. And nobody had. And so I thought well somebody should, and maybe it should be us.

DUBNER: You identified yourself at the top as a public intellectual. You also are a professor at a business school, correct?

LOMBORG: Yes.

DUBNER: With the Copenhagen Consensus project, what’s in it for you? Why are you doing this?

LOMBORG: Well I used to do game theory, and computer simulations, and I was writing papers that probably if I was lucky 100 people would read in my career. And I actually really, really liked it. I’m sort of a nerdy guy. I’m the kind of guy who can download Excel sheets at Saturday night and actually think it’s really funny. So it sort of gives you a sense of what drives me. And so I was totally content with living that life. But one of the things I also try to do is when you do stuff in academia, you should also help bring that argument out. So when I’d done my Ph.D., somebody from Danish radio actually called – like Drive Time Radio, one of the most listened programs, and they said, ‘Would you care to talk on our program for three minutes about your Ph.D.?’ I wasn’t smart enough at the time, but you know somebody said I should’ve said, ‘Yeah that’s like one minute per year, sure.’ And so, I tried to convey what was it that I had done. Because I think it’s important that we give back. If we have all this knowledge and information, that should go to society. Because after all, they’re the guys who are paying for us reading good books. And so in some way, what I’m trying to do with the Copenhagen Consensus and the arguments that we’re engaged with right here and now is to try and give back that sort of argument so that we can make better decisions. And hopefully at the end of the day, we’ll end up making at least slightly better decisions, and so the world will end up being a much better place.

DUBNER: Okay, let’s talk about then, your current project. Let’s start with development aid generally, or development goals generally. How much is spent globally in a year if you can tell me on development aid?

LOMBORG: Last year we spent $134 billion of overseas development aid in all kinds of forms.

DUBNER: Which in some ways is a monstrous amount, and in some ways is really not so much..

LOMBORG: Yeah, I mean we have to remember the total global GDP is in the order of $80 trillion, so we’re talking about less than half a percent. But remember, most of the money that we spend, we spend on ourselves. So in the U.S., you spend most of your money on the U.S. But to the extent that we care about other people around the planet, I think it’s great, I would love us to spend more. But we certainly want to spend whatever we end up spending on the rest of the world in the best possible way.

DUBNER: Right, and give me a sense of how that money breaks down, especially the U.N., what the U.N.’s share of that development aid is.

LOMBORG: Well, the U.N. is actually not all that much. Much of this is either given through direct development aid like in the U.S.A.I.D. and all the equivalent international countries, then there’s some that’s given to international organizations which you could claim is partly the U.N. through the World Bank, UNICEF, the others. And then there’s probably in the order of $20 billion that goes into the U.N. budget itself.

DUBNER: Now, that said, the U.N. is perhaps of outsize influence if for no other reason the publicity it generates when it decides what’s a goal worth going after and what’s not, yes?

LOMBORG: Yes, if they’re successful. Remember the U.N. constantly make all these proclamations. I’m pretty sure you didn’t know that you were living through the International Year of Crystallography..

DUBNER: I did not..

LOMBORG: ..which the U.N. has assigned this year to be. And it’s also the decade for family farming. So they have a lot of things that they proclaim that don’t actually have a lot of influence. But there’s one set of goals that have had an outside influence for the U.N., and they’re like probably their biggest success. And that’s the ones that are called the Millennium Development goals, which basically set out a number of very specific targets from 2000 to 2015 with very specific goals.

DUBNER: Yeah, give us a very brief overview of those.

LOMBORG: Well they ended up being about 18 targets, and really we only remember about nine of them. So they were halve the proportion of people living in poverty, halve the proportion of people starving, get all kids in school, reduce child mortality by two-thirds, maternal mortality by three-quarters, and get clean drinking water and sanitation to everyone.

DUBNER: And those goals worked out how?

LOMBORG: They have mostly worked out really well. We’ve spent a lot of money on them, there’s been a lot of focus and we have reached most of them reasonably well. Now there are some things, predictably, you know getting all kids in school – well that was never going to happen, because you can’t get the last kid into school. But we’ve gone from about eight out of 10 kids going to school to about nine, a little more than nine kids out of 10. Likewise, we’ve seen a dramatic drop in poverty. But again, remember, that’s also partly because of China. And of course that has very little if anything to do with U.N. proclamations. But we have seen a surprising decline in childhood mortality. In 1990 when the targets actually take their starting date, we estimate more than 12 million kids died before their fifth birthday. Today that number is below 7. It’s probably 6.6.  So we’ve almost halved the proportion of kids dying. And remember we actually have slightly higher cohorts. So it’s a phenomenal achievement. But what is problematic is they actually promised two-thirds reduction. So what most people have heard is, ‘Oh you didn’t manage, you didn’t make it,’ because we only halved it. And so that’s the risk of setting too ambitious goals that most people have actually heard, ‘Oh, the U.N. failed.’ Yes, but we failed on an incredibly ambitious target and we’ve actually made an amazing achievement.

DUBNER: They need to learn the trick of corporate finance officers who just reforecast whenever they need to, right? Instead of saying it was by two-thirds, say it was by one-third, and you get to half and you’ve succeeded.

[MUSIC: The Diplomats of Solid Sound, “Tennessee Toothpick” (from Instrumental, Action, Soul)]

DUBNER: Coming up on Freakonomics Radio: what is Bjorn Lomborg’s group really hoping to achieve?

LOMBORG: We like to think of ourselves as constructing a menu for society. Imagine if you go into really expensive New York restaurant and you get this wonderful menu but there are no prices and sizes on it.

DUBNER: And one more thing: if you are new to Freakonomics Radio, or new-ish, or just habitually lazy, you may to subscribe to it, on iTunes or wherever you get your podcasts. It is free, it’s easy, and, like the finest restaurants, it’s all-you can-eat.

ANNOUNCER: From WNYC: This is FREAKONOMICS RADIO. Here’s your host, Stephen Dubner.

[MUSIC: Crushed Stars, “You in Frost” (from Obsolescence)]

DUBNER: Today we’re talking with Bjorn Lomborg. He trained as a political scientist; now he teaches at the Copenhagen Business School and he runs a group called the Copenhagen Consensus Center, which tries to measure the best return on investment for development dollars. We were talking earlier about the United Nations’ Millennium Development Goals, which were set for completion in 2015.

President Barack OBAMA: Nor can anyone deny the progress that has been made toward achieving certain Millennium Development Goals. The doors of education have been opened to tens of millions of children, boys and girls. New cases of HIV/AIDS and malaria and tuberculosis are down. Access to clean drinking water is up. Around the world, hundreds of millions of people have been lifted from extreme poverty. That is all for the good, and it’s a testimony to the extraordinary work that’s been done both within countries and by the international community.

Yet we must also face the fact that progress towards other goals that were set has not come nearly fast enough.

DUBNER: Now that it’s almost 2015, the U.N. is choosing a new set of development goals to be met by the year 2030. Lomborg’s group applauds the millennial goals, but it’s trying to encourage the U.N. to think about goal-setting a bit differently this time around.

LOMBORG: There was actually no good cost and benefit analysis, it was just a number of targets that all sound really good. And generally I also think they really are very good. But now the U.N. is going to redo the targets from 2015 and fifteen years onwards. And this time, instead of having a very closed argument, it was basically a few guys around Kofi Annan who set out these targets back in 2000. And then everybody adopted them. This time they have said we want to hear everybody’s input. Of course that’s very laudable, but not surprisingly, it’s also meant that we probably have about 1,400 potential targets on the table. And so we need to make sure that we don’t just end up with a whole long list of Christmas trees as they call them in the U.N. jargon – you know, you just have everything and you wish for all good things, because they’re not likely to be as effective.

DUBNER: Okay, so describe the committee process, the triaging process within the U.N. and particularly the Open Working Group, which you’ve now formed a sort of relationship with. I’m not sure exactly how to characterize that relationship.

LOMBORG: Well, the U.N. has opened several different fronts. They have asked the public to come in with their priorities almost more than 5 million people have now answered what they think should be some of the top priorities. But of course that’s more around problems than around actual solutions. They had a high level panel including the Prime Minister from Britain, and the President from Sierra Leone and Indonesia and a number of other high dignitaries who came out with their proposal. And then they had the Open Working Group, which is a collection of 70 countries. Remember, the U.N. has 193 countries, so not everyone has been heard. But they’ve gone on for about 16 months, meeting very regularly and trying to make their set of goals. The problem is, the first set of Millennium Development Goals essentially had 18 targets. The high level panel had 58 targets. But the Open Working Group, their final document came out and had 169 targets. And so my problem here is if you say you have 169 priorities you in reality have none. And that’s why we need to find a way to make fewer, smarter targets.

DUBNER: Okay, so the idea, your idea then is to create a cost-benefit analysis to help an organization like the U.N. and the Open Working Group decide which global goals to accept or to set based on cost and reality of achievement and impact. So do you feel that most of the decision makers in this realm, in the U.N. and related agencies are open to pure cost-benefit analysis, or are they, whether out of habit or incentive, wed to a more traditional political view?

LOMBORG: Oh, I think when you talk to them, and I’ve talked to quite a number of the U.N. ambassadors and their staffers, they all love the idea. I mean when we first went around to them, we told them we were going to do this long process where we had all these peer reviewed papers and they would be coming out this fall. And they were like, ‘This is exciting! Is there any way you could have this done by next week?’, was their sort of original inspiration. That was actually why we did a very rough and ready version where we simply went through their list and marked it up with green, yellow, and red colors to indicate whether it was a phenomenal, or a good, fair, or a poor target. And I think that was very influential in getting them to think about, ‘Oh wait, it’s not just about what sounds good, and what our country has decided, but it’s also about costs and benefits.’ But of course let’s be realistic. It’s not like they’re suddenly going to go out and say, ‘Oh, oh we were wrong about that, well we’ll go for something else.’ But the world will spend $2.5 trillion on development aid over the next 15 years. So we’re leveraging huge amount of money. So if we can just make essentially the U.N. ditch one bad target and put one more good target in there instead, we could do hundreds of billions of dollars worth of good. And so, you know, we’re figuring we’re only going to change a little bit, but because we’re leveraging so much, we’ll actually end up doing a lot of good.

DUBNER: When I read the 17 major categories that the U.N. has put forth so far, it strikes me that development goals, what are called development goals are often very much like macroeconomic goals. Some of them at least. So one here is ‘promote sustainable consumption and production patterns,’ which sounds a lot like economics. And ‘promote strong, inclusive, and sustainable economic growth and decent work for all.’ So am I correct to assume that these committees that are working within the U.N. are full of economists, or are they not?

LOMBORG: My understanding is that they’re full of bureaucrats, and they come from a lot of different backgrounds, but they’ll probably a lot of them be political scientists, like myself. But they’ll be much more attuned to what is it that we typically focus on. So we had a good experience, for instance when I gave a presentation at the U.N. on our project, and people actually congratulated me afterwards for having done the best seminar that they’d ever experienced. And I was really flattered until they told me because nobody fell asleep. But we were talking to the U.S. U.N. ambassador, and she was very annoyed that we had pointed out one of her favorite targets was not a very good target. And so she said, ‘I really don’t like you pointing out that this is a bad target, but I really need to hear it.’ And I think that’s basically how they feel about it. Yes they understand the necessity. But it’s politically obviously not always convenient.

DUBNER: What was this target that wasn’t so good in your view?

LOMBORG: It was the idea that we should have gender-disaggregated data. So the idea is to say that if we get more data to support the fact that women get less education, that they get less well paid, and so on it will actually help stimulate the point of getting more gender equality. It’s a very nice idea. The problem is our economists tell us that we actually have enough data to achieve this.

DUBNER: You know, you speak as though the dynamic between you and them, your group and their group is good, and it is an Open Working Group after all that called for comment from the public, including yourselves. But I have to say, I would think they hate you. It would think that they sit around being very high-minded and kind of holistic, and then you come in and say, ‘Yeah, that’s nice, but let’s talk about you know the real world.’ And persuade me that that’s not the dynamic.

LOMBORG: No, I think you’re capturing part of it. You know, clearly their life would be easier if there was no one else commenting form the outside and it certainly would be easy if there was nobody marking up some of their text with red. On the other hand, they also want to help the world. They want to leave a lasting legacy. And they know just saying something that sounds beautiful and looks great in nicely written documents is not the way to save the world. So I think they appreciate that when we say they’re red, for all the other targets, for all the ones that their negotiation partners proposed, they’re like, ‘Yay, that’s right, that’s what we said!’ But of course then when we say, ‘One of your own targets is also pretty poor’, yes, then they get a little annoyed. And at the end of the day we recognize this is inevitably going to be a discussion that has lots and lots of other parameters. But if we can push it a little bit towards more efficiency, because we’re leveraging $2.5 trillion, we can do a lot of good.

[MUSIC: Arian Saleh, “Better in Blue” (from The Cobblestone EP)]

DUBNER: Ok, so Bjorn let’s get into the findings of your group. The Open Working Group of the U.N. has according to your report 169 total targets within more than a dozen major categories that range from poverty and famine to climate change and sustainable industrialization. You ranked more than two dozen of these targets phenomenal and a slightly smaller number than that poor, everything else in the middle. So talk generally just for a moment about what it takes to turn a goal into a phenomenal ranking versus a poor ranking.

LOMBORG: Well, there’s a number of different things. It has to be very clear and it has to be very one-directional, so you’re not trying to achieve things that are really at cross-purposes. But then mostly it needs to be something that we know how to do and we know how to do fairly cheaply and it will do a lot of good. And unfortunately, a lot of the targets that the U.N. has set up turns out to be one of those things where you say, oh all good things for all good people, and we don’t quite know how we’ll work it out. And if we try and do it, it will probably be fairly costly, and it will probably not do as much good. So that’s what defines a poor target. And of course we want to push more into phenomenal targets.

DUBNER: Let’s get into some of the specific whys of a phenomenal versus a poor ranking. Let’s start with food security. ‘Ending malnutrition in all its forms including under nutrition, micronutrient deficiencies’ and so on. You said the “ending” is a bad goal perhaps because it’s perhaps impossible, but you did rate that phenomenal, versus a poor ranking for developing food systems that are more productive, sustainable, resilient, and efficient, and so on. Talk about the difference between those two, why one is great, and why one is really not great.

LOMBORG: The first one, and again if we disregard the end because we will not be able to end this, but what we should be saying is get down to two or three percent malnourishment, which is both reachable and actually would be a phenomenal achievement.

DUBNER: Where are we now?

