Tyler Cowen is a professor of economics at George Mason University, and is the co-author of the popular economics blog, Marginal Revolution. Tyler has also published widely in the field of economics, and he is the author of numerous books, including his most recent one titled, *GOAT: Who is the Greatest Economist of All Time, and Why Does it Matter?* As a returning guest to show, Tyler rejoins Macro Musings for this special holiday episode to break down who should be considered the greatest economist of all time. David and Tyler also assign awards to the best performing macroeconomic theories of the past decade, in addition to discussing Tyler’s view on recent deflationary trends, the Fed’s framework, and more.
Donate to Macro Musings to hear from even more experts in macro!
Read the full episode transcript:
Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].
David Beckworth: Tyler, welcome back to the show.
Tyler Cowen: Happy to be here. Happy holidays, David.
Beckworth: Happy holidays. Yes, the show will be coming out on Christmas Day, so folks can open up their presents and listen to us talk about the gifts we'll be sharing with certain macroeconomists, our macro theories, and in particular, the GOATs that we'll get to in your book. So, Tyler, how many books have you written now?
Cowen: I don't know. It's more than 15 and fewer than 20.
Beckworth: Quite a few.
Cowen: Toward the lower end of that range, I think.
Beckworth: Yes, and I think the last time we had you on, we talked about your book, Big Business: A Love Letter to an American Anti-Hero. And I know, the time before that, we talked about The Complacent Class. That was a really good book. It's really left an impression on me. I think about it a lot as I go through different cases, different stories.
Cowen: It had good predictions, that book, The Complacent Class. Well, there's this slowdown, but it's about to explode, and racial issues will reemerge. I think it was published in maybe 2017, but I was writing it before then. And Wokedom has peaked, The Great Stagnation is coming toward an end, the world's going to get a lot more chaotic, including in foreign policy, so I like that book by me.
Beckworth: It's prophetic. Well, I like the fact that it talked about how as we get wealthier, we get more risk-averse, and all of these things build up to this moment where this change takes place.
Cowen: That's right.
Beckworth: Great book, and we'll encourage listeners to go back and check out that episode. We'll have a link to it in the show notes. Okay, as I mentioned, in the spirit of your book, GOAT, which you do assign a GOAT award to the best economist of all time, and in the spirit of the holidays, Tyler, I thought we could give some gifts, some awards out to macroeconomic theories, because I know you like to talk macro. You're a widely read person. You have a Bloomberg column. You're very much abreast of what's happening in the world, theories as well as real events. We can tie it all together here on this special holiday episode. And what I'd like to do is go back and look at the pandemic period, let's say 2020 to 2023, and look at the macro theories and who can best explain what happened. Also, maybe we'll take a look at the decade before that, 2008, say, to 2019, the post-Great Financial Crisis. Then, maybe we can look ahead, what theories do we think will fare well moving forward. So, let me throw out the contenders, just like you did in your book.
Cowen: Sure, but I'm going to hand out some raspberries here, but go on.
Beckworth: Okay, I'll throw out my contenders, and you can add to the list if you want. So, the contenders are: the new Keynesians, the monetarists, the fiscal theory of the price level, and then hydraulic Keynesianism. Do you want to add any to that, or is that a--
Cowen: I'll get into Fischer Black later.
Beckworth: Fischer Black, okay.
Cowen: After I strike down all the others.
Beckworth: Okay, okay. You have a book on that, don't you, on that approach? So, let's talk about, first, the new Keynesians, and then let's maybe talk about their views. They're real big into stars, U-star, R-star, Y-star, and their view of the world is, if the actual interest rate deviates from the R-star, there's something going on, or unemployment from U-star, and then they also view things through a Phillips curve. What is your sense of how well they have fared over the past three years of the pandemic period?
Evaluating the Recent Success of Different Macro Theories
Cowen: It was never developed as a theory for pandemics, so I don't intend any criticism of them. That said, the theory does not apply very well to pandemics, like most theories don't, so they're not going to get any prize. In the standard Princeton School, new Keynesian set of accounts, monetary policy often can be effective, but here we had highly unusual situations, where even if you agree with the general Scott Sumner, David Beckworth approaches, as I do, you needed some fiscal policy, and for reasons that were not directly related to liquidity traps, whatever you think of liquidity traps.
Cowen: You just had to hand out money to people and institutions to keep things running in a certain way, that monetary policy would not have done as effectively. There would have been more significant issues with transmission mechanisms, had we relied on money. So, I don't think those theories have been very useful. Now, the quantity theory of money performs very well for 2020 to 2022. When M2 is going up by about 40%, we get a lot of price inflation. You could credit new Keynesian views there, but you could just credit Irving Fisher and Milton Friedman for that. Again, I'm not going to give them any prize, but I don't want to dump on them. You don't develop most of your theories for pandemics.
Beckworth: Yes, so, monetarists had their moment. They came back on the scene because, as you mentioned, the money supply went up, and then about a year later, inflation goes up. So, if you're going to take a long variable lag, monetarists seem to have a moment. Let me go back to the new Keynesians, though. Some might say that the new Keynesians got some things right. They didn't have a model for the pandemic necessarily, but if you took a Taylor rule, if you took some of the critics who are new Keynesians, they would say, “well, the Fed fell behind the curve. It didn't raise rates when it should have.” So, the R-star was going up and they had R close to zero, so that fueled and added to the inflationary pressures. Any partial credit for them?
Cowen: Not really. I think of price stickiness, nominal price stickiness, as a key part of the new Keynesian worldview, and that's fine. But, I don't see that, in these last few years, nominal price stickiness has been all that important at all, and it was probably misleading to focus on it. When we needed disinflation, it came, not quite painlessly, but it really worked out better than people thought.
Beckworth: For sure.
