The Great Antidote

Russell Sobel on the Economics of Entrepreneurship

April 26, 2024 Juliette Sellgren
Russell Sobel on the Economics of Entrepreneurship
The Great Antidote
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The Great Antidote
Russell Sobel on the Economics of Entrepreneurship
Apr 26, 2024
Juliette Sellgren

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Russell Sobel is a Professor of Economics and Entrepreneurship at the Baker school of Business at The Citadel and he just put out a new book with the Fraser Institute, The Essential Joseph Schumpeter. He has also written an introductory economics textbook and many, many papers on the economics of entrepreneurship.

Today, we talk about what an entrepreneur is, what institutions ---both cultural and governmental --- uplift entrepreneurs, and why we want more entrepreneurs. He explains the work of the economist Joseph Schumpeter, walking us through his views on entrepreneurship to his pessimistic view that capitalism necessarily ends in socialism. We talk about ways to prevent that, if indeed we are on that path. 

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Send us a Text Message.

Russell Sobel is a Professor of Economics and Entrepreneurship at the Baker school of Business at The Citadel and he just put out a new book with the Fraser Institute, The Essential Joseph Schumpeter. He has also written an introductory economics textbook and many, many papers on the economics of entrepreneurship.

Today, we talk about what an entrepreneur is, what institutions ---both cultural and governmental --- uplift entrepreneurs, and why we want more entrepreneurs. He explains the work of the economist Joseph Schumpeter, walking us through his views on entrepreneurship to his pessimistic view that capitalism necessarily ends in socialism. We talk about ways to prevent that, if indeed we are on that path. 

Never miss another AdamSmithWorks update.

Follow us on Facebook, Twitter, and Instagram.

Juliette Sellgren 

Science is the great antidote to the poison of enthusiasm and superstition. Hi, I'm Juliette Sellgren and this is my podcast, the Great Antidote- named for Adam Smith, brought to you by Liberty Fund. To learn more, visit www Adam Smith

Welcome back. Today on March 27th, 2024, I'm excited to talk about something that is super essential to economic growth and honestly having an interesting and dynamic economy as well as a place to call home. That topic is entrepreneurship, something we haven't really talked about directly on the podcast yet. I'm excited to welcome Professor Russell Sobel to the podcast. He's a professor of economics and entrepreneurship at the Baker School of Business at the Citadel, and he just put out a new book, I'm going to say it, The Essential Joseph Schumpeter. Yeah, there we go. It's free, so go ahead and check it out. It will be in the links that we post when the episode is released on Adam Smith Works. Welcome to the podcast.

Russell Sobel 

Oh, well I appreciate the opportunity to come talk to you and your listeners today.

Juliette Sellgren 

So my first question for you is what is the most important thing that people my age or in my generation should know that we don't?

Russell Sobel (1.26)

Oh, there's too many to list, but I can give you a couple very quickly. First off, if you're a student, the one thing I think my students don't do today that's really detrimental to their learning is taking notes. Back in the old days. before laptops, we sat there and actually hand wrote notes as the professor was talking teaching class, and I really think the process of writing those notes helped to get your brain to remember the things more easily and then you have something to study from. And I mean, my students just sit there looking at me and to the extent that they're on their laptops, they're on Facebook. So you try to discourage that, too, pen and paper or maybe at least typing them, but pen and paper and then retyping 'em would be my biggest thing that I think would help do better in classwork.

Let's see, in terms of another thing is that there used to be a country called the USSR that actually did experiment with socialism once and it didn't work, and we've proven that. And then I guess for everybody else, I just say now that I'm getting older- in my fifties- the one thing when you're young, your work is so important to you and it takes precedence in your life and just don't forget about your family and your relationships with people as you get older. The priorities on how much time to spend on work and the importance of that versus family is something that you tend to shift on as you get older. And so make sure that you maintain those relationships well and don't sacrifice those for things associated with work because all of a sudden you get a dean that changes at your job and nobody remembers the things that you did or liked you anymore and you're like, wow, I invested all that time, and there's such a short memory of things at your office versus things in your family. So how's that for three?