LOMBORG: We’re at 13 percent I want to say. So you know we could definitely do a lot better. And the reality is we know that that’s very cheap. It’s essential making sure that you get, especially kids, good food for the first couple years. And we know how to do that, that’s by making sure that they get micronutrients, which is fairly cheap, and we can distribute it in the health days that are typical across much of Africa and Southeast Asia. And then we need to have emergency opportunities to get lots of calories to babies when they’re severely underfed. Both of which are fairly low-cost; we estimate per child it’s about $96. And the benefits are phenomenal. We know from studies around the world that if you can get better nutrition to kids, their brain develop more they stay longer in school, they learn more. Even if they’re in a crappy school, they’ll learn a lot more. And actually if you avoid being stunted, which is one of the best ways to show that you’ve been malnourished, you make three times the income when you become an adult. So basically you’re much, much more productive person in society. So we estimate that for every dollar you spend on that very simple way of avoiding malnutrition, you do about $59 worth of good. Now, the other target you asked about essentially tries to say we should do all good things. There are some of these things we don’t quite know how you would do. But let me just take the sort of obvious contradiction. On the one hand, you want to be more environmentally sustainable, which is a great thing, which means putting in less fertilizer, less pesticides, having less intensive agriculture. On the other hand, you want to get food enough so that everyone is fed and they’re fed cheaply with good food stuffs, which typically means you need to put in more fertilizer, more pesticides, more intensive farming. And so you’re essentially asking to do both things. Now, I’m sure there are some ways that we could actually develop a target that would still make some sort of balance and actually could be okay. But it’s not obvious that this would be more than okay, and it’s very likely that we would just simply end up taking parts of it and end up making it a pretty poor policy.

DUBNER: Let’s talk about a couple of education goals then. You are in favor, you give a phenomenal ranking to the idea of increasing the proportion of kids who are able to access and complete pre-primary education. Do you want to talk for just a second about the returns to that?

LOMBORG: Again I should just say that it’s not just me who are saying this, we asked 32 of the world’s top economists across all of these different areas, and this is their evaluation. So it’s not because I’m sitting here and saying, ‘Hmmm I think this or that.’

DUBNER: Fair enough, thank you.

LOMBORG: But the economist that looked at education actually shows that we have managed to get most kids into primary education, but there’s a lot of kids that don’t go to pre-primary education, preschool. Partly it’s very cheap because you don’t need all that much qualifications to teach. It’s very easy to get kids in there because they don’t really compete with anything else. The parents are not saying, ‘Oh but you could make a living wage instead.’ And they’re also much more open to having girls especially go to these preschools. So we can do something that is cheap, and we actually know that this leave lasting effects on being able to better educate yourself also in the future, even if you don’t get a formal education. So we estimate that the benefits are in the 30s. So probably for every dollar spent you do $33 worth of good. Now, is this a true number? Of course it’s not; it’s an estimate. But it gives you an indication that this is probably one of those places where you would get excellent return on your dollar.

DUBNER: Okay, so big return on pre-primary education, what about post secondary, college and so on?

LOMBORG: Yeah, the problem is that the way it’s formulated, they want to promise, and this is typical for these sorts of documents, they want to promise everybody to be able to get into, for instance, university. It’s a beautiful idea, but the problem is for most countries it ends up being a way to subsidize rich people’s kids to go to college. If you make college free, because most of the attendees at universities are from the high classes, that is effectively a subsidy to rich people’s kids. Instead what you should be doing is if you want to get more poor kids into college, you should be giving them scholarships. That’s a much cheaper much more directed way to make sure that you get a better socio-economic profile in college. But let’s not kid ourselves. This is not what makes productivity dramatically rise in the first 30 or 50 years of development. That’s much more about getting everyone educated so they can read and write.

DUBNER: Let me ask you about a phenomenal and a poor ranking the Copenhagen Consensus Center has given for two goals in the climate change arena. Phenomenal mark goes to the proposal to ‘By 2030 phase out inefficient fossil-fuel subsidies.’ But a poor mark to the proposal to ‘double the share of renewable energy in the global energy mix by 2030.’ At first blush those might seem to be contradictory. Explain why one gets phenomenal the other poor.

LOMBORG: Most people when you talk about it, certainly when we’re reaching out to an American audience will think that fossil fuel subsidies are something of the First World. It’s actually not. By far, the majority of fossil fuel subsidies come in Third World countries where many countries are subsidizing their basic provisions like bread and also gasoline as a way to keep their population quiet. Iran spends almost $75 billion, which is a huge proportion of their national budget, likewise with Egypt, some of the other big ones are Russia, China, India, Saudi Arabia, and that actually helps destabilize anything else those powers can do because fundamentally they can’t afford to provide, for instance better healthcare, or better education, or many of the other things because they’re spending a huge amount of their resources on fossil fuel subsidies. Of course they’re also at the same time encouraging overuse of fossil fuels and thereby more emissions of CO2. And also of course, if you for instance subsidize gasoline. You’re basically helping people who can afford a car, which will typically be the rich people. So in reality, cutting these subsidies has benefits on all those different accounts, and will probably leave the state much better able to do the things that it should actually be focusing on, namely for instance education and health and so on.  When you talk about getting more green energy, it’s something that a lot of us in the rich West like, we want to have more solar panels and wind turbines. The problem is for most people in the poor world it’s about getting access to electricity. And that access is mostly, not always, but mostly much cheaper with fossil fuels. There’s an estimation from the Center for Global Development in D.C. that looked at, you know, Obama has pledged to help electrify Africa. And the U.S. is probably going to spend about $10 billion doing so. That’s very wonderful. But if you spend it, which Obama will probably do mostly on renewables, they estimate that you can help about 20 million people come out of darkness, and hence poverty. But if you spent the same $10 billion on gas, you could lift 90 million people out of darkness and poverty. So the fundamental point here is to say that you can do much, much better and so unless you are very careful with your subsidies to green energy you will actually end up doing pretty poorly and very likely actually less than one dollar back on the dollar.

DUBNER: There’s one set of numbers here that is so astonishing I just want to run them by you and ask you to briefly comment. The costs associated with domestic violence are over an order of magnitude higher than the costs of civil war. Two hundred ninety million kids are beaten every month at a cost of $8 trillion compared to the $170 billion cost of civil wars.

LOMBORG: Yeah, I mean it’s a great outcome of a study, and this is the first time they put numbers to what’s the cost of domestic violence. And clearly this is only an approximate number. It basically takes what’s the cost of an assault in the U.S. and then scale it so that if you know you only make one-tenth of what the U.S. makes, the cost of that assault is also one-tenth. But even then, because there’s so many kids, as you mention 290 million kids that are abused each month, and there’s almost as many women that are abused every year, it’s a much, much bigger number, even though all our TV overflows with Syria and Iraq and… This is definitely serious issues. It’s actually much less so than the problem of domestic violence. So it’s both women and kids that sum up to $8 trillion, or about 9 percent of global GDP.

DUBNER: Alright, let me ask you this then. Economists have a saying they like. They’ll say that, ‘Oh that sounds great in practice, but does it work in theory?’ – right? And that’s because economists love theory and analysis and math – all of that is often much more elegant than the real world, wooly as it is, will allow. So let me ask you the opposite, what you’re doing by constructing a cost-benefit analysis of these development goals sounds great in theory, but what about in practice? How do you translate what you’ve learned to the real world and make it actionable, make it worthwhile? In other words, is anyone going to listen to you and act on it?

LOMBORG: Well I think a lot of people are listening as we talked about before. We’re not the only input to this conversation, but if we’re just part of that input, it becomes harder to ignore really, really great opportunities, and it becomes harder to ignore that some of the proposed targets are not very good. We like to think of ourselves as constructing a menu for society. Imagine if you go into really expensive New York restaurant and you get this wonderful menu but there are no prices and sizes on it. Unless you have a very good expense account, you’re going to feel a little uncomfortable ordering. But what we try to do is we put prices and sizes on those different menu points. Now, that doesn’t mean that the champagne or the caviar might not be your first choice anyway, but at least now you’ll know that you can afford less for dessert. So in some sense, what we try to do is we give people a sense of proportion. Now, this is not the only thing they’re going to use, but if they’ll just use a little bit of it, chances are we’ll end up with a slightly less inefficient, if you will, outcome. And that’s still great.

[MUSIC: Pailboy, “Shut Up”]

CREDITS

This is a transcript of the Freakonomics Radio podcast “Fixing the World, Bang-for-the-Buck Edition

Author: "Freakonomics" Tags: "Transcripts"
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Date: Thursday, 02 Oct 2014 14:00

(Photo: European Commission DG ECHO)

(Photo: European Commission DG ECHO)

Here’s $2.5 trillion. You have 15 years to spend it. How do you distribute this money in a way that will achieve the most good for the world?

This isn’t a hypothetical. In September 2015, the United Nations will set its Post-2015 Development Goals,  continuation of the Millennium Development Goals it set in 2000.

But with every interest group imaginable (and then some) scrambling for a slice of the  aid pie, how do you decide which goals are the most worthy?

That’s the question addressed by this week’s episode. It’s called “Fixing the World, Bang-for-the-Buck Edition.” (You can subscribe to the podcast at iTunes, get the RSS feed, or listen via the media player above. You can also read the transcript, which includes credits for the music you’ll hear in the episode.)

Bjorn Lomborg has a few ideas about how the money should be spent. A self-proclaimed “public intellectual” and adjunct professor at the Copenhagen Business School, Lomborg also runs the Copenhagen Consensus Center, which tries to calculate the best return on investment (ROI) for each dollar spent on development aid.

Lomborg doesn’t actually perform these cost-benefit analyses. Since 2004, the Center has worked with 288 economists, 6 of whom are Nobel laureates (including Finn E. Kydland and Thomas Schelling), to carry out the studies.

When setting the Millennium Development Goals, then Secretary-General of the U.N. Kofi Annan worked with a close-knit team of advisors. Current Secretary-General Ban Ki-moon has overseen a considerably more open process; a call for public input yielded more 5 million recommendations. At the U.N., a High Level Panel (chaired by Indonesian President Susilo Bambang Yudhoyono, Liberian President Ellen Johnson Sirleaf, and British Prime Minister David Cameron), worked with an Open Working Group to represent the interests of 70 countries. This process, while laudable for its inclusivity, has created a different issue: 169 potential goals. And not all of them provide a good ROI.

The Copenhagen Consensus Center isn’t officially part of the U.N.’s decision-making process. But Lomborg that with so many billions of dollars about to be spent, it can perhaps provide some useful guidance on spending that money wisely

LOMBORG: We’re not the only input to this conversation, but if we’re just part of that input, it becomes harder to ignore really, really great opportunities, and it becomes harder to ignore that some of the proposed targets are not very good. We like to think of ourselves as constructing a menu for society. Imagine if you go into really expensive New York restaurant and you get this wonderful menu but there are no prices and sizes on it. Unless you have a very good expense account, you’re going to feel a little uncomfortable ordering. But what we try to do is we put prices and sizes on those different menu points. Now, that doesn’t mean that the champagne or the caviar might not be your first choice anyway, but at least now you’ll know that you can afford less for dessert. So in some sense, what we try to do is we give people a sense of proportion. Now, this is not the only thing they’re going to use, but if they’ll just use a little bit of it, chances are we’ll end up with a slightly less inefficient, if you will, outcome. And that’s still great.

A hat tip for this episode to Matt Ridley and his Wall Street Journal article “Smart Aid for the World’s Poor.”

Author: "Joel Werner" Tags: "Featured Radio Post, Freakonomics Blog, ..."
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Date: Thursday, 25 Sep 2014 14:00

(Photo: Red Lion Hotel Denver)

(Photo: Red Lion Hotel Denver)

A New York City apartment building has a gym that only certain tenants can use. Which tenants? The newer ones who are paying market-rate rents — and not the ones who’ve lived there long enough to qualify for much cheaper, government-subsidized rent. Some tenants call this “fitness apartheid.” What do economists call it?

That’s what this week’s show is about. The episode is called “Fitness Apartheid.” (You can subscribe to the podcast at iTunes, get the RSS feed, or listen via the media player above. You can also read the transcript, which includes credits for the music you’ll hear in the episode.)

You’ll hear Theda Palmer Saxton and Jean Green Dorsey, both residents of Stonehenge Village, the building on the Upper West Side of Manhattan with the controversial gym. Stephen Dubner also talks to Steve Levitt and Daniel Hamermesh, a  professor of economics at Royal Holloway University of London and Professor Emeritus at the University of Texas at Austin. (Hamermesh was on the show most recently talking about discrimination and looks.) As you’ll hear, Levitt and Hamermesh have pretty different points of view:

LEVITT: I would call this disrespect. It’s intentionally showing through your actions that you have no respect for the old-guard people, and rubbing it in their face in a way that markets don’t really do. Markets are not moral or immoral, they’re amoral. Markets don’t care. In a market world, you say, ‘I don’t care if you live here or not. I don’t care who the identity of the person is. As long as you pay the right price and you don’t impose negative stuff on other people, it’s fine.’

HAMERMESH: The owner had to spend money creating this gym, right? How is the owner going to get the money back by giving it away for free to people who are already getting an extremely good deal? Essentially what the people who are rent-controlled want is a bigger subsidy than what they’re already getting. Isn’t that pretty greedy?

Also in the episode, you’ll hear a discussion of “poor doors” in New York City, and a discussion of whether first-class seating in an airplane is also discriminatory.

Author: "Suzie Lechtenberg" Tags: "Featured Radio Post, Freakonomics Blog, ..."
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Date: Thursday, 25 Sep 2014 13:59

This is a transcript of the Freakonomics Radio podcast “Fitness Apartheid

[MUSIC: Rob Bridgett, “ava”]

Theda Palmer SAXTON: I’m Dr. Theda Palmer Saxton. I’m a resident of 160 W. 97th Street, here in New York City, Upper West Side. Is that enough that you need to know about the situation?

Stephen J. DUBNER: I for one wouldn’t mind knowing a bit more. Why, for instance, Dr. Saxton has chosen to speak out about this issue.

SAXTON: I cannot possibly be quiet while I hear something that we fought… you know, Mandela had to fight about… I’m not doing that here. I did the 60’s already. I’ve done the dogs, I’ve done the water hoses. I’m not doing that again. Not here. This is the only place I have ever even had to say apartheid for myself.

DUBNER: Apartheid? On the Upper West Side of New York?

SAXTON: So I guess I am living in apartheid. I need a pass. They need to give out passes that say these are the good people and these are not. I don’t need a star to put on my little chest to say, ‘Oh, I am going to be put on a train and be sent off somewhere.’ Same concept. When you can start dividing people based on value, that’s dangerous. And these people here are dangerous.

DUBNER: Saxton is originally from St. Louis. She started out as a dancer and actor. She became an arts-in-education administrator. Later she got a Ph.D. in organizational communication from Howard University. Now she works as a life coach in New York, with a special focus on women over 50. Her business is called “The Seasoned Woman.” The “dangerous people” that Saxton is referring to – they held a public forum.