Cowen: On the upside, when relative prices needed to adjust, shifts in and out of durables versus services, that happened pretty seamlessly. The event was so extreme that people said, “well, forget about that nominal stickiness, customer morale, worker morale, I've just got to do this.” So, I would say there that the new Keynesian views mostly didn't apply, even though they often apply in more normal settings, so still no prize. Sorry.
Beckworth: No prize. Okay, so let's go to the fiscal theory of the price level.
Cowen: Let me just say something about monetarism first. The funny thing about monetarism [is that] you can disagree about the turning points, but before the early 1980s, I think it works great in the data. Milton Friedman was right. He convinced so many people, because he had a lot of evidence. Money demand appeared stable, M2, nominal income, it all hung together. Then for whatever reasons, it stops not working, different monetary aggregates. It's also a bigger choice. Is it M2? Is it some bigger aggregate, or whatever? Is it a Divisia index like Barnett said? It stops working. Then we get these few years back where it's working again. So, maybe there's some meta theory which is telling us, when does monetarism work? When does it not work? That's where I want us to be looking. So, maybe monetarism is done working again, or maybe it gets 20 years in the saddle. That, to me, is an important open question.
Beckworth: Here's my explanation for why monetarism worked, [why] or quantity theory worked so well in this period, and it appears to not have worked the previous 20 years. I think it might be just an identification problem. Go back 20 years, the Fed did a relatively decent job, right? We had the Great Moderation. We had problems, of course, in the Great Recession. Inflation was relatively stable after the Great Recession and prior to that, right? You can think of the Fed as doing a decent job. It's responding to shocks to stabilize inflation. And you can reframe all of that in terms of a quantity theory perspective that the Fed is effectively responding to money demand shocks. It's adjusting monetary conditions, response to money demand shocks, keeping things stable. And because it's doing such a good job, it's going to be impossible to find a systematic relationship, at least in reduced form data, between money and inflation because, it's Milton Friedman's thermostat.
Cowen: Maybe I agree with your argument, but I'm not sure it's a defense of monetarism. It might be a defense of a meta-monetarism. Money demand isn't stable, the aggregates are not that predictive on their own. That's okay, there's this bigger framework. But, if you read Milton Friedman in the mid-1960s, you're not going to see it during that period of inflation targeting.
Beckworth: Fair enough. And, of course, that's why I advocate nominal GDP targeting, to get around some of these problems.
Cowen: But that's tricky, too, in a pandemic. We can get to that, but fiscal theory of the price level, first. I love John Cochrane, but I don't get how the fiscal theory applies to at least two episodes. The first is the 1970s, which are inflationary, but there's not a big problem with solvency or debt deficit at all in the US, right? Then, the recent disinflation, where we've gone from about 9% to a bit below, probably 3%. We haven't improved our fiscal position any, quite the contrary. I just don't get it, is what I would say. I'm not going to give John a prize. I like his book. It's really important. I love him. But, on those two key, core episodes, I don't see the argument.
Beckworth: Let me make the case for the fiscal theory of the price level people, John Cochrane, Eric Leeper, and others. They would say, Tyler, give us at least partial credit as you're grading us or awarding us, because we predict that if there is a sudden increase in federal government expenditures and it's permanent, it's not going to be reversed in the future by tax increases or some other way of driving higher primary surpluses. It's a permanent increase in the quantity of government debt or spending, it's going to be a permanent increase in the price level.
Cowen: This is my guess. My guess is, the fiscal theory applies quite well when solvency is in doubt, where then you really do need prices to equilibrate real value of government assets and liabilities. When solvency is not in doubt, which even during the pandemic, solvency was fine for the US, I don't think it's a binding constraint. There's many constraints pinning things down, and that one doesn't seem binding to me. So, it might be great for Argentina, *The End of Four Big Inflations,* Thomas Sargent, I know all of that. But, today in the US, I'll still say no.
Beckworth: So, you're saying that monetary dominance continues to hold, [and that] there is no fiscal dominance?
Cowen: In the current situation. But, again, it's part of some bigger meta-theory where it explains a bunch of cases extremely well, and they get credit for that. They get other prizes, but they don't get this prize.
Beckworth: Okay, one last question related to this, and that is, one way to approach the fiscal theory of the price level, fiscal dominance, monetary dominance, Sargent-Wallace, is to look at the government's budget constraint. In macro, we like to take the intertemporal version of it, iterate it forward. When you look at that, it's hard not to see the linkages between fiscal policy and monetary policy. In other words, for the Fed to have control of the price level, somewhere in the background, fiscal policy is doing its job, right? It's making sure that we stay solvent.
Cowen: Sure, but we are staying solvent. If you look at even our terribly high level of debt relative to national wealth, not GDP, but wealth, it's pretty low.
Beckworth: That's a fair point.
Cowen: I don't want to raise taxes. I'm against it. But there is room to raise taxes. So, we're going to get through this one.
Beckworth: I think another interesting observation, in conjunction with the one you mentioned about inflation coming down, is that the 10-year Treasury yield has fallen quite a bit. It was at 5%, now it's at 4.2%.
Cowen: That's right.
Beckworth: That's a huge and pretty quick drop.
Cowen: Paul Krugman has suggested that we're headed back to our days of ZIRP. To me, that's an open question. I guess I'd give Paul 40-60 of being right, but that's a key issue before us. Who ever is right on the return of ZIRP, I'm definitely giving them a prize. Paul may get a prize, but not yet.
Beckworth: Okay, so we've had some fun with these different schools of thought, different macro theories. I believe we've covered them all, but you had one more to add to that, and that is Fischer Black.
Cowen: Fischer Black's macro, I would say, is two different segments. One is whatever Fischer Black thought about a particular moment in time, which you may or may not agree with. But the other was a meta-theory suggesting that whatever theory people thought held at a point in time, that would influence which theory actually held. So, the correct macro theory is shifting all the time, and I take that view more and more seriously as the decades pass.