Juliette Sellgren (3.10)

Perfect. It's perfect. There's also a lot of research actually that's coming out about the benefits of writing on pen and paper versus typing or not even taking notes because in addition to actually engaging with the material as it's happening, what you do when you write notes because of the speed is you have to synthesize the information and there's more of a physical strain, which means that your body is going to actually form a deeper connection. I don't know the high tech sciencey part of it super well, but it becomes more deeply ingrained in your brain because you've put in a physical effort on top of a mental effort and because you've had to reword it in your own words, which I think is super cool. So it's great advice and scientifically valid. The rest of it is great as well. So thank you for giving us more than one. That's awesome. So something I've been wondering about with entrepreneurship is the difference between how society talks about and defines it versus how economics defines it. Sometimes I have professors who take it to be anyone who owns a business. Is that really the economic definition? And if so, or if not, I guess what is the definition and what is the difference between how economics sees it and how society sees it?

Russell Sobel (4.36)

Well, I have to tell you that question is so much more interesting than it first appears. In fact, what I love to do on my very first day of class is I say what we're going to do on class two is talk about what does it mean to be an entrepreneur? What is entrepreneurship? How do you define it? And I say, I want you guys to think about that between class one and class two. And I come back and they think it's going to be such a boring class, and we spend the whole class arguing with one another over this definition. It's really funny. Everybody looks at somebody like Elon Musk and Elon Musk. We would all agree as an entrepreneur, this guy has changed the way we live and revolutionizing the electric car industry doing private space flight, which was once only the realm of governments.

This guy is really changing the world and private sector for-profit, the whole shebang, right? That's the easy one. The problem is all of a sudden you get to somebody like Jennifer and Jordan Olson who own, and this isn't a story from the internet, it's not that I know them. They own a Subway franchise, and the way they ended up owning this Subway franchise is that they worked there as teenagers. That's where they met. They went off and got married, they moved away halfway across the country and the owner of the Subway died. So the Subway franchise was up for sale and they bought it. They still live six states away. They never go there. Somebody manages it for 'em and they just own it. So I ask you are Jennifer and Jordan Olson entrepreneurs? I swear I haven't gotten three minutes into class when half my class is yelling at the other half of the class about whether we should count them as entrepreneurs.

And this is only my second example. What if we talk about somebody like Blackbeard who is a pirate who had to go out and capture ships and recruit men to work for 'em, and you think it's hard to get normal people to work together, try managing a ship full of pirates who want to kill each other and getting them to work together to go out and overtake other ships and then not kill each other over the booty that you collect. And what about political entrepreneurs like Elbridge Gerry, the guy who invented gerrymandering or legal entrepreneurs or sports entrepreneurs like Abner Doubleday who invented baseball, it's culinary entrepreneurs who invent new ways of cooking things. Who do we count and who do we not count? And Juliette, I'll try to make some sense of this for you. I think there's three possible ways you can define entrepreneurship.

The first to which I consider the narrow definition, it's only counting people that are in the private sector for-profit sector is new, different Henry Ford's of the world. Then the other is kind of what I consider the textbook definition, which is everybody who owns a business, but it has to be a private sector business. So you count the guy who owns a pressure washing company, a painting company. The Subway franchise doesn't have to be new and different, it's just you own a private sector business. So business owners, I think that's the more textbook dictionary definition, but what I think economists tend to adopt is the broader definition, which is the idea that's really entrepreneurs are agents of change and that we can understand that creative people and employ their talents differently. If you're a really creative, talented person in North Korea, you can't open a business.

What you try to be is the best central planner to kiss the dictator's ring that you can be, right? You try to find creative ways to be a political leader. So it's like one of these things, if you're in Roman times, you try to find a way to be a creative military general. There's a lot of creative people in the world. They're agents of change in every sector of life. How they devote their time and talents is driven mostly by the political and economic institutions in which they live and economic freedom, and we can talk more about that, but Joseph Schumpeter had a very specific definition of entrepreneurship and we can talk more about that when we talk a little bit more about him that differed, I think from all three of those, ironically.