SAXTON: And this poor woman about three rows in front of me said, ‘Well can we pay? Is that okay? Aren’t we at least good enough to do something?’ And it was something to the effect of being good enough. And the man sort of — not sort of, straight-out said to her: ‘No.’ No! I have not heard anyone to their faces being told that they were not good enough to be somewhere, ever. I couldn’t get over that.

DUBNER: Saxton is African-American, but she says the problem she’s describing here is not about race. Here’s her neighbor, Jean Green Dorsey, who is on the same side of the fight:

Jean Green DORSEY: They are as relentless with the white people who are rent-stabilized, or the brown people or the yellow people. Because we have lots of Asians, we have lots of Hispanics, all of various stripes, along with a lot of American blacks and Haitian blacks. They don’t want to give a damn about any of us. They wanted to make all this money.

[MUSIC: Color Radio, “Towers” (from Architects)]

DUBNER: So what is it that led Dorsey, Saxton and others to level charges of apartheid? What is the violation that has got them so upset?

SAXTON: A physical fitness center cannot decide for me who I am, what I can and cannot do.

DUBNER: Did she say “a physical-fitness center”? Let’s listen to that again.

SAXTON A physical fitness center cannot decide for me who I am, what I can and cannot do.

DUBNER: That’s right, podcast listeners. The topic of today’s program: fitness apartheid.

[THEME]

ANNOUNCER: From WNYC: This is FREAKONOMICS RADIO, the podcast that explores the hidden side of everything. Here’s your host, Stephen Dubner.

[MUSIC: Pearl Django, “Samois Swing” (from Swing 48)]

DUBNER: Theda Palmer Saxton lives in New York City, in a rent-stabilized apartment. There are a lot of buildings like hers in New York, and other cities. This one was built several decades ago, to provide housing for moderate and middle-income families. It used to be that her whole building was rent-stabilized. But in this case, that’s no longer true. The original affordable-housing program expires over time, and a few years back, this building was bought by a property-management company called Stonehenge Partners. Saxton and other tenants like her can stay at the rent-stabilized rate. But when an old tenant moves out or dies, Stonehenge can charge the going market rate. So a  two-bedroom apartment that someone like Saxton might be renting for $1,000 a month might go for $3,000 or $4,000. Now, if you’re Stonehenge, what does it take to attract a $4,000 tenant to this building? Well, you’ll probably renovate the old apartment, and you may want to offer some building amenities. Like, how about… a little fitness center on the ground floor?

[MUSIC: 3 Leg Torso, “B & G’s” (from Astor in Paris)]

DUBNER: That’s what happened in this building. Saxton and the other long-time residents were pretty excited when they heard about the new gym. But once it was built, they found out there was a catch.

SAXTON: It was like, I am expecting them to tell us this outrageous figure, like $1,000 or $2,000, or no family, or whatever, the hours, I’m expecting something about that, and price to discuss. So then I was informed that there was nothing to discuss because the people there that had been there already, the so-called original — I call the aborigines, the original people — you are not allowed to be there. And I said, ‘My goodness. I’m not hearing right.’ And so, I was kind of like, I think we were all in a state of shock.

DUBNER: That’s right: only the new tenants paying market-rate rent would could use the gym. There are more than 400 apartments in this building, about 60 percent of which are still rent-stabilized. So the gym would be for the minority who pay market rate; they’d get a special keycard for the gym. A sign went up on the gym door, said: “Please do NOT hold the doors open for other residents. ALL Residents MUST use their keycard to gain entry. Please make sure that the door fully closes behind you. Thank you and Enjoy. Stonehenge.” And that’s when Theda Palmer Saxton and a lot of other people from the building got upset and starting talking about fitness apartheid.

Daniel HAMERMESH: Uh, it’s a cute catchphrase, and I’m sure it’ll get a lot of publicity.

DUBNER: That’s Dan Hamermesh.

HAMERMESH: I’m Professor of Economics at Royal Holloway University of London and at the University of Texas at Austin.

DUBNER: I know Hamermesh a bit. Very sweet guy. He’s a grandfather – and grandfatherly. But – he’s also an economist.

HAMERMESH: Look, the owner had to spend money creating this gym, right? How is the owner going to get the money back by giving it away for free to people who are already getting an extremely good deal? Essentially what the people who are rent-controlled want is a bigger subsidy than what they’re already getting. Isn’t that pretty greedy?

DUBNER: But you can understand, let’s say, the parent walking past the gym with the kids feeling bad that their kids can’t use the gym, when the other people living next door to them can. In part because that’s the emotion attached to money. There are a lot of, economists like to talk about how prices take care of things, and they usually do, but in this case, it’s not really, in this case the price can’t really take care of the emotional harm that might be caused, can it?

HAMERMESH: No, the price can’t. There’s a very simple solution: abolish the rent control and the stabilization, and the people can pay the same price as the others, and they’d have access to the gym and their kids wouldn’t feel badly at all about it. I’m quite sure they’re not advocating that and will not be doing that anytime soon. I’m a tough guy on these things.

DUBNER: You are a tough guy on these things. Now let me ask you this: for the people who consider this fitness apartheid, don’t you think they would consider the first-class cabin on an airplane, which you have to walk through to get to coach, wouldn’t they consider that ‘airline apartheid’ as well?

HAMERMESH: Absolutely! My kid sees these people getting their Champagne before the flight takes off. That’s all they’re ever gonna see. I see very little difference in how they’re gonna tell the kid, ‘Gee, they get Champagne and we don’t.’ They’re paying more, we aren’t. It’s exactly the same. The difference is, there the company clearly unbundles the product. The first-class product is different than the coach product. Here, they’ve made the mistake of bundling them and they don’t have to be bundled. That’s my solution. It won’t help the kids feel better, but it would do the job.

[MUSIC: Euforquestra, “Obatala” (from Explorations in Afrobeat)]

DUBNER: So Dan Hamermesh doesn’t see fitness apartheid when he looks at the segregated gym in this building. But how might he have handled it differently?

HAMERMESH: If I were the owner, I’d say: ‘Look, included in the rent is partly a regular rental for your apartment and let’s say $50 or $100 a month gym fee.’ In other words, rather than calling it all rent, I’d separate it out. These are two separate un-bundleable commodities. Which seem to me to be easily unbundled. They’re different things.

DUBNER: Right, so rather than making the $3,000 rent, have the free gym, you’d say your rent is $2,985 and a $15 gym fee if you want it.

HAMERMESH: Yes.

DUBNER: And then you can say to me, the subsidized guy, and if you want to use the gym it’s $15 a month, no problem.

HAMERMESH: That’s exactly right. And presumably the $15 or whatever the price would be, it’d be more than that, would reflect the actual costs of building and running the gym. I think it’s an easily solved problem.

Steve LEVITT: So Dubner, you know I believe in markets and prices and the usual way to deal with the provision of goods is through prices. But I think that the developers here probably have an ulterior motive.

DUBNER: That’s Steve Levitt, my Freakonomics friend and co-author. Also an economist – at the University of Chicago.

LEVITT: The way that these contracts are usually written is that these apartments will remain rent-controlled, below-market apartments for as long as the current tenants live there. So in a typical setting, it would never make sense to say the old guard tenants can’t use the gym, you just find the right price, it might be a very high price, that takes into account the negative externality they may have on the new tenants, but you wanna charge that price. And it would just be a mistake to ban them completely. But, I don’t know, if I’m that developer, I just wanna get these old guard out and so maybe really the market isn’t the best tool. It’s actually making life very unpleasant in a way that prices can’t actually make life unpleasant. So the idea that you actually ban them from the gym serves a real purpose here. It tells them, look, we think you’re second-class citizens, we don’t respect you, and as long as you live here we’re going to treat you horribly. Now that’s not a very nice and a very moral way to do it, but if your objective is to make life awful for these folks and get them out, it’s proving to be a pretty effective way of doing that, I bet.

DUBNER: Hmm. Good answer. What do you call this? It’s not quite price discrimination, is it market segmentation? What do you call this?

LEVITT: I would call this…disrespect. I mean, it’s intentionally showing through your actions that you have no respect for the old guard people, and rubbing it in their face in a way that markets don’t really do, and markets — markets are not moral or immoral, they’re amoral. Markets don’t care. In a market world, you say, I don’t care if you live here or not. I don’t care who the identity of the person is. As long as you pay the right price and you don’t impose negative stuff on other people, it’s fine. But what’s happening here is that regulation, right, the existence of rent control has obstructed markets and doesn’t let these folks use prices in the way they’d like to use them, to allocate resources so that they could have the quote “right” people in the apartment at the right prices. And so instead — I mean this is actually an example of how markets are good and regulation is bad, it’s that there’s no reason why a developer would insult people or try to intentionally degrade them if markets were allowed to work. It’s that they can’t do what markets want to do that makes degradation and disrespect the tool that you would use. I mean it’s like middle school right? Middle school doesn’t have markets so you get bullying and mean kids and stuff like that. But in general you don’t have a lot of that in the real world, you know? The cable company doesn’t bully you and doesn’t humiliate you, they just, you know, they just use prices. And in a weird way, markets are a relatively humane way of allocating resources. It’s not always quote “fair,” in the sense that if you have more money you get more stuff, but at least everybody understands the rules, and there’s no sense usually of outrage, it’s just an understanding that sometimes you have to pay for stuff.

[MUSIC: Pearl Django, “Mulholland Bounce” (from Modern Times)]

DUBNER: Coming up on Freakonomics Radio: if we can’t make the fitness apartheid charge stick with the economists – how about a “poor door”?

HAMERMESH: I take more offense at the poor door, because it separates people out. It’s segregation. It really is apartheid.

DUBNER: One more thing: if you don’t already subscribe to Freakonomics Radio, let me encourage you to do so. You can sign up at iTunes, for free, and we will silently sneak into your phone or computer every Wednesday at midnight, Eastern Time, and drop a new episode into your queue. Which has the potential to make your Thursday a bit more interesting. That’s the idea, at least.

[UNDERWRITING]

ANNOUNCER: From WNYC: This is FREAKONOMICS RADIO. Here’s your host, Stephen Dubner.

[MUSIC: Judson Lee, “Little Cheap Euro Romance”]

DUBNER: We’ve been talking about fitness apartheid, as the residents of one Manhattan building call it. We’ve heard from a couple tenants, and a couple economists, including Steve Levitt.

LEVITT: I would call this… disrespect.

DUBNER: Now, as much outrage as fitness apartheid has generated here in New York, I would say that even more outrage has been generated by a separate but quite related story which is now being called the saga of the poor door. Ok, so a poor door — have you ever heard the phrase, Levitt, a poor door?

LEVITT: No, I have not.

DUBNER: Ok, so a poor door is what happens when you build a building, but have two classes of living in that building. So, in this case, there’s a building being put up, a 33-story residential building at 40 Riverside Boulevard on the Upper West Side — a nice neighborhood. There will be 219 luxury condos and 55 affordable-housing units in this building, and there will be a separate entrance for the affordable-housing tenants, which is now being called the poor door. So I am curious how you see that. Good solution? You’ve got subsidized housing which is being put in the same building, I’m sure, as a requirement for the developer, but they have to come in a different door, probably around the corner or something. Do you like this idea? Good solution?

LEVITT: I mean, it all goes back to the idea that somebody in the government thinks it’s a good idea to have relatively poor people live with relatively rich people. And so there’s some kind of either regulation or subsidy that goes to the developers for putting these mixed-income facilities together. And in that regard, so look, I have no idea whether there are benefits that come from the mixing of income this way, but you cannot possibly think that if the goal is to have rich and poor live together, or middle class and lower middle class live together, that having separate entrances is serving that goal. So, this really seems to me, like a case where there are well-intentioned regulations, or at least regulations that have an objective, and that clever developers have come up with schemes which are clearly not in the spirit of what was meant to happen and are finding ways to, essentially loopholes, to get around laws that maybe they think are stupid or maybe they think shouldn’t be there, but doing it in exactly a way which it seems to me is likely to infuriate everyone in sight. And even when an economist can see that it’s going to infuriate everyone in sight, you know, it’s pretty obvious it is going to infuriate everyone in sight. It’s not that there’s really anything wrong, in a moral sense, with fitness apartheid or the poor door, it’s just not the way we’re used to transactions being done. Right? So when you live in a place, you’re used to being allowed to go where you want and be able to do what you want. And I think, especially the poor door, has this feeling that harkens back to separate but equal…

DUBNER: Back of the bus…

LEVITT: … and all sorts of stuff which I think is very touchy and hurtful whether or not it’s meant to be. I mean, certainly, you and I, sometimes get to sit in the front of the plane because we do a lot of flying. And there’s a real, I feel a real awkwardness about it, I mean, I think we’ve even laughed about it that some of the airlines have a red carpet you walk down if you are privileged and other people are shunted to the side, and I hate walking down that red carpet. I feel awkward. Oftentimes I wait in line…

[MUSIC: Paul Freitas, “Shhhh!”]

LEVITT: … You know, I remember, I remember one time I was going to a conference and for whatever reason the people who ran the conference, this was in South America, had given me a business-class ticket. And much to my horror when I showed up at the airport, a bunch of other people who were academics who were going to this same conference were not in business class. And I felt so terrible about the fact that this was happening, now, again, I didn’t feel so terrible that I wanted to give up my seat in business class, but I felt terrible enough that I didn’t want them to know that I remember feigning illness and going to the bathroom and stuff, so I would be the last one on the plane and then hoping that they wouldn’t realize that I was sitting up front. Somehow, I don’t remember what happened, but my plan fell apart and they did discover that I was up front.

HAMERMESH: I take more offense at the poor door, because it separates people out. It’s segregation. It really is apartheid.

[MUSIC: Jessica Lurie, “Solitaria” (from Licorice & Smoke)]

DUBNER: That’s Dan Hamermesh again.

HAMERMESH: Whereas the the other, the fitness center, is just another door within the building. I see my rich co-renters when I walk in and they see me. But in the poor door business, they don’t see each other even. And that I find personally more offensive.

DUBNER: I would think that if the people were – if people who were offended by the fitness apartheid idea, that the offense comes from having to have that uncomfortable confrontation…not… I shouldn’t say the confrontation, that uncomfortable passing in the hall, at the very least, ‘That guy is on the way to the gym that I can’t get to’—the poor door removes that discomfort, no?

HAMERMESH: It removes that kind of discomfort, but how is it very much different from the back of the bus? In a very real sense, I perceive that as a back-of-the-bus kind of thing.