Cowen: I don't think Black pinned that down in a way that's falsifiable or even identifiable. Nonetheless, so you have the 1990s, there's a fiscal consolidation, real rates fall, the Clinton people congratulate themselves, I was delighted at the time. Okay, then years later come, debt and deficits are way higher, and real rates can appear to be negative 2% or whatever, and you're like, something's not right here. So, the idea of the meta-macro theory, to me, is the future. It might just be too hard for we humans to develop it, but that's what I think about every day.
Beckworth: Okay, so, we are left with an award for whom then? Nobody? Fischer Black?
Cowen: I don't know if Black quite gets an award, [but] the people who thought that quite high real interest rates would not be that big of a deal. It's not really a theoretical approach, but there are certainly commentators, like Conor Sen at Bloomberg, who said that we're going to get through this. I'm going to give Conor an award. Can I do that?
Cowen: I don't know what to call his doctrine, but a bunch of practical people said, there's enough debt baked in at other rates that we'll actually get an okay disinflation and not a major recession. It's funny about Krugman, he was fully correct in calling that we'll get an okay enough disinflation, but it totally goes against the macro model he's been pushing for so long, which is naive Keynesianism, IS-LM. All of a sudden, it's not mentioned anymore. So Krugman, over the years, again, gets this raspberry because he should have been with Larry Summers, thinking that it's going to be quite bad. And there's some chance you can give the rational expectations people, Lucas, Sargent, “well, if the disinflation is truly credible, it's going to work.” Maybe it was credible. They get a probabilistic award because they might have the right explanation there.
Beckworth: That was the group I left off, the hydraulic Keynesianism, the people who look at output gaps relative to stimulus or the amount of money, and so the early 2021… like Olivier Blanchard, Jason Furman, they were noting that the CBO had an output gap of near maybe $600 billion and we're adding $2.1 trillion.
Cowen: And they were right for that. They get a prize. I'm not sure that hydraulic Keynesianism gets a prize, but Furman, Blanchard, and Summers get big prizes. I'll give them the biggest prizes just for calling that, but I think you can have that view without being a hydraulic Keynesian. And they were completely correct, but they were not correct about the lack of recession. That gets us back to the meta-theory. It's like their theory, all of a sudden, went poof. And Krugman's new theory, all of a sudden, had something to it and he'll never credit Lucas and Sargent. He'll never mention that in a column, I think, and it’s weird. Everyone's somewhat wrong.
Beckworth: What's your view on why we've had such rapid disinflation?
Tyler’s View on Recent Disinflationary Trends and the Fed’s Framework
Cowen: One way to look at this is in a sticky nominal price model. You have to think really carefully, is the stickiness about levels or rates? If it's just about levels, and if you're at 9% inflation going down to 3%, even with variability of relative prices, not that much nominal stuff has to fall that much for macro reasons. That might be one reason why we got through it. Another reason could be the interest rate reason. So many people, like myself, were locked into real estate positions where the higher real rates didn't scrunch the mortgage market.
Cowen: That may yet come, of course. And that moderated the downturn. The credibility, both parties were behind the disinflation. Jay Powell did a very good job on that. And the Fischer Black thing, people just expected we were going to return to normal, the old macro, and we did, because they believed it in a kind of sunspot’s noise, Fischer Black weird stuff that no one can really model or test, but he was probably right. And there's four or five reasons why, so far, we've avoided a recession, I would say.
Beckworth: Maybe one of those reasons is the Fed's credibility. Even though we had that inflation pop, we're now back down, and markets and the public takes the Fed seriously.
Cowen: The Fed basically said, we made a mistake. I thought they did a great job ex post, though they screwed up ex ante. They're just like, well, this isn't us. Argentina, they don't do that, right? I'm headed to Argentina next week, so I'll be curious to see what I learn there, but I think that our Fed, after an initial mistake, really gets a prize for the turnaround.
Beckworth: I think it's refreshing to see the Fed so honest and forthright about that mistake. In years past, it would take a lot longer for them to admit that they made a mistake. They very quickly recognized that they were falling behind the curve.
Cowen: That's right, so a prize for Jay Powell.
Beckworth: Okay, a prize for the Powell Fed. Speaking of the Powell Fed, one more thing before we get to your book and the GOAT of all economists, and that is Jay Powell's new framework that they adopted in 2020. They had their framework review in 2019-2020. As you know, 2024-2025, there's another review coming up. Of course, I'm excited about this because it presents opportunity for nominal GDP targeting to be discussed again. But, I just want to touch on that change from a flexible inflation target to a flexible average inflation target, or FAIT, because it really is a manifestation or a sign of the success of what you referred to earlier, the Princeton School of Macroeconomics, which is really a subset of new Keynesians.
Beckworth: But they thought long and hard, late 1990s, early 2000s, there's a group of them there, Ben Bernanke, Paul Krugman, Lars Svensson, Michael Woodford. They were wrestling with the issues of Japan, and then how would we fix it and how would we apply it to other places? They promoted things like level targeting, which today we might call makeup policy, or strong forward guidance, the use of balance sheets, really going in guns blazing. And I look at FAIT, and I look at what central banks have been doing, and it seems to me that that's their legacy, in part.
Cowen: We did as well as we did coming out of 2008-2009 because of that work. Probably, we should have done more, as you and others have argued, but I give them a lot of credit for that. And I think next time around, if we have a crash like that crash, we will do more and tolerate a 4% inflation rate in a way that we didn't in 2009, and things will be much better. That's when the real payoff of what Scott has done and you have done, Bennett McCallum earlier, and others, next time around we're going to say that we can live with 4% inflation, we can get it back down later on in a painless enough way, and in the situation like the next 2009, we're going to do better. I strongly believe that. And all of the Fed talk in the meantime, it's Straussian. The real question [is], would Congress put up with the Fed doing 4% inflation next time around? I think it's yes.