Juliette Sellgren (8.14)

Is there a more productive or useful type of entrepreneurship in the sense that obviously political and cultural entrepreneurship and maybe you create a new economic testing method or something that's important and cool, but is there one that's better for prosperity or do you have to measure it based on, I don't know, what you personally value as more important to society? How do you go about ranking maybe not so explicitly? Is that what types of entrepreneurship are more or less useful or to be focused on and how do you quantify that when you're looking into it to try to talk about it and research it?

Russell Sobel (9.03)

Yeah, I think that's a fabulous question. In fact, my most cited paper, which is cited more than the principles textbook that I co-author ironically enough, is one of productive and unproductive entrepreneurship. And what the distinction is for any of your listeners you're familiar with, when we do these game theory things, talk about zero sum games, positive sum games, negative sum games- positive sum means you and I are both better off if I trade you, I don't know, we go out to eat. I really am not a big fan of tomatoes, but I love onions and say that you are just the opposite. You love tomatoes and hate onions and our salads get delivered and I say, Hey, Juliette, I'll give you my tomatoes if you'll give me your onions and you say, yes, thank goodness I don't like onions and we trade. Well, we're both better off.

That's a positive sum activity. And productive entrepreneurship is defined as entrepreneurship. Exactly that. We have a gentleman here in Charleston, South Carolina, my hometown where I live now, who just opened a chain of barbecue restaurants that are packed every night and I go in there, I love eating there. I thank them on my way out the door, right? They're happy to have me in there because they're making money. I have a student, a former student who works there, is an employee who loves it. They treat their employees so well and the guy that they buy their hogs from, he's had to grow his business because now they've got three locations instead of just one. They're buying all his hogs from him. I mean, he's making the suppliers better off his employees, better off his customers, better off. And the building he started, the thing is in a building that had been sitting there run down, boarded up for 20 years and a part of town that nobody was locating businesses in.

So it's just amazing what he's done, but that's just a barbecue restaurant. It's nothing that's like Elon Musk is doing, but that's what we mean probably productive entrepreneurship and people like that are the ones that are making the world a better place. Unproductive entrepreneurs are the ones whose activities actually reduce society's wellbeing, right? It's the people who find new ways to sue people, people who can use the political process to try to steal from others and get subsidies and restrict competition and those kinds of things where obviously people who engage in pure violence and threat and destruction and wars. If those kinds of things are the unproductive forms of entrepreneurship and how people devote their time, just depends on where the rewards are. If you live in a state or a country where opening a barbecue restaurant is a way to make a lot of money, you're going to do that. If you live in a place where there's a lot of central planning and autonomy, you're going to become a talented lobbyist instead. And that's the problem with giving away these huge incentives to these companies is that they have billion dollar incentives to some of these companies to locate in places, those companies will hire 20 or 30 full-time lobbyists to go around to try to get those. Instead of hiring 20 or 30 full-time R and D people to invent new products. I mean a billion dollar subsidy is worth a lot, and that's unproductive entrepreneurship.

Juliette Sellgren (11.49)

I'm trying to grapple with this idea of Zero to One, very Peter Teal idea of if you're not becoming a monopoly or becoming the one, then effectively you have no market power, you're zero, you're going to go under or not make profit. And I haven't read it, if you can't tell. I just kind of vaguely know the idea, but I think about that often with respect to the big entrepreneurs that we think about to like Steve Jobs, Zuckerberg, Musk, those people, and I try to grapple with the idea that they create this widespread social and economic change through their innovations. But then you look at Zuckerberg and he is almost verbatim writing legislation to keep people out of the market, out of protection for young people and people who might get abused by technology when he's the one who pioneered it. And so you could think, well, maybe he's changed his mind, he regrets it, but I don't think the money in his bank account says that. But how are we supposed to reconcile this idea of them becoming wielder of the government in order to actually not actually become maybe unproductive as you've explained it?