DUBNER: When we talk about this kind of discrimination or segmentation, whatever it’s called, where does your brain go next? What kind of either problem or solution or scenario does your economist’s brain turn toward when you start thinking about this kind of issue?

HAMERMESH: Well, what you’re combining here are two basic economic issues. One is a price fixity, a fixed price, in this case the stabilized apartments. And the other is the issue of price discrimination, charging different prices for what might ostensibly be thought about as the same product. So I started thinking about price discrimination, what’s causing it. I started thinking about cases where there are price ceilings, for example the NCAA Regionals. They couldn’t raise the price on tickets, but they made you buy a map of the arena when you got in, as a way of getting the price up to market. Okay? And the question is here, they can’t do that. They’re sort of sneaking around by not giving you something they just added. And that goes a little bit of the way toward raising the price toward market, but not much.

DUBNER: Let me ask you to give me, finally, your favorite example of price discrimination. The purest example.

HAMERMESH: OK. I’ll give you two examples, because they’re basically two different causes. First example, when my kids were young teenagers, they were getting haircuts for $12 and I was getting mine for $10 at the same barber—which really ticked me off! As much as it ticks off the people in the gym, in reverse, for not getting the gym, the people in the building. I told him, ‘Darn it, ask the guy for a $10 haircut. Why are you paying twelve bucks?’ This is a while ago, obviously. And my son came back just laughing. I said, ‘Did you get the ten dollars, David?’ He said, ‘No, I paid twelve.’ ‘Why?’ I was really angry. He burst out laughing. He said, ‘The barber said to me, ‘You have more hair than your dad.’ Okay? That’s called cost-based. It was an easier job to cut my hair, of which even then there wasn’t very much, than my very hairy sons.

DUBNER: Once the barber put it that way, were you accepting of that cost-based discrimination?

HAMERMESH: I was completely mollified. The other and probably more common source of price discrimination, is when it really is the same product. My haircut and my kids’ were not the same product. But for example, take a seat at the movies. I go in there being a senior citizen, I pay $7.50 at the local theater here. You would pay $9.50, which is still a good deal, by the way. It’s one seat. Same seat. Why do they charge me less? Because my time is more flexible—in economic terms, my demand elasticity is higher, and they give me a lower price because they know I’ll respond to it. Well you, you can’t go during the day or even on weeknights if you have kids, so they’re gonna really sock it to you. So that’s demand-based, differences in our willingness to pay for the product. And those who are willing to pay any old price, like yourself, gets socked with the full price. The flexible people, like me, get a good deal.

DUBNER: Now why is that not considered discriminatory in an unacceptable way? Why is that not considered discriminatory against me, a non-old person? Or when a bar has a Ladies Night and ladies get in free? Why is that not discriminatory to me just because I was born with male anatomy?

HAMERMESH: And being a young man, too. It is, it’s exactly as discriminatory as anything else we’ve talked about. It’s certainly discriminatory and companies are allowed to do it, absolutely.

DUBNER: And they’re allowed to do it just because they got there a while ago when it was considered okay, and now it would be a weird thing to un-grandfather it? Whereas the newer examples are happening in an age when we’re a little bit more sensitive to this stuff? Is that the explanation then?

HAMERMESH: I think it’s an issue that, as you say, that we’re used to things. For example, when I turned 55, there was a three-week period when the local movie theaters still had 55+ as seniors. And then within a month of my birthday they raised it to 60. And I was really ticked off!

DUBNER: I bet you were. I bet you were.

HAMERMESH: It’s a classic example of loss aversion. They have every right to do whatever they thought, and it made sense, because people in their late 50s are still very active and they’re willing to pay a higher price. But you know, I had it and I was ticked when I lost it.

DUBNER: I recently read, and I can’t vouch for the verity of this, but I read that Jill Abramson, the New York Times executive editor who was fired, in part it said because of her management style, which was found to be grating, and she was the first female hire at The New York Times in that job. So people put one and one together and got that, ‘Well, she was fired because she was a woman who was grating, that would’ve been acceptable in a man.’ And believe me, there were grating male editors of that newspaper…

HAMERMESH: Shocking, shocking.

DUBNER: Shocking. And now, this is the part that I read that I’m not sure is verifiable, is that she’s now doing a lot of media interviews to talk about different stuff—not just about her job there and her firing, but journalism and the future thereof and so on—but she’s only giving interviews to female journalists. How does that strike you? Is that an acceptable form of what we might call discrimination?

HAMERMESH: It’s certainly legal. I personally find it offensive. I’ll talk to anybody. I’ve been on Fox, heaven help me. I’ve been in Al-Jazeera. I mean, to me, you deal with people. But she has every right to do that. I think it’s sort of silly, though, because it limits the amount of outreach she’s gonna do. In that sense, it strikes me as being a bit self-defeating.

DUBNER: Now why does she have every right to do so? So I’m a male journalist. Let’s say I wanted to interview Jill Abramson for this show. And I’m told by her, and again, I have no idea if it would actually happen this way, but let’s say I’m told by her and her people, ‘Well, you know Dubner, you’re not the biggest idiot in the world but sorry, you’re male and she’s only talking to women journalists right now.’ Isn’t that a violation of my, some kind of rights, as an American with free speech, blah blah blah blah blah blah blah blah?

HAMERMESH: No. I don’t believe that there’s a legal right that you have to give access to somebody. If some panhandler on the street starts talking to me, do I have to respond to him or her? I don’t think so. And I see no difference between her not wanting to talk to you.

DUBNER: So you’re basically calling me a panhandler, is what you’re doing here.

HAMERMESH: I didn’t say a ‘panhandler.’ You’re analogous to a panhandler!

[MUSIC: Color Radio, “Towers” (from Architects)]

DUBNER: As you’ve probably gleaned by now, economists see the world a bit differently than the rest of us. They think that simply putting the right price on something can take care of a lot of problems. But in the real world, with all its nuance and psychological shadings, a price tag is sometimes too blunt an instrument. A solution that might seem obvious to an economist may be, for one reason or another, impossible. There’s a big difference between price theory and public sentiment – and, as correct as price theory may seem, public sentiment can carry a lot of weight. As in the case of the fitness apartheid building and the poor door building. We reached out to representatives of both buildings; they declined to comment. Here, meanwhile, is the fitness apartheid tenant Theda Palmer Saxton:

SAXTON: The idea of someone saying to you that you are not good enough to do this but there is someone else in this very building who is good enough who might be sitting next to you, or standing across from you, in the same elevator with you, and we can decide the worth of your humanity. Now that was the amazing part about it. That someone sat in some room and said that and came before us in public and said it out loud. And I think it is dangerous to even start thinking that, because it is so easy to start a trend… you know, Germany had a trend…it turned into the Holocaust. You can start things. And people will accept things and you will say oh that can’t happen here. Sure it can.

DUBNER: So Saxton and her allies are pushing back on that trend. There’s a bill before the New York State Assembly that would require — here, I’ll read from it — that “any rental tenant must be provided with the opportunity to use amenities that are accessible to any occupant and/or not unique to an individual unit, including, but not limited to: pools, fitness centers, storage spaces” … etc etc. Violation of this law would be, “punishable by a fine not to exceed two thousand dollars.” That means a building with 15 rent-stabilized tenants would be fined $30,000 if those tenants were denied access to a new gym. Which sounds pretty substantial…until you realize that $2,000 per fine is roughly the difference between a single month’s rent for a market-rate tenant and a rent-stabilized tenant. Which, if you’re the landlord of that building, might be a fine worth paying if your long game is to maximize your profits, and as Steve Levitt put it, disrespect your tenants. Hey, come to think of it, maybe price theory does work.

CREDITS

This is a transcript of the Freakonomics Radio podcast “Fitness Apartheid

Author: "Freakonomics" Tags: "Transcripts"
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Date: Thursday, 18 Sep 2014 15:00

(Photo: Nishanth Jois)

(Photo: Nishanth Jois)

What does it mean to pursue something that everyone else think is nuts? And what does it take to succeed? That’s what this week’s episode is about. It’s called “Outsiders By Design.”  (You can subscribe to the podcast at iTunes, get the RSS feed, or listen via the media player above. You can also read the transcript, which includes credits for the music you’ll hear in the episode.)

You’ll hear about three radical thinkers whose lives didn’t proceed in a perfectly straight line. In each case, their work was ridiculed or ignored — but ultimately, they triumphed. This podcast was inspired by the recent death of the economist Gary Becker, whose firm belief in the rational choice model led him to publish works like “Crime and Punishment: An Economic Approach” and “A Theory on the Allocation of Time.” As described by the Harvard economist Ed Glaeser – a former student of Becker’s, who has appeared on this podcast before — Becker’s early work on the economics of racial discrimination caught the academy off-guard:

GLAESER: I think it’s impossible to overstate how radical it was. There are famous stories that Becker told about people leaving the room when he was giving a seminar, in a huff, saying, “I thought this would be about price discrimination.” It was something that was not at all treated with some degree of reverence. Because it doesn’t look or feel like economics.

You’ll also hear from Richard Posner, the federal judge and legal scholar with whom Becker wrote the spirited Becker-Posner Blog for many years.

Around the time Gary Becker was getting beaten up for his work, a young Australian doctor named Barry Marshall was just getting his career underway. Marshall came to have a radical notion about the cause — and cure — for ulcers. And, in a risky bout of self-experimentation, he proved he was right. But it would be many years before his findings were accepted, as explained by the medical journalist Norman Swan:

SWAN: The response, I think at least in Australia, was dominated by the response to Barry. He wasn’t from the establishment, not one of them. Barry was not seen as credible researcher. … And then the pharmaceutical industry found every angle they could do oppose it.

(Photo: Public Domain, Scan by the Library Foundation, Buffalo and Erie County Public Library)

(Photo: Public Domain, Scan by the Library Foundation, Buffalo and Erie County Public Library)

William Smith, a proto-geologist in 19th-century England, was also very much not a part of the establishment. And so when he created, after many years of solitary work, a map that laid out the invisible mineral underlayers of the British Isles, he was both condemned and plagiarized. The author and journalist Simon Winchester (whose books include The Professor and the Madman and The Men Who United the States tells us how Smith’s work was received by the Church of England:

WINCHESTER: These early maps evoked enormous hostility. Because the received wisdom of the day was that the Earth was created at a very specific point in time. [But] the early geologists drove a horse and cart through the biblical teaching that the earth was only 6,000 years old. So there was great hostility and these maps were seen to be instruments of heresy.

Despite the odds faced by all three men, they ultimately got their just rewards. Sometimes it can pay to be an outsider by design, as you’ll hear in the podcast.

Special thanks to the Australian Academy of Science for the use of their Barry Marshall interview footage.

Additional resources:

Author: "Gretta Cohn" Tags: "Featured Radio Post, Freakonomics Blog, ..."
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Date: Thursday, 18 Sep 2014 14:00

This is a transcript of the Freakonomics Radio podcast “Outsiders by Design

[MUSIC: The Civil Tones, “One Day, Again and Again” (from City Stoopin’)]

Stephen J. DUBNER: Hey podcast listeners. Our mission at Freakonomics has always been to tell you things you always thought you knew but didn’t … and things you never thought you wanted to know, but do. Now it is your turn to tell us something that we don’t know.

On Monday, October 6, in New York City, we’re launching a live radio game show called “Tell Me Something I Don’t Know” — and the audience, that’s you, is the star. So if you want to get up on stage and tell us something fascinating, please go to freakonomics.com/TellMe to sign up.

It might be  an idea, a technological breakthrough, a new line of important research, a set of strange facts, a historical wrinkle, or perhaps just a great, unasked question.

All we ask is that the thing you tell us is interesting (at least to you), worthwhile (at least a little bit), and — well, true (there will be a fact-checker on hand). There will also be prizes — and celebrity judges, including Malcolm Gladwell. Again, that’s Monday, Oct. 6, in New York City; sign up at freakonomics.com/TellMe. I cannot wait to hear what you’ve got to say.

[MUSIC: Clay Ross, “Army For You” (from Entre Nous)]

Simon WINCHESTER: No one took his ideas particularly seriously.

Norman SWAN: And he was ostracized and isolated they thought he was mad. In the Australian parlance, a complete nutter.

Ed GLAESER: You know, there were people who called him a great American humorist within the profession.

WINCHESTER: He was intellectually alone. He had got this idea and no one was particularly interested in it and by God he was  going to do it on his own if it killed him.

DUBNER: Does that sound like anyone you know? Maybe even sounds like you? If so, you might be interested in today’s show. We tell the story of three people whose lives – well, let’s just say their lives did not proceed in a perfectly straight line. This episode is called “Outsiders By Design.”

[THEME]

[MUSIC: Peter Mulvey, “Brady Street Stroll” (from The Knuckleball Suite)]

ANNOUNCER: From WNYC: This is FREAKONOMICS RADIO, the podcast that explores the hidden side of everything. Here’s your host, Stephen Dubner.

DUBNER: This episode was inspired by the recent death of Gary Becker. Now since you listen to Freakonomics Radio, you may have heard of Becker; but most people probably haven’t. He was born in 1930, grew up in Brooklyn. He was a good student. At 16, he faced an important decision: join the handball team, or the math team. He was better at handball. But he chose math. He got into Princeton, where he studied economics, even though the fit wasn’t quite right.

Gary BECKER: When I first started taking economics I almost left it in my senior year because it seemed to me it didn’t deal with important social problems. Sociology, for example, did, and I tried thinking about sociology but I finally decided that it was a little too hard.

Richard POSNER: Well, he said that when he went to college his interest was in the traditional subjects that sociologists study.

DUBNER: That’s Richard Posner. He’s a judge on the U.S. Court of Appeals in Chicago; he also teaches law at the University of Chicago. He and Becker were longtime friends.

POSNER: But he thought that sociology was a weak field analytically; whereas, economics had a great deal more rigor. And he thought that the methods of economics could be used to deal with sociological issues.

[MUSIC: Pearl Django, “Spiral Waltz” (from System D)]

DUBNER: Becker went on to get his Ph.D. in economics at the University of Chicago. He took a course with Milton Friedman, who was in the midst of redefining the field.

GLAESER: So twenty years earlier, economics meant money and banking. It meant international trade. It meant finance. It meant a very clearly defined set of topics.

DUBNER: That’s the Harvard economist Ed Glaeser.

GLAESER: But there was no clear methodology. Economics was as much moral philosophy as modern social science during those early years. But there you have Friedman who comes along and says, ‘No, economics is about science, it’s about science to do with human beings.’ And Becker, before anyone else sees the implication of that, which is, well, if it’s about science applied to human beings why do I have to work on money and banking? Why can’t I work on something that seems like a more pressing social problem like discrimination?

BECKER: I would tell myself, it’s so obvious that discrimination is such an important topic. That economists don’t see it? Eventually they’re going to have to see it.