Beckworth: Tyler, I appreciate your optimism here. I was taking a glass half-empty, but you're taking a glass half-full from this experience. My half-empty view was, we got burned on inflation and it was tied to FAIT makeup policy, and as a result, they're going to be much more timid next time. But you're saying, no, actually the lesson is different. We've come down, the soft landing, we were able to get disinflation, therefore we will be eager and open to using these aggressive policies because we can quickly get past any inflation that would come from it.
Cowen: That's right, and if Biden is re-elected… or I have no prediction, but it's possible, right? Then, that will be all the more true. People will say, oh, politically, he survived this, and that would cement the tendency. And if Trump is elected, again no prediction, he's not opposed to easy money, as far as I can tell. Either way, you get very different versions of this willingness to inflate more, and frankly it makes me nervous too. But, I do think we're going to get it. In fact, I think we have it already. We already got it.
Beckworth: We did.
Cowen: People said we can't do too little like last time, and they definitely did too much. It feels like we've survived doing too much. Let me tell you my worry about nominal GDP targeting.
Beckworth: Oh yes, let's circle back to that.
Cowen: Scott himself has said that it's the worst time to have nominal GDP rules. In a pandemic, I think all rules get tossed out the window, whether or not they should be, they probably should be, but they will be. Then your price data… So, if I wanted to see a movie in May 2020, is the price infinite? Is the price still $14? That's quite arbitrary. So, how you define the price indices for services, to me, becomes arbitrary. Nominal GDP targeting just becomes seat of the pants, which to be clear I'm fine with, but it's not really nominal GDP targeting, because the quality of the price data is gone.
Beckworth: So, if you were a decision-maker with the magic wand, and you like nominal GDP targeting, would you just reset the target after the pandemic? How would you make it work?
Cowen: I don't think that we can have a Fed bound by rules, as much as I would like to do that. The old Carl Schmitt idea, “he who is sovereign decides the exception.” I just don't think you're going to get around that. I don't think the Fed would ever accept rules or recommend them to Congress. What you want is a Fed imbued with NGDP ideology, that at critical key moments in history, is willing to take some chances in the right direction. We got that. We've won, maybe temporarily, but for now-
Beckworth: Here's my takeaway from the experiment, if you want to call it that. We did incredible makeup policy. Unlike 2008, there was a return to the pre-trend nominal GDP path, but we went above and beyond that quite a bit. My hope would be that we're able to do that makeup policy and minimize the overshoot, maybe a little bit. I believe we were, I forget the exact number, 6%, 7% above trend, roughly $2 trillion higher than if we'd been on the previous path. Now, maybe some of that is because of poor price indices measures. Clearly, there's some part of that where you could say it was too much.
Cowen: It was too much.
Beckworth: And we could do better next time.
Cowen: Maybe we should have only had 6% or 7% inflation and could have, yes.
Beckworth: Okay, well, we have been giving out awards left and right to macro theories.
Cowen: Raspberries, a few awards.
Beckworth: Raspberries, okay. Hey, this is the holiday season. It's Christmas. It's New Year's. We're in the spirit of giving, and Tyler is full of great gifts. In fact, Tyler has a new book for all of us to read. In fact, it is a gift because it's free online.
Beckworth: It also has its own AI, its own kind of ChatGPT version where you can interact with the book. The title of the book is, GOAT: Who is the Greatest Economist of All Time, and Why Does it Matter? It's online, and we'll provide links to it. This is just recently released, right?
Cowen: A few weeks ago. This was, what, October 2023? I've lost track now.
Beckworth: Yes, and it's not a small book, either. It's like--
Cowen: 100,000 words, and it's written by me. People think it's written by the AI-
Beckworth: It's all Tyler. So, Tyler, tell us the story of this book. How did you decide to come up with a GOAT for economists?
Breaking Down the Greatest Economist of All Time
Cowen: It's a very simple story. The pandemic comes, and we're in the depths of the pandemic. The school library is closed. I can't travel to many places. A lot of forms of research that would involve talking to people or whatever, I just can't do. I'm sitting there, and I don't want to go crazy. I need a new project that will keep me busy and give my life further meaning. This is one… I either own the books or they're online or I could access them, and I thought, well, this is what I have to write about. It was a purely reactive strategy. And I've always loved the history of economic thought and it just kept on going. I thought, well, I'll cover the best-known people, Hayek, Keynes, Adam Smith, Malthus, and at some point, I had a book.
Beckworth: Now, your book, again, it sets out to determine who is the greatest of all time. Inevitably, there has to be some criteria that comes along with that to make that judgment. And so you have, I see here, six items or six different categories, and this list is really going to exclude a lot of people, right? It makes it a very exclusive club.
Cowen: It should be an exclusive club. If you're talking a GOAT for basketball, it’s arguably down to two or three people, right? Michael Jordan, LeBron James, maybe Kareem Abdul-Jabbar. First point I would make, [is that] a big part of my mission in life is to help people appreciate things, whether it's my podcast guests or people at Mercatus, or just the world of ideas out there, the music of Bach. I want to help people appreciate top economists. But, to write another [inaudible] academic book… I thought, I want to write this book from the perspective of a fan, like [how] Bill Simmons wrote his basketball book. That's, what I would call, the key innovation of the book, being willing to write from the perspective of a fan.
Cowen: And I think that will help people see how smart these economists were in a way that another standard treatment would have just been repetitive. But you're wondering, well, who's the greatest of all time? They have to have done micro and macro, had something to do with empirics relative to the standards of their time, have covered a number of different areas. They can't have been too wrong, like Marx was quite broad. I would just say he was too wrong about some very key things. And then you go through the list and you're not left with that many people.
Beckworth: Let me run down the list as you have it in the book. You say they have to have an innovative impact, lasting influence, broad application, real-world relevance, internal consistency, and ability to overcome challenges, which is kind of what you just you just said there. So, that's a nice list, and just out of the gate, you come up with some names, Milton Friedman, John Maynard Keynes, Hayek, and John Stuart Mill.
Cowen: Yes, and Malthus.
Beckworth: Malthus and Adam Smith.
Cowen: I think Malthus is the one that not everyone would add there, but I feel strongly that Malthus is a contender, though not the winner.
Beckworth: Let’s go back again through this list, just to reiterate the point I made earlier. This is going to be an exclusive club, because of this list that you have, as a fan, what you're looking for. And I don't want to steal the punchline, we'll get to your verdict later, but something you say at the end that's tied to this is that there probably will never be another GOAT for economists. Now, tell us why that's the case.
Cowen: People are not generalists anymore. You're required, really from the beginning, to write very long research papers with multiple appendices, robustness checks. You have to do maybe your own programming, find your own data set, work with teams of co-authors. That leads to higher quality work. I'm not complaining, but that system will not produce a modern-day Adam Smith or John Stuart Mill or even a Keynes. So, GOAT is behind us for the foreseeable future.
Beckworth: Now, when I was reading that, I thought of baseball players. There'll never be another .400 hitter probably or a Babe Ruth who can pitch and who can hit, because it's such specialization in the profession. And it's good for the profession, I guess, because we're more specialized, we're getting better, more productive. But, individually, there's no giant, no GOAT that can emerge.
Cowen: It may mean we have less impact, so it's good for the quality of papers, for sure. But if your impact comes from having a few very well-known celebrities… like Keynes had real impact because he was Keynes, not because people understood the equations and Treatise on Money, which, actually, probably were wrong. So, we don't really have the same now and that worries me. Even though the work is much better, I'm not sure the profession is in a better place.
Beckworth: Well, let's start with Milton Friedman, who is the first on your list. Talk about him and why he made the cut.
The Case for Milton Friedman
Cowen: I think he was just the best flat-out economist of everyone on the shortlist. He had a phenomenal command of micro, obviously had major contributions to macro, monetarism, the quantity theory of money. He definitely had historical impact, floating exchange rates, fall of communism, the idea of cash transfers, school choice, multiple areas [where] he had a big impact. He was, in my opinion, right about most things, but even if you're less of a Friedmanite than I am, the areas where he had impact are areas where he was most right. If you think he was too extreme on the welfare state or something, well, he didn't have that much impact there, other than to encourage cash transfers, which has been a good thing, say, in Mexico and Brazil. So, Friedman is definitely a contender and I think there's a strong case that you can make for him. He did a lot and a lot of what he said was correct.
Beckworth: Just going back to macroeconomics, as you said, his impact is much broader than just macro, but I'm going to speak to that. The modern new Keynesian model really has his fingerprints all over it. His work is embedded implicitly in that framework.
Cowen: Yes, but I have some worries with Friedman as GOAT. The first is simply, Keynes' A Tract on Monetary Reform from the early '20s is as good a statement of monetarism as Friedman ever produced. Now, bravo to Keynes, right? But, it a bit downgrades Friedman's originality. Friedman is a lot like Irving Fisher, which is a sign of picking influences wisely, even the permanent income hypothesis. If you look at Fisher on intertemporal education and the role of allocation, the role of wealth, well, Friedman's coming from that. Friedman's two biggest things, quantity theory and permanent income, I wish they were a little more original than they were. So, Friedman is in the top part of the shortlist for GOAT, but to me he's not a clear winner. He's not a clear loser, but I don't think, oh, he's definitely number one.
Beckworth: Okay, let me ask about one of Friedman's contributions, the plucking model. I don't know if it elevates him or not in your mind, but where does he come out on the plucking model? Is that something that he would have promoted late in his life as an important contribution?
Cowen: He has that JPE article pretty late in his life, but it seems to me that late Friedman, on inflation targeting, on free banking, on plucking, it more or less repudiates earlier Friedman. The stuff Milton was best known for, he himself moved away from. That's a sign of personal virtue and wisdom, but again, claim for GOAT— if he is repudiating his own major contributions… Keynes has a bit of this problem, too. He's just not a clear number one.
Beckworth: That's a ding against his record, then.
Cowen: Not against his record as a human or a thinker, but a ding against his GOAT.
Beckworth: Okay. One of the great stories I like about Friedman-- there's many great stories. In fact, I had Ed Nelson on the podcast. He has a multi-volume biography on his academic work. But, he actually promoted and got excited by Bob Hetzel's idea to create TIPS. Before TIPS were in existence, Bob Hetzel said, “let's create an inflation indexed bond,” and Friedman in Monetary Mischief goes, “this is one of the best ideas I've seen. In fact, it's even better than my money supply target.” He mentioned this, which is really interesting to read this. And so, I've talked to Bob about this and he said, yes, Friedman got excited. Of course, things didn't work out quite as Bob had hoped and I'm not sure where Friedman came down.
Cowen: He overrated TIPS. And, you know, in the early '80s, I think, it was the [Chicago Mercantile Exchange], they tried a CPI futures, and Friedman had some indirect hand in that. That just failed, the market wasn't interested. And that was at a time of much higher inflation than 2%.
Beckworth: Let me ask on that very thing, since you're a widely read person. Why don't we see more take-up of TIPS? Why is TIPS such a small part of the overall Treasury market?
Cowen: You have a lot of other assets where, directly or indirectly, you can bet on inflation. Inflation isn't varying that much. A lot of finance people tell me that there are not natural shorts in the market the way there would be with, say, some number of commodities. Deborah Black wrote a very long study a while back, why aren't there more futures in forward markets? It's a big puzzle and it's related to why haven't prediction markets taken off. But maybe liquidity is scarcer than we think in some very profound way and that gets at Keynes being an important thinker, because Friedman… I wouldn't quite say he took liquidity for granted, but the fact that he was wrong about the import of TIPS, it gets at a weakness in his thought. There's something more contingent about financial markets working well than he saw at the time.
Beckworth: Okay, well, since you mentioned Keynes, let's go on to him. Tell us about his record and his legacy.