POSNER: So Becker’s approach is what’s called “rational choice.” Since it is assumed that people are rational, trying to maximize their utility, welfare, happiness, so forth, in all domains of life.

GLAESER: It’s impossible to overstate how radical it was. There are famous stories that Becker told about people leaving the room when he was giving a seminar, in a huff, saying, “I thought this would be about price discrimination.” So it is clear that this was something that was not at all treated with some degree of reverence, because it doesn’t look or feel like economics.

POSNER: It wasn’t regarded as an economic field and Gary was actually laughed at. He was rather bitter about the reception that his work had received.

DUBNER: Becker believed that any domain of human activity was worthy of an economist’s scrutiny. So it wasn’t just discrimination. He studied the economics of marriage, and child-bearing. He wrote a paper called “A Theory on the Allocation of Time.” At Harvard today, Ed Glaeser still teaches a 1968 Gary Becker paper called “Crime and Punishment: An Economic Approach.” Here’s how Glaeser introduces the idea to his students:

GLAESER: We are all criminals. Right? I certainly did not drive at 55 mph all the way to work today and I cannot promise that I have stopped at the red light on every street getting to this lecture. And I’m sure all of us have things that we all have violated to a greater or lesser degree. And I think that respect shown for people who have chosen to violate the law is crucial. If you think about just how immediately obvious the power of that observation to solve the puzzle, the supposed puzzle of recidivism. The fact that you sent people to prison and they decided to go back to doing crime again. If you have some view that they are sadly misinformed subhuman people who with a little bit of right thinking you can convince to go straight. Well, that is a puzzle. But if you view criminals as being people who made a decision to undertake a particular profession, why should sending them off to be a guest of the state for a couple of years cause them to change that choice of profession? That’s what made sense before and it’s what makes sense afterwards. That’s the immediate implication of viewing criminals as being rational.

[MUSIC: Clay Ross, “Forget The Math” (from Entre Nous)]

DUBNER: Becker had his supporters but more common were the detractors who thought his work lay somewhere between silly and worthless:

GLAESER: You know, there were people who called him a great American humorist within the profession. There’s that famous article on the economics of brushing your teeth, which is clearly sort of mocking the Beckerian approach. So clearly there were people who, you know, for whatever reason thought that this was embarrassing to the profession or beneath what economists should be about.

POSNER: He argued a lot, or was criticized a lot by another very distinguished economist at the University of Chicago, Ronald Coase, because Coase said economics is the study of the economic system, period, not of the entire social system. And of course Gary had a very more expansive view of the scope of economics. So that was a big disagreement.

GLAESER: I think it probably stung him more than he would usually admit. He was a pretty… Gary was not a let-it-all-hang-out kind of guy.

DUBNER: Becker preferred to keep his head down and do his work; he wasn’t big on self-advocacy:

BECKER: I was always a shy person particularly when I was younger so I wasn’t one of these aggressive persons who went out there, talking about everything they knew, it wasn’t my nature.

[MUSIC: Clay Ross, “Army For You” (from Entre Nous)]

DUBNER: What does the universe do with someone like this, someone who is out there on his own, following his own off-kilter curiosities and sensibilities? You know what the universe does: it ridicules them, or beats them up, maybe just ignores them. As we all know, if you want to get ahead in life, you have to color inside the lines. No excuses, no exceptions. No papers on the economics of crime. No more crazy ideas of any sort, thank you very much.

SWAN: They thought he was mad, in the Australian parlance a complete nutter.

[MUSIC: Clay Ross, “Street Sweep” (from Entre Nous)]

DUBNER: Around the time Gary Becker was getting beaten up for papers like “On the Interaction Between the Quantity and Quality of Children,” a young Australian doctor named Barry Marshall was just getting his career underway.

SWAN: I think it’s important to actually set the scene a little bit in terms of Barry and his personality.

DUBNER: That’s Norman Swan, he’s a renowned medical journalist in Australia who trained as an M.D., himself.

SWAN: There is a word in Australian English which is “larrikin.” And it just means somebody who is a bit of a lad, who doesn’t respect authority, but is honest and straight, but doesn’t mind irritating people and annoying people. And that was Barry. He came from essentially a working class family. And he got into medicine. But he wasn’t a star in medical school. He didn’t win any medals. And then he started training as a specialist physician. To get his specialist exams, he needed to do a research project. And he was looking around for one and he came across this shy, retiring, geeky pathologist called Robin Warren, who had noticed when he was doing biopsies of ulcers that there were these bacteria there. What were they doing there? But he needed some help. And just by happenstance, Barry was looking around for his research project, and this was a meeting made in heaven.

[MUSIC: Spencer Garn, “Corn Nuggets”]

DUBNER: The notion that bacteria might be causing an intestinal illness seemed far-fetched. It had long been held that the gastric environment was too acidic for bacteria to thrive; they were thought to be incidental to the action. It is tempting, in the modern age, to think about medicine as a massive body of known, provable science. But the more one knows about medicine, the more one will acknowledge how much is not known – even about something as seemingly straightforward as the ulcer.

SWAN: So there were all these ideas floating around. But as you know, Stephen, medicine is not very good on mechanism. Doctors post-hoc invent mechanisms in many ways to explain phenomena that they see. And the mechanisms did not easily explain ulcer disease. So nobody had an idea really of what caused them. There are all sorts of theories: stress, and indeed acute stress can cause ulcers, but people thought maybe chronic stress did. People thought that smoking increased the risk. And smoking does in fact increase the risk.

DUBNER: At the time, ulcers weren’t cured; they were merely treated, or managed, and not all that well.

SWAN: So when I trained in medicine there really was only one effective treatment if you had gastric or duodenal ulcer. And it was surgery. Where they cut nerves to the acid-producing areas of the stomach to reduce acid. And then they developed drugs which actually turned off the acid. And these were massive industries, not just for treating ulcers. Well, they didn’t treat ulcers, they actually treated the symptoms and settled them down. But it was very hard to get ulcer healing. So this was a multi-billion dollar international industry.

DUBNER: But Barry Marshall suspected that all this conventional wisdom might be wrong. He wondered if the ulcer – the foundation of a multi-billion-dollar industry which didn’t even cure it – if the ulcer were perhaps related to this squiggly bacteria that he and Robin Warren were studying. This bacteria came to be known as Helicobacter pylori. Marshall was working hard in the lab, trying to learn the bacteria’s properties.

MARSHALL: Well we did some animal experiments but we could not make the human bacteria infect animals such as rats or pigs…

DUBNER: To Marshall, the next step was obvious:

MARSHALL: …so I said, I have to test it out on a human.

DUBNER: Hmm. Feeding a potentially dangerous bacteria to human test subjects. Not so easy. And therefore:

MARSHALL: Well I decided that I was going to have to drink the bacteria myself and I thought what would happen is I’d have no symptoms for few years and then I’d have an ulcer and, Hallelujah, It would be proven.

DUBNER: Marshall first had to make sure his own gut didn’t already contain any of this bacteria. He asked a colleague for an endoscopy.

MARSHALL: And I think he knew what was going on. But he said, as he put the scope down me, he said Barry, I’m not going to ask why I’m doing this. So he took biopsies from me and they were all clear. No bacteria.

DUBNER: Marshall didn’t tell anyone what he was about to do. Not his wife, not his research partner, Robin Warren …

MARSHALL: If it was successful and I developed an ulcer, or stomach problems from the bacteria, that proved they are harmful and possibly I was right and they caused ulcers. But if nothing happened that means that my two years of research by then were wasted.

DUBNER: Barry Marshall drank the bacteria. The two years, it turned out, were not wasted.

MARSHALL: After five days I started having vomiting attacks. Had another endoscopy and the bacteria were everywhere, there were absolute millions of them in the lining of my stomach. So at that point I proved that the bacteria could infect a healthy person and cause gastritis.

DUBNER: Having studied the bacteria in the lab, Marshall knew what kind of antibiotic he could treat it with – so he took the antibiotic, and quickly made himself well. Norman Swan again.

SWAN: They’d done now what they call now “the killer experiment.” I suppose in Barry’s case it almost was the killer experiment.

DUBNER: Barry Marshall had proved, at least to himself, that bacteria was the true cause of ulcers. So what happened now? Did the worldwide medical community immediately hoist Marshall on their shoulders and praise his breakthrough? No, they didn’t. His research was ridiculed, dismissed, badmouthed.

SWAN: The response, I think, at least in Australia, was dominated by the response to Barry. He wasn’t from the establishment, he wasn’t one of them. He made this discovery before was even, before he had even got his specialist qualifications. He wasn’t a card carrying researcher. And Barry’s a bit odd. Barry’s, um, he’s odd, he’s very amusing. He’s remarkably candid, outgoing, he can be quite manic. And he would present and people would think “who is this nutter?” Because it was with almost a religious fervor from this good Catholic boy that he was promoting this, because he believed it so strongly. And there was this question in their mind that if he was selling it this hard, in this kind of odd way, was there something fishy about the research. So that was, if you like, the subtext that people did not quite articulate, but it was certainly there. That Barry was not seen as credible researcher. And regardless of his finding, because he wasn’t credible, because he just was not one of them, he was rough and ready. And I think that was a major part of it. And then the pharmaceutical industry found every angle they could do oppose it.

DUBNER: And how did he respond?

SWAN: Well, I think Barry just got angrier and angrier. So, in other words, he didn’t tailor his message to the boys. You know, he wasn’t a good old boy sat around the table. You know, he wasn’t going to tailor the message. The message was the message and he just kept banging away at it. And didn’t compromise.

DUBNER: Which must have made him seem even more of a nutter to his opponents, yes?

SWAN: I think so.

[MUSIC: Tallboy 7, “Electro Acoustic”]

DUBNER: Coming up on Freakonomics Radio: one more heretic who tries to buck the establishment:

WINCHESTER: These early maps evoked enormous hostility. Because the received wisdom of the day was that the earth was created at a very specific point in time.

DUBNER: And: are all these outsiders doomed for lifelong despair?

MARSHALL: People would always say Dr. Marshall do you feel vindicated? Well, we won. We knew we were going to win. We knew we were going to win because we had the truth.

DUBNER: One more thing: did you know you can subscribe to this Freakonomics Radio podcast, for free, on iTunes? You can. It has not been shown to prevent ulcers – yet … but you never know. New research in this field every day…

[UNDERWRITING]

ANNOUNCER: From WNYC: This is FREAKONOMICS RADIO. Here’s your host, Stephen Dubner.

[MUSIC: Johannes Brahms, “Academic Festival Overture”]

DUBNER: Today we’ve heard the stories of Barry Marshall and Gary Becker, one a doctor, the other an economist. They both followed their own light – and paid for it. In each case, the Establishment treated them like rank outsiders. Well, if you want to see how an even more established Establishment can marginalize someone who dares to try something new, let’s go back to 19th-century England. Among a certain portion of upper-crust gentlemen, the rage of the day was collecting fossils. They were considered objects of beauty and fascination:

WINCHESTER: And they’d have rather genteel dining clubs where they would pass around. You know, “we found a new trilobite, have a glass of sherry, but don’t you think this is absolutely beautiful, Your Honor.”

DUBNER: That’s Simon Winchester, an author and journalist. His best-known book is The Professor and the Madman, about the creation of the Oxford English Dictionary. Winchester has also written a book about a man named William Smith, who was born in 1769 into a farm family in Oxfordshire. Smith was nothing like the gentlemen who drank sherry in clubs. He did, however, love to collect fossils.

WINCHESTER: So he became interested very much in the earth and the kind of things that were to be found in the earth, not only relics of former living things, like fossils were, but the actual sandstones and limestones of which his neighboring countryside was constituted.

DUBNER: Smith took a job as a land surveyor, which got him acquainted with the topography – and got him curious as to what lay beneath it. Working for a coal-mining company, he got a chance to take a look. Smith observed a sequence that few before him had noticed.

WINCHESTER: Siltstone, mudstone, sandstone, limestone, coal, siltstone, mudstone, limestone, coal.

DUBNER: Not only that, but he noted that each layer contained different kinds of fossils.

WINCHESTER: And he began to have thoughts about geology and particularly sedimentary geology, the laying down of sedimentary rocks, which were quite revolutionary. No one else had really begun to think like this. And then there was this extraordinary epiphany.

DUBNER: Smith traveled all over the English countryside. He noticed that the sequence of layers, and their corresponding fossils, were the same from place to place.

WINCHESTER: Sandstone with an ammonite, limestone with a brachiopod. Then you have another limestone or another sandstone with a trilobite. Those three unique rocks, if he found them 100 miles away, those same three rocks, same order, same color, same fossils, then he said: these are clearly the same strata of rock and all they are doing is they are disappearing beneath the surface of the earth and then coming up and reappearing 100 miles away. I can therefore draw a map showing where these things outcrop, showing how they slope down and at what angle down below into the subsurface of the earth. And I can draw a map which will enable people to predict where, when they dip down in that 100 miles, how deep below the surface they will be. In other words, I can draw a map of the invisible underneath of the British Isles.

[MUSIC: Wolfram Grus, “Petit Gennevilliers”]

DUBNER: A map of the invisible underneath of the British Isles, or of any isles, would be, as you can imagine, revolutionary. For science. For industry. For history. The Church, for instance, disapproved mightily.

WINCHESTER: These early maps evoked enormous hostility. Because the received wisdom of the day was that the earth was created at a very specific point in time. That was the Church’s belief, that the Earth was, let’s say in the 1880’s, 4004 + 1800, so that’s 5,804 years old and that was that. To challenge that in any way, as these maps did, because these maps were based on the evidence of fossils — which when you look at them carefully change so imperceptibly slowly — that you had to be oblivious to reality to assume that all of these could be changed and evolve and create you and me in 5,804 years, it simply was not possible. So these early geologists drove a horse and cart through the biblical teaching that the earth was only 6,000 years old. So there was great hostility and these maps were seen to be instruments of heresy.

DUBNER: But William Smith pressed on, almost entirely by himself. He created a massive, hand-drawn, hand-colored map; at his own great expense, he had it printed to be sold to the public. Its name alone was quite descriptive:

WINCHESTER: “A delineation of the strata of England and Wales, with a part of Scotland, exhibiting the collieries and mines, the marshes and fen lands originally overflowed by the sea, and the varieties of soil according to the variations in the substrata, illustrated by the most descriptive names.” And out it came, it was uttered for publication, as they say, on the 1st of August, 1815. And what then what happened is the sort of central tragedy of this story.

DUBNER: The tragedy, as Simon Winchester tells us, emanated from London:

WINCHESTER: I mentioned earlier that geology was a calling of the upper classes. And the Geological Society of London was peopled entirely by men, aquiline-nosed, refined dandies who would pass around fossils and mineral samples for the sheer delight of looking at them and collecting them.

DUBNER: And who came from the kind of families that William Smith did not come from.

WINCHESTER: Precisely. They saw this map, that was produced by a man who wore rough old boots and workman’s clothes and had dirt under his fingernails and didn’t know how to hold teacup properly, as a gross impertinence. And one of their number, a man called Greenough, said, ‘I’m going to copy this map, and I’m going to sell it under the authority of the Geological Society of London, and I am going to sell it more cheaply than this upstart’s map, which is on sale in the bookstores in London and Oxford and Cambridge. If he is charging 7 pounds we are going to charge 5 pounds for ours.’ So you had this extraordinary situation in the winter of 1815, 1816, where two maps, almost identical, one by William Smith and the other unresearched and plagiarized but with the imprint of the Geological Society of London on it being sold for less money. Well, the outcome was obvious. The Greenough map sold to those who were interested, and a growing number of people were, because this was not only beautiful, but everyone knew that it would allow you to dig for minerals and therefore possibly make yourself wealthy. And Smith’s map didn’t sell. He had to pay his money back, his loans back. He went into a financial tailspin, and he went bankrupt and he went, how humiliating for this decent human being, he was sent to debtors prison. I mean it’s a terrible story.

DUBNER: So William Smith works creatively, and tirelessly, and usually singly for all these years. Creates and publishes this astonishing map that turned out to be prescient on many dimensions, that turned out to be revolutionary on at least a few dimensions. And yet the publication is essentially sabotaged by people with greater means and access to, well, the public and access to good reputation and so on. He gets thrown in debtors prison. He comes out and he has lost home, his possessions have been bought up, yes? He had to sell off his collection of fossils, is that right?

WINCHESTER: Indeed.

DUBNER: So it’s incredibly heartbreaking that a man who worked hard and so brilliantly and nearly always alone creating this map of lasting usefulness was so deeply unrewarded for life’s work. But… the story doesn’t end there, does it?

WINCHESTER: Yes, it doesn’t end there.

[MUSIC: Niklas Aman, “Above the Clouds” (from Above the Clouds)]

DUBNER: The years pass. William Smith – poor, aging, dispirited — takes a job in Scarborough, in North Yorkshire. He’s working as a surveyor for a man named Johnstone. Smith creates one of his elaborate hand-drawn maps of Johnstone’s property.

WINCHESTER: So Johnstone looks at this map that this old man, because he is now a pretty… at least he has suffered mightily, he is stooped and weary and somewhat asthmatic, and he gives him this beautifully produced map of his estates. And a light bulb goes on in Johnstone’s mind. He says, “Wait a minute, this map. I recognize your style. You’re Smith aren’t you? Didn’t you create a map of the whole of the British Isles? I’ve seen it in London.” And Smith said, “Yes, I have the honor to say it was me that done that, sir.”

DUBNER: Mr. Johnstone, as it turned, out, was not only an influential gentleman — a member of Parliament – but a geology enthusiast:

WINCHESTER: He said, “So, what are you doing here working as a jobbing surveyor on my estate? You should be being honored and living in London in great comfort and be showered with medals and decorations and things.” And Smith says, “Well, life didn’t turn out like that.” And Johnstone says “This is monstrous and I’ll see what I can do.” And blow me down, he did.

DUBNER: In short order, William Smith was brought to London, where he was welcomed into the Geological Society of London and was more generally hailed for his earlier achievement:

WINCHESTER:  And he got his due. In the end he was recognized and honored as “The Father of English Geology.”

DUBNER: Simon Winchester’s book about William Smith – it’s a wonderful book; I encourage you to read it – is called The Map That Changed the World.

WINCHESTER: And it did change everything, so far as humankind’s search for minerals. Because it altered the economic landscape of the planet.

[MUSIC: Reid Willis, “The Self-Loathing Optimist” (from Rockslide Lullabies)]

DUBNER: What’s most remarkable about the story is not how hard Smith worked to create his map, nor how wise and clever he was. What’s remarkable is that this outsider, whose reputation was taken from him, lived to see that reputation rehabilitated, his ideas celebrated. It would have been so much more likely for him to die broken and bitter, in the wilderness, utterly unrecognized. That is a risk taken by people who work outside the system, who challenge the conventional wisdom. Like Barry Marshall, the Australian gastroenterologist, who had the audacity to suggest that he had found a cure for ulcers even though the medical establishment didn’t believe him. Here’s the Australian doctor-journalist Norman Swan:

SWAN: Medicine chose to ignore it. They chose to ignore it because it didn’t suit their prejudices, because they didn’t quite like the way the messenger was selling it, and because of a huge marketing push by a very influential industry which told them it was bull.

DUBNER: But after years and years of promoting his theory – and of being ridiculed for it – Marshall finally, in 1994, saw his findings accepted by the National Institute of Health.

MARSHALL: People would always say, “Dr. Marshall do you feel vindicated?”…well, we won. But we knew we were going to win. We knew we were going to win because we had the truth.

SWAN: If you look at history of medicine, it’s interesting how long it takes for evidence to get into the thick skulls of doctors. So when Pasteur proved the germ theory of disease it took about thirty years for the medical profession around the world to accept the germ theory of disease. Amazingly. It took twenty-odd years for doctors to accept that aspirin reduced the risk of dying of coronary heart disease after you’ve had a heart attack. It was well proven, it took twenty-odd years for doctors to accept that. It takes a long…it’s a conservative profession. It takes a long time to convince them of new ideas, and this was no different, because it was so radically outside of what they were expecting.

DUBNER: Radical indeed. Barry Marshall and Robin Warren’s work proved not only that Helicobacter pylori was the true cause of ulcers, but of stomach cancer, as well. In 2005 – more than 20 years after Marshall swallowed that batch of bacteria – they were awarded the Nobel Prize.

SWAN: It is very rare in medicine to find a cure for anything. You can never really be sure you’ve cured cancer, even though the treatment, for say, breast cancer is effective these days. You certainly can’t cure heart disease. Once you’ve got it you have got it for life. You can’t cure diabetes. I mean, yes, you can reverse it in some people, but it tends to come back. But you can cure infections. So antibiotics do get rid of infections and you can cure them. And this is a rare example, a really rare example, in modern medicine of a cure rather than an effective treatment. So what they had before was an effective treatment. It was expensive. It was for life. And here was something which got rid of the disease. And it got rid of the disease pretty cheaply.

[MUSIC: Clay Ross, “Army For You” (from Entre Nous)]

DUBNER: And what about Gary Becker, the rogue economist who led off today’s program? He thought his field should look beyond finance and banking and consider all of human behavior, from racial discrimination to mate-picking. Well, Becker, too, after years of being marginalized, was ultimately celebrated. Time caught up to his way of thinking. Becker, too, won a Nobel Prize, in 1992; and, in 2007, the Presidential Medal of Freedom. How did he feel about the Nobel? Here’s his friend, Judge Richard Posner.

POSNER: Well, he was pleased. I think he felt it was overdue. He should have gotten it earlier, that’s the standard reaction to these things.

DUBNER: And Harvard economist Ed Glaeser, who studied with Gary Becker, and still teaches his work:

GLAESER: This is person who in some sense felt if he was being universally loved he was screwing up, right? That he, in fact, wants to push you out of your comfort zone on this.

DUBNER: Let me just ask you maybe in summary: I’m curious whether you think that there are any lessons to be learned from Gary Becker’s experience generally, and maybe how anybody who’s listening to this, whatever occupation or vocation they might be thinking about, could perhaps apply some of that determination of Gary Becker’s to their own lives?

GLAESER: It’s the right question to ask. And I think Becker is different from many of the wilderness-years-type scientists that we think of in the sense that he was not somebody who came out of nowhere who had a brilliant idea and was mocked for it initially. He was someone who was part of a very well-established economics department, who had, early respect, early rewards in lots of different ways. But what’s different from many of us is that he didn’t in any sense rest on those, and he didn’t rest them not just in the sense that he kept working, although he worked like heck. He didn’t rest on them in the sense in which he decided to risk everything on every throw of the dice, right? He wanted to always be out there. He wanted to push as far as he could. He wanted be as risky; he wanted to risk going back into the wilderness even though he had, you know, gotten himself a seat in the throne room, right? And that’s what’s really special about him, it’s being in the wilderness by design, by choice. Here’s a guy who over and over again decided to take those risks, to court disaster, to be on the very edge, to go into rooms, to enter fields in which he knew that people were going to think that he was outrageous. He knew that people were going to denigrate his work. And yet he still did it. And that’s what made him so productive. And I think the challenge for all of us, particularly all of us who are in the idea business is it’s a reminder to try to push ourselves as much as possible to try to be different, to be unpopular often, to do things that are troubling to the status quo, that risk us being thought of as being, you know, less than we are. And I think that’s the Becker lesson is it’s trying to be an outsider almost by design.

DUBNER: I asked Norman Swan what the story of Barry Marshall and Robin Warren could teach the rest of us.

SWAN: I think the generalizable takeaway from Barry and Robin’s discovery and the resistance to it is that people should judge things on their scientific merit and not shoot the messenger. And to make a discovery like this probably does take somebody who is out of the ordinary. And somebody who is out of the ordinary may not communicate in the way that we expect or have become used to amongst our colleagues. And therefore we really do need to go back to the science.

DUBNER: And, finally, Simon Winchester on map maker extraordinaire William Smith.

WINCHESTER: Well, I don’t want to get too sappy about this, but tolerance for the true eccentric is important. I think it is important for people like you and like me, writers who are interested in the unsung heroes, to listen to these stories. Listening is important. Being kind and tolerant is important, too. And you’ll discover, I think, an unsung hero in places where you would have no thought that such a person would exist.

[MUSIC: Greg Ruby Quartet, “Deja Vu” (from Look Both Ways)]

CREDITS

This is a transcript of the Freakonomics Radio podcast “Outsiders by Design

Author: "Freakonomics" Tags: "Transcripts"
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Date: Friday, 12 Sep 2014 17:59

Our latest podcast episode — “How to Save $1 Billion Without Even Trying” — discusses research which finds that health-care experts generally buy generic medicines for their own use rather than the more expensive name brands. The episode discusses the various reasons that brand names might be more appealing despite the higher cost. A listener named Mike Dimore has written in with an interesting, and serious, reason that didn’t come up:

This won’t apply to many people but for the few that it does apply to (myself included), it can end up costing them hundreds of thousands of dollars. I was diagnosed with ulcerative coilitis after taking an acne medication called Accutane. I had a lawsuit against the company that manufactured the drug, but since it was a generic version the company had no liability. They offered me a $8,000 settlement but I refused. My case was dismissed after the Supreme Court decision for Mutual Pharmaceutical Co. v. Bartlett, which essentially made it impossible for a consumer to sue a generic drug company. The people who took the non-generic version of this drug however received significantly higher settlement offers ($100k+).
This is a very specific and unfortunate example of why brand name can be better, but if and when it does happen it becomes a very significant one.

Author: "Stephen J. Dubner" Tags: "Freakonomics Blog"
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Date: Thursday, 11 Sep 2014 14:00

This is a transcript of the Freakonomics Radio podcast “How to Save $1 Billion Without Even Trying

[MUSIC: Glenn Crytzer and his Syncopators, “Fumblin’ Around” (from Harlem Mad)]

Stephen J. DUBNER: We recently held a peanut-butter-and-jelly sandwich taste test here at WNYC, where we record our show.

DUBNER: So guys, this is for an episode about premium brands versus store brands, okay? And so what you see here are two rows of sandwiches, one on a plain white plate there, and one or a bordered plate there. Okay? And the sandwiches were made with either the premium Skippy Creamy and the Smucker’s strawberry preserves. So any nut allergies or verbal waivers, if you die not our problem.

Suzie LECHTENBERG: There’s a lawyer in the room.

DUBNER: Who is the lawyer, you?

Janna FREED: It will be fine.

DUBNER: Good lawyering.

DUBNER: And the store-brand sandwiches are ShopRite peanut butter creamy, they put their adjective last, peanut butter creamy, and strawberry preserves – ShopRite. And the bread is identical. It’s Bimbo.

DUBNER: So really all we want is for you to eat one of each and tell us which one you prefer and why.

Laura MAYER: Patterned plate is the one.

Steven VALENTINO: Tastes nuttier.

John DELORE: More honest stuff in this one.

Malissa O’DONNELL: Yeah, less sugar.

Matt KIELTY: Ohhh. A little more texture.

DUBNER: More texture and therefore better or therefore worse?

KIELTY: I like a little texture so I’m going to say better.

VALENTINO: I liked the border, and I thought it was the premium brand.

Andy MILLS: I liked the border one, for whatever reason, it just tasted slightly more delicious and it makes me think that that was the Skippy.

DUBNER: So how would you feel collectively if I told you that they were just all the same? And they were all the generic, and that there was no difference at all in the plate?

KIELTY: I would call you a liar.

DUBNER: And you’d be right. [LAUGHTER…]

[THEME]

ANNOUNCER: From WNYC: This is FREAKONOMICS RADIO, the podcast that explores the hidden side of everything. Here’s your host, Stephen Dubner.

[MUSIC: The Diplomats of Solid Sound, “El Corazon Negro” (from Instrumental, Action, Soul)]

DUBNER: We try not to lie too much around here but yes, in the interest of science, we did tell a lie about the peanut butter-and-jelly sandwiches. They were all made with the same store-brand ingredients; none were made with the Skippy peanut butter or Smucker’s preserves. And yet, as you could hear, most of our tasters were pretty sure the two sandwiches were quite different, and they knew which one they preferred. Which one was “better.” Even though neither of them was “better.” Now, why’d we do this? The idea was to get all of us thinking about the consumption choices we make – how meaningful they are for us as individuals and for the overall economy. We have a couple of economists to walk us through this:

Jesse SHAPIRO: I am Jesse Shapiro. I’m an applied microeconomist.

DUBNER: And that’s that. And that’s that, damn it, yeah. And where do you teach?

SHAPIRO: I’m a professor of economics at the University of Chicago Booth School of Business, and a visiting professor of economics at Brown University.

DUBNER: Ah, very good. Ok. Matt?

Matt GENTZKOW: Yeah, I’m Matt Gentzkow. I’m also a microeconomist. I’m a professor of economics at the University of Chicago Booth School of Business.

DUBNER: I want to talk to you today about a working paper called ‘Do Pharmacists Buy Bayer:’—Bayer as in the aspirin—‘Informed Shoppers and the Brand Premium.’ So in order to get that very dramatic question out of the way: Do pharmacists buy Bayer or are they more likely to buy the generic aspirin?