The Record and Legacy of John Maynard Keynes
Cowen: He's best known for the General Theory. That complicates matters. In my view, it's quite a particular theory. It's about fiscal policy during a deep depression when you have a gold standard and a liquidity trap. That's a super specific theory. Keynes' real recommendation at the time was to socialize investment. He preferred fiscal policy, but some of the General Theory is actually saying that fiscal policy is not enough, this is going to recur, we really need the government to socialize investment. That's pretty wrong, so that's a big ding against Keynes. General Theory is a brilliant book. It's one of the five most important, interesting, and brilliant economic books ever. That's big credit for Keynes.
Cowen: Monetarist Keynes in the '20s, I think, is beautiful and wonderful and largely correct. The Keynes of Bretton Woods, working under very difficult constraints, he came up with a good enough, maybe not perfect, but how many other people could have done better, kind of system that lasted long enough, and that's to his credit. So, he has Bretton Woods, importance of fiscal policy, early statement of monetarism, just getting how to have impact in economic policy more generally, so his interventions on Versailles, which are somewhat overrated as I say in the book, but it was still an example of Keynes getting it, knowing where to be, right place, right time, talk to the right people. As a policy economist, he gets some really big award even if you don't agree with all of it.
Beckworth: Yes, he definitely had an instinct for being in the right place at the right time, making the right connections.
Cowen: And he did it many times, not just once or twice. Even Keynes on India, right?
Beckworth: Oh yes. Recently, I had the chance to go to the Bretton Woods Hotel and see the cash room and all of the places where these meetings took place, and it was fun to think through that Keynes walked through here at one point along with some of the other characters of that time.
Cowen: And I say in the book, he's the one I'd most want to hang out with. I think he would be genuinely the most stimulating, interested in the arts, creative person. His friends are so interesting. You look at Milton Friedman's friends, it's like Leo Rosten, whose books I like a great deal, but Keynes' friends… the Bloomsbury Circle and Bertrand Russell. That's something.
Beckworth: He's your boy, okay,
Cowen: But he's not my GOAT.
Beckworth: He's not your GOAT, okay.
Cowen: He's my wannabe best friend.
Beckworth: Wannabe best friend, yes. Let's talk about Friedrich Hayek.
Beckworth: What's his case?
The Cases for Friedrich Hayek and John Stuart Mill
Cowen: His few best articles are the best articles ever, by anyone. So, the critical one is, *Use of Knowledge in Society,* American Economic Review, 1945. It's about how the price system works to mobilize decentralized knowledge. It's also indirectly about how central planning is impossible on a rational basis. It gets the essence of microeconomics, information, the price system, better than anything ever. It's the best article ever, and he has follow-up pieces, *Competition as a Discovery Process,* that are some of the best articles. They might be the best articles if he didn't already have number one. So, that's worth a lot.
Beckworth: So, he carries a lot of weight and--
Cowen: But after that, it gets weaker. He's not [the] GOAT either.
Beckworth: What about John Stuart Mill? How does he fit into this?
Cowen: Mill is someone that most people wouldn't put on the list at all, not on the shortlist. I have a very high opinion of Mill. He represents the best of classical economics, integrated. He understands aggregate demand/aggregate supply analysis better than anyone in his time. He's quite good on macro. Even the idea that you can have these oligopolies with low marginal cost, and demand swings lead to big output swings, it's very clearly stated in Mill. It's remarkable. He understood incentives, property rights. Contrary to what some critics say, he was never a socialist. He did care a lot about the interests of workers and worker bargaining power that was entirely appropriate at the time.
Cowen: He's the deepest thinker, the broadest thinker, is one of the leading philosophers of his century. I would say [he is] the deepest and most sophisticated defender of liberalism, broadly construed, to this day. Mill is actually my favorite. If you are measuring narrow economics, he doesn't win, but if you're looking at economics in the service of larger social goals, to me, Mill wins. Mill's best work is actually his book on women, which is more than half the human race. None of these other people—I mean, Malthus did indirectly, and that's interesting, but they didn't cover women at all. Mill saw this as a central problem of his time, and he had an economic analysis of it, mostly correct, brilliant work. I'm a huge Mill fan.
Beckworth: Remind us of the period that he wrote in?
Cowen: The middle of the 19th century, so Victorian England. And in the 1860s, he's even in Parliament, which is an interesting test for any economist. So, Mill said in his short essay, *Civilization,* that the two ways you can have influence in the world is to either have a media monopoly or be in the legislature. For Britain, that could include being prime minister. I'm not sure that's true, but It's a pretty phenomenal hypothesis. It's still relevant as a hypothesis, right? Mill ran for Parliament, he didn't get re-elected. He did see through his ideals in practice. I think you'd say the same about Keynes. Keynes, in power, was sincere. Mill, in power, was sincere. He led the Jamaica investigation. He pushed for good things, universal franchise, rights of women. He did a good job. Voters didn't want that, but he stuck with his ideas.
Beckworth: So, he was ahead of his time, and he was also a broad intellectual thinker.
Cowen: And right about most things. I don't think he was right about colonialism, either of Ireland or of India. Those are flaws in Mill's worldview. He was too naive about his own British liberal elite. He thought they would rule these places with the best interests of India and Ireland in mind. He failed to see that the British elite would have to resort to all of these intermediaries who, even if the British elite were benevolent, and they were not always, but the intermediaries would ruin the whole scheme and the Brits would end up supporting bad intermediaries in power, and neither Ireland nor India went well, I would say. On that, Mill was wrong. For a guy who was right about so many things, that was, to me, his biggest mistake.
Beckworth: So, Mill was human, too.
Cowen: Mill was human, too.
Beckworth: Alright, let’s go to the individual who I was the most surprised to see on your shortlist, and that's Thomas Robert Malthus. Why did he make the cut?