GENTZKOW: Pharmacists don’t buy Bayer.

DUBNER: That was easy. Okay.

DUBNER: And what about going outside of the domain of pharmacists and headache medicine. What about other experts in their domains, do they tend to buy store brand versus premium brand?

SHAPIRO: Well, first of all, if you look at health experts outside of headache remedies, you see this pattern in a lot of products, especially medications, over-the-counter medications, you see that people who are informed about the products and who are occupational experts, they’re way more likely to buy store-brand across a lot of categories. Outside of the health domain, we took a look at pantry staples—things like table salt and sugar—and it turns out that chefs are considerably more likely than non-chefs to buy store brand salt, sugar, baking soda, things like that.

DUBNER: Ok. So this is the kind of research that I think is of great interest to most people, and yet would lead many of those most people to say, ‘Wow, really? This is what economists at the University of Chicago spend their time doing, is figuring out if pharmacists buy Bayer aspirin’? So, let’s assume that beyond that very narrow question there’s a great broad answer or a great, broad line of thought you’re trying to pursue. What are the questions you’re trying to answer really when you do a study like this?

GENTZKOW: Yeah, I think that’s a good way to introduce it, because this is a paper we think of as some really simple facts that speak to a big, old, and to us, kind of important set of questions. The set of questions in the background is, what is advertising and branding and all this stuff that companies spend so much effort on really about? Is it fundamentally about trying to inform consumers, help them make good decisions, help them identify what are the best products so they can buy them? Or, at the other extreme as a lot of people have speculated, is it really about trying to confuse people, cause them to make mistakes, convince them that stuff that really is not any better is, and get them to pay a lot of money for it? So that’s something people have argued about for a very long time. We have some quotes in the paper from, you know, 50-60-70 years ago, people speculating. You know, there’s this branded soap flakes that people seem to pay a lot for, instead of the simple, basic soap flakes, and both of them are just soap flakes and so you wonder, ‘Why are people paying for this?’ Is it because there’s something special about the expensive ones, or is it just that people are confused? And so having now these really large datasets where you can actually go look at lots and lots of peoples’ actual purchases, as well as their occupations and various other indicators of how sophisticated they are, it kind of gives you new traction on an old question.

[MUSIC: Matthew Aguiluz, “Organism”]

DUBNER: Okay, so let’s say you buy this argument for why this kind of question is meaningful. Assuming it is, how do you go about answering it?

SHAPIRO: So, I think, stepping back—I’ll tell you in a minute how we did it—but stepping back, I think what we want to do is, we want to follow somebody around the grocery store or the drugstore. And every time they make a decision, between say, a store brand (you know, CVS brand aspirin) or a national brand (say, Bayer aspirin), we want to ask: would that decision have been different if they knew more? That’s really the question we want to ask. And we want to know that for every aisle in every store and for every shopper. And that’s a very tough question to answer. We don’t have that, you know, hypothetical other more informed shopper standing next to them saying what they would do. So we need to go and find those counterparts in the data. So, we started with a dataset called the Nielsen Homescan Panel. And this is a dataset where people basically have a barcode scanner at home, and they record all of the purchases they make at supermarkets, at drugstores, at club stores, at mass merchandise stores, all the main kind of retailers. And that was great for getting a measure of the everyday person’s purchases. Then we needed to find a way to identify these kind of informed counterparts for everybody. And so the way we did that is we ran two custom surveys, in collaboration with Nielsen, of the Homescan panelists. So we basically went out to them and asked them some questions. We asked people what is their occupation, so what did they do for a living? And then we also gave people a quiz. We said, ‘What’s the active ingredient in Tylenol?’ ‘What’s the active ingredient in Advil?’ and we gave them a multiple choice test to see how they did. And so, what we try to do then is, we try to find people who have a similar age, homeownership, live in the same geographic area, shop at similar kinds of stores, but differ in how much they know about the products that they’re buying. And from that we can construct a kind of data-driven answer to the question, ‘How different would these choices be if people were better informed?’

GENTZKOW: A thing that’s really important is that that dataset is really, really big. So relative to a lot of surveys and things, the Nielsen Homescan Panel has tens of thousands of people in it. And that means that once you zero in on a particular occupation like pharmacists or chefs, you still have lots of those people in the data. So almost any other traditional sources one might’ve had, surveys that ask consumers what they buy, would’ve been hard to use for this because at the end of the day, you might end up with three pharmacists and six chefs and then you couldn’t really figure it out.

DUBNER: I see. Let’s talk about the headache medicine, the aspirin, for a little while. You said there’d be some questions asked multiple choice. How many questions were there? And can you recite them and let me and the listener play along and see if we have any idea what we’re talking about?

SHAPIRO: I think there were five questions. I can ask you the questions but I don’t think I’ll be able to remember all the multiple choices. Let me give it a try. So: What is the active ingredient in Tylenol? Is it A. acetylsalicylic acid? B. acetaminophen? C. naproxen sodium? Or D. ibuprofen?

DUBNER: Acetaminophen.

SHAPIRO: Congratulations! You nailed it.

DUBNER: Thank you very much.

SHAPIRO: You are a very informed shopper.

DUBNER: That would put me in the ‘informed’ realm already? Just one?

GENTZKOW: That’s one out of five.

DUBNER: Give us one more.

SHAPIRO: Ok, this time I’m not gonna give you multiple choices though. I’m just gonna ask you what’s the active ingredient in Advil?

DUBNER: Advil is ibuprofen.

SHAPIRO: Okay, there you go.

DUBNER: I could even do Aleve. I could do Aleve if I had to.

SHAPIRO: Go for it.

GENTZKOW: You’d be five out of five.

DUBNER: That’s the naproxen something or other.

SHAPIRO: That’s right.

DUBNER: I know my pain medication, fellas.

GENTZKOW: The multiple choices had a couple of—sodium chloride, or something, was tossed in, there were a couple of not-so-headache-remedy kind of things tossed into the multiple choices to mix things up.

DUBNER: So those are the kind of questions you’re giving to separate out how ‘expert’ someone is in their domain, correct? Not how they know something about the product, correct?

GENTZKOW: Yeah, we ask these questions of everybody. And so we think of them as, separately from occupation, this is a separate measure of how much do people know about these products? How sophisticated are they? It’s gonna be, we think it’s gonna be correlated with lots of general knowledge and sophistication. Not only do you know these active ingredients per se, but somebody who knows these active ingredients, like you, is also a pretty smart, talented, sophisticated person who knows lots about lots of different kinds of things.

DUBNER: And the idea being that if you know the active ingredient in the name brand thing and then you look at the store brand thing and you say, ‘Oh, active ingredient is identical,’ then you think, ‘Well, I should buy the one that’s a third the price.’ Right? That’s the connection we’re trying to make here, right?

GENTZKOW: Basically, yeah. So I think, there’s sort of a simple version of this and then a slightly more subtle version. The simple version is: you know, Tylenol and CVS brand are both acetaminophen. If you realize that, you would know they’re the same thing, so you should buy the cheaper one. That’s the simple story. The more subtle story is even if you know that they’re the same active ingredient, you might still be kinda worried about a variety of things. You might wonder, do they have different coatings? You might think, I heard that these store brands are manufactured in India, and maybe these plants in India are not so good? I heard that there was like a recall of these products, once upon a time when something went wrong with the manufacturing and they weren’t safe. So you could come up with a whole bunch of reasons why even if they’re the same active ingredient, you might still want to pay a little bit extra for the fancier thing—cause maybe it’s safer, cause maybe it has a coating that makes it work better. And so above and beyond knowing they’re the same active ingredient, you need some knowledge and sophistication to be able to assess are all of those other differences things I should be worried about? Are they really different, first of all, and if they are different, should I care? And should I care to the tune of, you know, three dollars every time I buy a bottle of this stuff? So we think of these in knowledge measures as picking up both ‘do you know the fact’ and also probably they’re correlated with ‘are you sophisticated enough to be able to make good judgments about those other characteristics’?

DUBNER: And  what can you tell us about the reality of that? For all those factors that you just described. I know some people say that with generic pain relief medicine, they worry that the absorption rate, or maybe the breakdown rate, I don’t know what it’s called, in the body is different than the premium brands. So do you know much about, or what can you tell us about the actual physical difference between a premium and a generic pain relief pill?

SHAPIRO: It’s hard to say completely for sure, but if you go to the FDA website, they’ll tell you that store brand and national brand over-the-counter medications have exactly the same strength and composition and safety and efficacy as one another.

GENTZKOW: But still, this is one of those topics that people get very worked up about. In going around and talking about this paper, we’ve met many smart academics, people whose judgment we respect, who have a different view of it. Who think ‘I buy Advil and there really is a good reason for that.’ And so I think it’s fair to say there’s at least enough controversy that people can read the evidence different ways. There are certainly studies of prescription medications, for example, where it was shown that these absorption rates would differ, or different coatings actually affected efficacy. There certainly have been recalls and examples of safety problems. It’s not at all clear whether those are different for the…Tylenol has had recalls, the brand, so it’s not clear how different they are. But I think from my sense at least talking to people, there’s enough murkiness—just enough murkiness in the facts—that people could come to different conclusions. In a way that’s where the study kind of comes from. We could’ve just had this debate based on direct evidence and first principles and what about the absorption rates? We think of this as a way to sidestep all of that and say, ‘Well, whatever all that stuff is, let’s see what the smart people do when they make purchases for themselves.’

SHAPIRO: We’re sort of assuming whatever differences do or do not exist, doctors and pharmacists know more about them than people who are not doctors and pharmacists. So we can learn from their choices when they’re shopping on their own dime, what they think.

DUBNER: Ok. So what do the smart people do? In the case of aspirin or headache medicine or something like that, do the pharmacists buy the name brand or do they buy and take the generic?

SHAPIRO: They by and large take the store brand. So in the context of headache remedies, about 92 percent of the headache remedies pharmacists buy are store brand. And we see that very consistently across other healthcare occupations—nurses, doctors, and so on—they’re all buying way more store brand than the rest of us.

[MUSIC: The Mackrosoft, “Three Views Of A Secret” (from S.E.M.E.)]

DUBNER: As for the rest of us? About 74 percent of non-pharmacists buy store-brand headache remedies compared to 92 percent for the pharmacists, so a big difference. Coming up on Freakonomics Radio: an economist like Steve Levitt prides himself on thinking with his brain rather than his emotions. So does this apply to personal consumption?

Steve LEVITT: Oh yeah, I’ll always buy the most expensive golf ball, because if there’s even the tiniest chance that there’s a little magic in there, then I want that magic.

DUBNER: And what about Jesse Shapiro and Matt Gentzkow: did studying generics make them buy more generics?

SHAPIRO: I think I probably buy a little more now than before we wrote the study. Not so much because of anything I learned from the study, but more because I think I would just feel hypocritical buying the branded good after writing this paper.

DUBNER: And one more thing. If you don’t already subscribe to Freakonomics Radio, why don’t you give it a try? You can sign up for free, at iTunes. Based on what we’ve learned on today’s programs, Freakonomics Radio is probably just as good as This American Life or Radiolab…

[UNDERWRITING]

ANNOUNCER: From WNYC: This is FREAKONOMICS RADIO. Here’s your host, Stephen Dubner.

[MUSIC: Spencer Garn, “TNT”]

DUBNER: Today we are talking with two economists about how experts tend to buy cheaper, store-brand items like aspirin or kitchen staples. Why is that? Presumably because they know enough to know that the store-brand items are just as good as the more expensive name brands. So you might think that economists behave the same way. Economists like Steve Levitt, my Freakonomics friend and co-author:

DUBNER: So Levitt, what about you? Are you a slave to name brands? What are some products that you only buy a name brand of?

LEVITT: It is funny. I’m a little bit into the magic. So when I am at the store and I’m looking at branded or unbranded I honestly, each time I look at it and I ask myself for a particular application: do I think there could be magic in the brand? And sometimes I do and sometimes I don’t, but it doesn’t follow any logic. But you know, I’m not very price sensitive anyway, so if I think there’s even a little chance that there’s some special magic built into it, I’ll pay double for even just the whiff of magic, I’ll pay double.

DUBNER: So I’m guessing the realm in which you suspect this magic may apply would be golf balls for instance? We always buy the premium brand golf ball?

LEVITT: Oh yeah, I’ll always buy the most expensive golf ball, because if there’s even the tiniest chance that there’s a little magic in there, then I want that magic.

DUBNER: Matt Gentzkow and Jesse Shapiro, meanwhile, argue that a lot of that brand-name magic is – well, an illusion. Which means that a lot of people are spend a lot of money that they probably don’t need to. So what does that add up to? Here again is Jesse Shapiro.

SHAPIRO: We look at six different headache medicines: aspirin, ibuprofen, acetaminophen and so on. And I think we estimate that people are spending $8 billion on those alone, every year. And there are other headache remedies out there. And I think we find that in those categories, if everyone were to act like a pharmacist, people would spend between $1 and $2 billion less every year.

DUBNER: And how should we, the populace, think of that 1 or 2 billion. That’s 1 or 2 billion dollars that would not be going from individuals’ pockets into corporate pockets, and then distributed to their friends, families and shareholders, et cetera. Is that OK for the economy, that people are overspending on premium brands, because it’s something that they want and they’re just revealing their preferences—even if it’s a placebo effect, hey! Placebo effect is not nothing. Or, is that, in your view as economists, a waste of time and money?

SHAPIRO: I mean it really depends on whether you accept that people would like to act like doctors and pharmacists act and they just don’t know enough to do it. If you take that premise then, yeah, people are making a 1 to 2 billion dollar mistake. If you want to say that believing that branded medicines are better allows them to work better, reduces headaches more and so on, then I think it’s much harder to make that case.

DUBNER: And this proves, your paper proves or argues more broadly what? That we are susceptible to marketing and advertising to a degree that we shouldn’t be? That we are ‘informed’ by things that aren’t really very informative? That we are just gullible generally? What does it argue?