The Cases for Thomas Malthus and Adam Smith
Cowen: Malthus saw the economic problem as environmental economics. We may or may not agree, but that's strikingly contemporary and it might be right. Right off the bat, Malthus has what is possibly the most important idea, and he saw it early. Malthus is often misread as though he was a pessimist or he had these crude hypotheses about population. If you read the third edition, none of that is true. The basic Malthusian worry is that things grow at different rates and you can end up with systems very badly out of balance due to exponential factors. That's a super wise insight, still relevant. Today, is it carbon emissions? Is it loss of biodiversity? Is it something else? Is it now a fertility crisis? You can debate that.
Cowen: But, the idea that exponents not marching in lockstep are going to create your biggest problems… these other people don't have that, Malthus does. And, on Macro, Keynes cites him as a precursor. He understood aggregate demand macro. He had a debate with Say, he basically beat Say. He pointed out the exceptions to Say's law. He understood sticky prices. On a lot of nuts and bolts stuff, he's really pretty good and innovative. He's not my final pick, but I think he's way underrated. And people have read too much Julian Simon, and I love Julian Simon.
Beckworth: That's me, guilty.
Cowen: I was his friend, but Julian Simon was not a historian of thought of Malthus.
Beckworth: Yes, so, probably the impression I have of Malthus was incomplete at best, and I will make sure to check out the third edition.
Cowen: Third edition.
Beckworth: Third edition for Malthus. Okay, let's go then to someone I expected to be on this list, Adam Smith.
Cowen: Smith can just win flat out. He's the fountain of wisdom, the origin. He's actually right about most things. He didn't have marginalism, but at times he could think good enough like a marginalist. He has the invisible hand, the price system, division of labor, increasing returns, economic growth, and much, much more. There's a version of the book where Smith just wins before the book starts. But you know how these things are, you can't write the book that way. So, I don't give it to Smith, but Smith has a very strong claim, clearly.
Beckworth: So, is that the list then?
Cowen: I feel that, in retrospect, Kenneth Arrow should have been on the shortlist. He's next in line, and I say that, but he's really a pretty serious contender, Arrow.
Beckworth: You also mentioned some other economists who didn't make a shortlist, but were close, Alfred Marshall, Paul Samuelson, Gary Becker, Joseph Schumpeter.
Other Possible GOAT Contenders
Cowen: They're top 10, top 12. Obviously, [they are] major figures, but there's reasons in each case. So, Becker, super important, you could have given him five Nobel Prizes, but I can't quite see putting him ahead of Friedman, so he's not going to win. Schumpeter, one of the most important thinkers, but his contributions to economics, narrowly construed, they're not quite there. You'd give him entrepreneurship, although that's in Say and others. But, economic microanalysis, I don't really know what he ever did, so I'd give him a top thinker award, like in the top tier, but not top economist.
Cowen: Samuelson, no empirical work, was wrong about a lot of things, including Soviet economic growth. He thought price controls were going to be fine. Frankly, I just don't like what I know of his written record. And I’ve had historians of thought come to me after the book came out and say, “I was looking through these archives, and Samuelson, according to other people, just wasn't a nice guy.” And I think Arrow was a better and deeper thinker, so Arrow for me is ahead of Samuelson. But Arrow is a serious contender. I guess I didn't rate general equilibrium theory highly enough.
Cowen: And I don't think that the Arrow impossibility theorem has turned out to be important, so that knocks Arrow down. But moral hazard, economics of healthcare, discount rates, using state prices to value securities, is his most important contribution. And Arrow has a very real and serious claim, I think. No empirical work, you could say he has no macro, [but] is Arrow's environmental econ macro? Maybe, yes, but he doesn't have direct macro. But Arrow is an intellect. I think he’s a more commanding intellect than Friedman was, and deeper. And that has to count for something, too.
Beckworth: So, before we go to the winner or winners of this GOAT competition, I just want to throw out another question to you. So, again, you've noted that all of the low-hanging fruit has been picked, there's not opportunities for general economists. It's much more specialized, so it's harder to generate a GOAT today. But, if you could pick a GOAT, say, from the past decade or two, and again we're lowering the standard, maybe we're at a lower threshold here… I mean, are there any economists [from the] past decade or so that come to mind? In my mind, Daron Acemoglu would be someone, very productive. Do you have anybody you would throw out there, just for consideration?
Beckworth: No, okay.
Cowen: I mean, you could write a different book and give it to someone, but no one who would be on par with Arrow, Samuelson, and Friedman. And no slight intended, but the nature of work is different today. Maybe if it's 30 years, I guess I would pick Bernanke. He's also done practice, micro and macro.
Beckworth: That's a good point.
Cowen: Of 20 years, I think is what you said, it's not enough for him to really count.
Beckworth: Okay, so, there are some people with big impacts, but given the criteria, that list you gave, not anywhere near enough to be considered a GOAT.
Cowen: And there are not many people with big impacts. Take someone like Krugman, who's probably the most influential economist for about 20 years. I'm not sure what his impact is. He's pushed Democrats to the left. I don't know the impact of that. It could be a negative impact from Krugman's point of view, even. I don't know what policies have been shaped. Maybe that the fiscal response was too much this time, to the pandemic. Krugman probably had influence on that outcome. What we would've done instead, I'm not sure, but that could be either a positive or negative impact depending on the counterfactual. But even he hasn't had much actual impact.
Beckworth: So, even the impact that he has had, the verdict is still out, whether it's a net positive or--
Cowen: And it will depend on your point of view. So, a lot of Trump supporters are happy that the Democrats moved to the left. It can cut either way.
Beckworth: That's a good point. I hadn't thought about that.
Cowen: It means they lose more elections.
Beckworth: Okay, well let's cut to the chase here and get to where we wanted to be all along, and that is, who is the GOAT, the greatest economist of all time?
The Verdict: Who is the Greatest Economist of All Time?
Cowen: Well, my book is hooked up to GPT-4, and you can ask GPT-4 any question about the book. You want more detail on Keynes at Versailles? Ask. If you want to know, what would Paul Krugman think about what Tyler says here? You can ask. You want a summary of chapter four? You can ask. So there's a universal tutor attached to my book. It's the first time this has been done for a book of any length, and I'm very happy to have been associated with that. And if you ask GPT-4, you say, well, read Tyler's book and tell me, who does he think is GOAT? Every time it gives you a different answer.
Cowen: People say it's a drawback, but it's not. It's the strength of GPT-4. So, it's open-ended. I state quite clearly my personal favorite is Mill. I understand full well, on the basis of purely technical economics, he cannot be the winner. The best economist in that lot is Friedman. The best person working the policy scene is Keynes. Malthus has a dark horse chance of taking the whole cake if it all turns out to be about the environment. Smith is kind of an automatic winner just because he's Smith. You can always make that move, I'm not going to argue against it.
Cowen: And Hayek, if you want to count his most important idea, how much did it reshape how people view the world? He does have a claim, even though I think a lot of the second-tier Hayek works, like Constitution of Liberty-- I'm not as impressed by that book as many people are. I like Road to Serfdom a great deal. I think that the trade cycle theory is underrated, but it does pretty poorly on a lot of cases. It can't explain co-movement, why consumer and investment goods sectors so often move together. In Hayek's theory, it predicts when one goes up, the other goes down. But clearly, and Keynes understood this, in most business cycles, they move together, and Hayek never could explain that or didn't even have a good attempt. There are some credit-based cycles that seem pretty Hayekian to me, and I think, again, this trade cycle theory is underrated, but not quite correct as stated, so I don't give it to Hayek, but again, he has a claim.
Beckworth: So, you kind of give it to all of them, don't you?
Cowen: Of course, yes.
Beckworth: It's a group award.
Cowen: And they get to be in the book, which is my tribute.
Beckworth: Yes, so it's a group award.
Cowen: It's a group award.
Beckworth: But when you start out the book, you don't know that. You start reading, and, okay, who's it going to be? Because we all want to know who's the best, who's the GOAT, and then we find out it's a group award.
Cowen: I'm making fun of the reader a bit. I'm making fun of myself. It's like a tease. It's like, by the end, you know I can't really do this, right?
Beckworth: Right. Well, I mean, everybody is going to have their subjective approach, their way of viewing things. And you lay out your criteria, so it's very clear, so we shouldn't be surprised. We know what's coming if we go back and think, “oh, yes, he left these little crumbs, little hints all along of what he was going to do.”
Cowen: Most people should say Smith, but the greater depth of Mill on liberalism weighs heavily on my mind, and since I personally consider myself a classical liberal, and that's the most important point, I want to give it to Mill, without justification. But again, that's my subjective pick.
Beckworth: Okay. Any final thoughts on your book?
Cowen: I want to write more on the history of economic thought, but applying it to the current day. And I'm wondering if the Marginal Revolution itself, and I don't mean the blog, the 1871 Marginal Revolution, if it needs a rethink, what was it actually about? What were those people up to? So, I've started to look into this. I'm not sure what I'll do with it. I was thinking of writing a monograph on Marx and maybe one on Mises, like what did Mises get right?
Cowen: There's so much not-as-serious-as-it-should-be commentary on Mises. I'd like to look at that in a different way, like mostly positive, but truly critical. And then Marx, Marx has had staying power. It's not just because he was some kind of commie. What can people who are market-oriented economists learn from Marx that, if not literally correct, is interesting and worth pondering? That would be what I would do on Marx, but we’ll see.
Beckworth: Okay, well, one last question. Do any of these thinkers, including the ones you just mentioned, have any insights that might help us better understand AI and the potential big productivity gains that might emerge from that?
Possible Insights Into AI and Higher Productivity
Cowen: Most of them wrote about the machinery question, which was their version of AI, right? And Mill is maybe the most concerned with it, of these thinkers. And Keynes has his hypotheses for a very wealthy near future where people work, say, 15 hours a week. Keynes was obsessed with the same question. We don't know yet who's going to be right about AI. That may reorder the GOAT rankings, right?
Beckworth: Fair enough. But you're fairly optimistic though, aren't you?
Cowen: I'm optimistic, but I would admit to high degrees of uncertainty about any AI prediction. I think it will remix most of our status rankings for most things. So, let's say AI destroys us all. You've got to upgrade Mary Shelley, right? If AI is purely beneficial, well, then the French utopians of the 18th and 19th century, I think you would upgrade them a fair amount. So, it will change how we think about every single part of our world, how we think about economics. A lot more economics will become energy economics, because demand for energy will go up so radically.
Cowen: But I think, also, there will be a new way of doing economics that none of us are trained in doing, so maybe the next chance of GOAT is the first person who can build an AI model of an economy and simulate it using something like an offshoot of a future large language model, but with other capabilities, not just LLM capabilities, like self-learning capabilities. That will be a fundamental break in all of economics, and it will come. I think it will come in less than 50 years. And maybe at first it won't be that good, but it will be how economics is done, not entirely, but in large part. And no one is ready for that.
Cowen: The person who does that, maybe it's a company. Like, my goodness, they deserve more than one prize, and they'll get it, in fact, right? We'll start with a Native American village in Alaska. Oh, there's 50 people, maybe they trade fish. There's some welfare payments coming in, like a pretty "simple system". We'll simulate that, and then we'll make it bigger and more complex, feed in more data. It'll be astonishing. But again, at first, it will look like nonsense.
Beckworth: Well, on that optimistic note about the future and AI, our time is up. Our guest has been Tyler Cowen. His new book is titled, GOAT: Who is the Greatest Economist of All Time and Why Does it Matter? Be sure to check it out. Tyler, thank you for coming on the program again.
Cowen: David Beckworth, thank you very much. A real pleasure and a pleasure to work with you here at Mercatus and George Mason University. We're honored to have you with us.