GENTZKOW: I think to answer that question, it’s good to take account of this full set of products that we look at. So we start with this case study of headache remedies, where we find these very big effects. We look at other over-the-counter medications, where we see similarly big effects. And we look at these pantry staples like sugar and salt, where looking at chefs’ purchases, we see similarly big effects. So all those categories of products, the takeaway conclusion is, Yeah, this seems to be a mistake and people are misled either by advertising or by just absence of knowledge that it would take to make good decisions. But we also go look across a much broader set of products in the supermarket—everything from soft drinks to frozen entrees to all kinds of different products you’d buy in the supermarket—and what we see in that really big set is there are actually lots of product categories where the experts don’t differ systematically in their purchases, and even a couple of categories where experts like chefs seem even more willing to pay for brands. And so across all those categories, it looks like maybe there are many where the brands really are better. And so the big picture, I would say, is we know that if we look at the products where we would’ve been the most worried that there aren’t any differences…like headache remedies are really chosen to be…if there’s any product category where you would’ve thought that these things can’t possibly be that different, it would’ve been that. So when we look at those places we see, ‘Yeah, there are some big mistakes.’ But we’re also very far from the situation where all brands are a mistake, or all brands are about misinformation. And so one way to think about it is, on average, in the decisions consumers face, brands typically are better, or there are differences across products and differences across brands. The heuristic that, yeah, I should probably pay a little extra to go with a brand that I trust, isn’t so bad. That’s like a pretty good way to make decisions, on average. The problem is, it’s a good heuristic in some places, it’s not a good heuristic in other places. And like a lot of things, people apply the same rule too broadly and end up making mistakes as a result.

DUBNER: I’m curious what you’ve heard from advertisers or marketers about your research? On the one hand, your research is this massive compliment to them. You’re saying to them that you could take two identical objects and make one three times more valuable by designing a nice package and writing great jingles. On the other hand, you’re saying ooh, everybody who responds to your fantastic work is kind of an idiot.

GENTZKOW: Well, we’re fortunate enough to have two marketers as co-authors on this paper. One of our colleagues at Chicago, J.P. Dubé and Bart Bronnenberg, who’s a marketing professor in the Netherlands. So we get their input on this. They don’t seem to be walking around incredibly depressed, at least as far as we can tell.

DUBNER: Yeah but they’re professors of marketing. They’re not making their money by selling products, right?

GENTZKOW: Fair enough.

SHAPIRO: No but they’re teaching their students how to market products. And I think they think, and I think the data are supportive of this, that there are a lot of categories where marketing effort really is helping people and I don’t think there’s anything in the paper that really disputes that. It’s just that there’s a subset of categories where it looks like people are overpaying for brands. The other thing you have to remember is pharmacists, take pharmacists and doctors buying headache medicine. You know, in the case of aspirin, the national brand costs maybe five times per pill what the store brand costs. So at a 5x price, the experts are generally buying store brand. Maybe at a 2x price or a 1.5x price, you’d get some of those doctors and pharmacists buying the national brand. You know, we don’t know for sure.

GENTZKOW: I like to think about the thought experiment. Imagine that you walked into a supermarket or Walmart or you walked into CVS, and instead of all these fancy, brightly colored, branded packages, everything was just in white boxes with black labels stating what it was. And you had no brands in the store and you tried to walk around and figure out what to buy. I think that would be a pretty hard situation for most of us, and you would spend a lot of time trying to get your groceries. I think the brands are serving first as a marker of quality. Second, as a way to just make all these decisions we have to make every day easier, and deploy a little psychology to help us be able to quickly identify and get what we want. I think there’s clearly a lot of value being produced there. The question is just, where is it more? Where is it less? Is it — are firms exploiting the same mechanism that’s sort of useful in many places to drive up their profits in a small number of categories?

DUBNER: I’m curious how this has changed your guys’ consumption habits? Especially if you have kids? Especially when it comes to cold and flu or baby, allergy medicine, or anything you might give your kids or yourselves?

SHAPIRO: I don’t know. I buy a lot of store-brand stuff. I think I probably buy a little more now than before we wrote the study. Not so much because of anything I learned from the study, but more because I think I would just feel hypocritical buying the branded good after writing this paper. [All laugh] I’m more afraid of that than any risks of store-brand medication.

GENTZKOW: I also pretty much buy just store-brand, over-the-counter things and generic prescription things, even for my kids. I think that was true before this paper. I don’t think it’s really changed much. I think, my experience, I guess, was kind of growing up in a milieu where this message that you’re kind of a sucker if you pay extra to buy brands was pretty pervasive. And so, something you see a little bit in our data, I think there’s a kind of generational thing where 20, 30 years ago, generics actually weren’t very good for a lot of things, and so maybe you carry that forward. But this seems like, for my own personal habits, it’s something that hasn’t made a huge difference.

DUBNER: That’s a great point and I guess it’d be nice to know from you guys—and not that this is your realm—but how is a shopper to tell the difference between a store brand generic and just a piece of junk? I mean, sometimes the line is pretty thin, right?

GENTZKOW: All they need to do is get access to a Nielsen Homescan Panel and do a survey of a bunch of experts and just run some regressions and then it’s like, it’s pretty easy to figure out.

SHAPIRO: Easiest thing in the world.

DUBNER: Easiest… Bunch of lazy civilians out there. Why aren’t they doing that?

SHAPIRO: As you say, this isn’t our area of expertise, but my sense is that store brands have gotten a lot better and that major retailers now invest a lot in the supply chain for their store brands and trying to make sure that they’re as comparable as possible to the national brands that are side by side with them on the shelf. You look at data on trends, you know store brand as a share of purchases has just been going up tremendously. It started in the 1990s really taking off and has continued to do that. So I think for most categories, at least these kind of supermarket and drugstore kinds of products, I think it’s pretty safe to buy a store brand. And then there are gonna be cases where maybe it’s just a matter of personal taste. Like maybe you don’t like the taste of the store brand cola or something, then I don’t think you need an economist to tell you you probably shouldn’t buy that kind.

DUBNER: Alright, so trying a store-brand cola and seeing how your taste buds like it compared to Coke is pretty simple, and cheap, and there’s not much commitment to it. What about something way bigger — choosing a college, maybe? How is someone supposed to assess the premium brand versus — let’s not call it the generic college, but the less-premium brand of college?

SHAPIRO: I think that’s a great question. We should do a survey and see where professors at fancy name-brand colleges are sending their kids.

GENTZKOW: I was going to say, I think the same methodology would deliver a very convincing answer in the opposite direction. If you took the somewhat controversial view that college professors are sophisticated and know what they’re doing—which could be debated at some length—definitely college professors at fancy universities also pay extra to send their kids to fancy universities, for sure.

DUBNER: Right. Although that’s a little bit of a self-reinforcing pat on the back, right? Because, you know, if I’m a professor at a fancy university, especially, plainly it is, you know, that type of university only is deserving of my offspring. So…

SHAPIRO: There’s an element of that in all these products, though. Because, it could be that a chef doesn’t want to have store-brand baking soda on their shelf. They want to have some fancy baking soda from Italy or something like that, so they can tell a story about how sophisticated their tastes are for baking soda. So you might’ve seen the same thing there. And maybe there is a little bit of that going on.

GENTZKOW: It would be interesting to look at college professors more generally. I bet it’s the case that faculty at state universities are more likely to pay extra to send their kids to Ivy League universities than the average person.

DUBNER: So is that your next study that we should be looking for, then? Cause man, people would read that.

GENTZKOW: This was your idea; maybe we should work on this together.

[MUSIC: Glenn Crytzer and his Syncopators, “Payin’ No Mind” (from Harlem Mad)]

DUBNER: Thanks to Jesse Shapiro and Matt Gentzkow for their fine knowledge today. And to everyone who took part in our peanut-butter-and-jelly taste test – which, you’ll recall, was really a taste trick: all the PB & J was store-brand, and it seemed like everybody liked it just fine. Caroline English made the sandwiches; they were eaten by: Matt Abramovitz, Gretta Cohn, John Delore, Janna Freed, Caryn Havlik, David Herman, Matt Kielty, Bourree Lam, Laura Mayer, Andy Mills, Malissa O’Donnell, Greg Rosalsky, and Steven Valentino. We should say that not everybody was fooled:

FREED: Dude, they taste exactly the same.

Greg ROSALSKY: They taste exactly the same to me.

FREED: Thank you.

DUBNER: Really?

DUBNER: After the sandwiches, we chatted a bit:

DUBNER: For those of you who buy anything, which is everybody, what makes you buy a premium brand when there’s a store brand equivalent, and when you buy a store brand and when you wouldn’t.

VALENTINO: If it’s a party and I’m feeling cheap, sure, you know. But if it’s going to be on display, then I would probably bring something that was premium.

Matt ABRAMOVITZ: I would in a heartbeat buy generic medicine, because I can’t taste it.

DUBNER: And as a new father when you get sent out to buy cold medicine for your screaming six-month-old, you’re going to say I want to save the five bucks and buy the cheap one?

ABRAMOVITZ: There’s a lawyer in the room, but I am going to say yes on that one. And that’s because I feel like most of these products, and probably the peanut butter, too, is mostly made in the same place. My perception of these things is like one big extruder that puts it in this jar, in that jar and they just label them differently. And so I’ll save the five bucks, even on my toddler.

DUBNER: Name one thing, if any, that you would never buy a store brand, generic brand, non-premium brand for.

VALENTINO: Orange juice.

MAYER: I never get the store brand of this very basic facial moisturizer that I pay like three times as much for.

LECHTENBERG: Condoms.

DELORE: Anything that touches genitals is totally top shelf.

DUBNER: I wanted to ask John… what else that touches your genitals would you not buy?

DELORE: I refuse to give you the end of your episode.

DUBNER: Oh yeah, John? That’s what you think.

CREDITS

This is a transcript of the Freakonomics Radio podcast “How to Save $1 Billion Without Even Trying

Author: "Freakonomics" Tags: "Transcripts"
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Date: Thursday, 11 Sep 2014 13:56

(Photo: Chris Potter)

(Photo: Chris Potter)

When a pharmacist gets a headache, what do you think she’ll buy: Bayer aspirin or the much cheaper store brand? You’ll find out on this week’s episode. Hint: the episode is called “How to Save $1 Billion Without Even Trying.” (You can subscribe to the podcast at iTunes, get the RSS feed, or listen via the media player above. You can also read the transcript; it includes credits for the music you’ll hear in the episode.)

It features Stephen Dubner interviewing Matthew Gentzkow and Jesse Shapiro, a pair of economics professors at the University of Chicago’s Booth School of Business and co-authors (along with Bart J. Bronnenberg and Jean-Pierre Dubé) of a working paper called “Do Pharmacists Buy Bayer? Sophisticated Shoppers and the Brand Premium.” Along the way, we find out if conducting this kind of research leads a researcher to buy more store-brand items himself:

SHAPIRO: I think I probably buy a little more [store brand stuff] now than before we wrote the study. Not so much because of anything I learned from the study, but more because I think I would just feel hypocritical buying the branded good after writing this paper.

You’ll also hear from Steve Levitt about his shopping habits. He says there is one particular item that he’s always willing to splurge on. Can you guess what that is?

Author: "Suzie Lechtenberg" Tags: "Featured Radio Post, Freakonomics Blog, ..."
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Date: Thursday, 04 Sep 2014 13:00

Airbnb ad

Airbnb graffiti in the New York subway.

A battle is being waged between the Internet and the State, and this episode of Freakonomics Radio gives you front-row seats. It’s called “Regulate This!” (You can subscribe to the podcast at iTunes, get the RSS feed, or listen via the media player above. You can also read the transcript; it includes credits for the music you’ll hear in the episode.)

At issue is the so-called sharing economy, a range of services that facilitate peer-to-peer transactions through the Internet. Companies like Airbnb, Uber, and Lyft have seen rapid growth and eye-popping valuations, but as they expand around the world, they are increasingly butting heads with government regulators.

In this episode, you’ll hear from Nathan Blecharczyk, the co-founder and CTO of Airbnb (now valued at roughly $10 billion), and one of the youngest billionaires in the world. Blecharczyk tells Stephen Dubner the story of Airbnb’s founding, how it initially struggled to find investors, and what kind of obstacles it still faces daily. In New York City, for instance, it’s estimated that about two-thirds of its business activity is illegal. That’s a big concern for New York State Senator Liz Krueger, known as “Airbnb’s doubter-in-chief.”

In 2010, Krueger was the chief sponsor of legislation that came to be known as the Illegal Hotel Law, which has made it harder for New Yorkers to legally rent out their rooms through Airbnb. Blecharczyk argues that it’s time for lawmakers like Krueger to recognize the reality of Airbnb, which he estimates will bring in $768 million worth of annual economic activity in New York:

BLECHARCZYK: We’re not advocating that there shouldn’t be rules. We’re just saying that things have evolved and it’s worth taking a fresh look from the ground up.

Krueger, meanwhile, argues that current laws aren’t strict enough:

KRUEGER: I want to look at more enforcement, perhaps increase fines, and penalties. I do have a very serious frustration that the kind of law that we really need needs to be federal because the state is superseded by federal law when it comes to regulating online business. Some people seem to think that if you’re a business model that’s on the internet it’s like magic and hocus pocus. It’s just business. And there’s a reason for government to regulate business, whether it has a physical site somewhere or whether it’s in the cloud.

Inspired by Airbnb, the entrepreneur Guy Michlin co-founded EatWith, which enables cooks to convert their homes into restaurants. EatWith has yet to clash with regulators, but he’s bracing for the inevitable:

MICHLIN: I think that sometimes, or actually many times, the regulator is a little bit behind to catch up with technology… And if you think about Airbnb, it’s obvious that this is a phenomenon that’s not going to go away…. Obviously the regulator will need to come in and hopefully in a dialog with all the different constituencies, adapt and create a new regulation that fits the reality.

The ride-sharing company Lyft, meanwhile, has engaged in high-profile showdowns with state regulators around the country. John Zimmer, its co-founder and president, explains:

ZIMMER: They interpret laws one way and are trying to do their job. And we interpret laws another way and are trying to innovate. And those two things are at odds, and the timelines are at odds. And if we took the approach of, “Hey, let’s wait and see what the government does to create a path that is very, very clear … then we wouldn’t be operating anywhere.

Lyft recently got into a head-on collision with New York State regulators, including the office of Attorney General Eric Schneiderman (which has also clashed with Airbnb). Schneiderman’s chief of staff Micah Lasher tweeted that Lyft and Zimmer were “not just ‘disruptive’ but also personally dishonest.”

It might be easy to conclude that state regulators are clamping down on these companies in large part to protect the entrenched hotel and taxi industries. Lasher says this isn’t the case, that the A.G.’s office isn’t against innovation or competition, but is instead just looking out for the public:

LASHER: One of the big issues is the question of externalities and external impacts. In other words, if my next-door neighbor is using their apartment as a hotel room, they’re not just running a risk of their apartment getting trashed, they’re having an impact on me. Similarly, in the case of Lyft, if one of those drivers gets into a car accident, doesn’t have appropriate insurance, that can have an impact on a whole bunch of folks who did not sign up for that.

Throughout the episode you’ll hear from award-winning Stanford economist Jonathan Levin, who specializes in Internet marketplaces. Levin tells us a story about a brilliant business idea he had as a kid — and how mobile Internet beat him to the punch.

Author: "Greg Rosalsky" Tags: "Featured Radio Post, Freakonomics Blog, ..."
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