Russell Sobel (13.22)

Yeah. Well, I tell you what, you're going to love the work of Joseph Schumpeter. This guy is exactly up your alley in terms of all the questions you just asked, which aren't traditionally answered by economics. So if you'll bear with me, I'm going to try to answer, you had three questions in there and I can answer them all with basically the ideas of Joseph Schumpeter. Please do. First off, interestingly enough, Joseph Schumpeter, a market that's great is a market that's very competitive. How do you measure competitive, it will has a large number of firms in it, right? Like the grain people producing grain, there's a million farmers all producing identical grain. That's the hallmark of pure competition, right? Joseph Schumpeter believed that it's really these large monopoly type firms who get market power like the Apples of the world who come on revolutionize a product, get very big, and then earn a lot of real profit, true economic profit that they can reinvest in R and D, that really it's that these companies replace one another through time, and it's that replacement process that is what he called creative destruction that I'll get back to in a minute.

That's his term that really is the source of progress is large firms replacing large firms. You probably don't remember MySpace, but MySpace was the Facebook before Facebook. It's like one thing to replace it another. Before Walmart, there was Kmart, and before Kmart there was Montgomery Ward. My students have never heard of Montgomery Ward. This was the largest firm in America in the 1950s, was in every mall in America. Everybody knew who Montgomery Ward is. People today don't know who it is. That's like me telling you, your grandkids won't know what Amazon is. You'll be like, yeah, well, you've never heard of Montgomery Ward. And that process that Schumpeter really believed led to prosperity in the long run, rather than a bunch of small firms trying to compete with one another. It's these large firms who have large market shares are able to really generate economic profits from their true innovations and reinvest that.

But let me get back to the middle part of that, which is the idea that there's this process that Joseph Schumpeter's famous for terming, which is called Creative Destruction, which is the idea that entrepreneurship isn't just creative. Henry Ford doesn't just bring us the car. He also destroys the horse and buggy industry in the process. So tens of thousands of people across America lost their jobs, people raising horses, making all the leather fittings, repairing the wagons. It creates this whole process where when Walmart came to town, it shut down all the moms and pops; Blockbuster and Pick-a-Flick Video, were run out of business by Netflix. This is the process of creative destruction. And really Joseph Schumpeter thought that that was the main source of prosperity. The problem is it creates a lot of enemies. The very people who benefit from the ability to enter into markets and compete when they get in a market power position, they try to use government to restrict competition, to limit their odds of getting replaced.

So they're entrepreneurs who benefit from free and open markets by coming in creating a new business. Then you try to get, when they get large enough to use the power of government to put in barriers to entry against their potential competition. And in fact, Joseph Schumpeter's work into, on a very sad note, he really believed in the long run, capitalism was dead. It was going to be replaced with socialism. I mean, here's the guy that's considered one of the most biggest champions of free markets in the world, and his books conclude with the idea that capitalism is going to fail for this very reason that people are going to start using the powers against that we could talk about. But that's one of the several reasons he points to…

Juliette Sellgren (16.45)

And I want to get there because that's, it's not maybe a scary notion, but it's a cynical one, and I don't like cynicism. And so I want to explore that a bit. But first I want to kind of get into this term creative destruction. You've elaborated on it with these examples that make a lot of sense, but how do you defend that even before we get to the, well it ends in socialism maybe a bit. How do you defend that to people who say maybe are having an aversion to destruction because of something specific like the environment or generally just being kind of averse to change in society and otherwise, how do you maybe not reconcile that, but defend against those sorts of arguments?

Russell Sobel (17.43)

Yeah, very good question. Let me though try to narrow it a little bit. I think the term destruction, the environment has so much associated with it, and that's not exactly what we're talking about. We're really talking about a new firm coming into an industry and displacing existing for-profit firms because consumers go to that new firm rather than buying the products of the other firm. So the destruction here is a very specific one of a firm going out of business because its customers no longer want its products. So you might have a McDonald's opening up next door to where a Burger King is and lowers Burger King's profits in that Burger King goes out of business. That's the kind of competition that we're talking about. And obviously there's, there's foreign products that compete with domestic products and drive the domestic industry out of business. My South Carolina, used to be a major textiles producer, and we don't produce shirts here anymore.

Those went overseas, those firms closed down. And that's the process of creative destruction. And obviously people always, if you're a representative from in the US Congress from Pennsylvania, and there's a steel mill on your district, and that steel mill is getting run out of business by cheaper steel that we import from somewhere else, you're going to try to on behalf of the workers that you represent, try to get Congress to put in place tariffs that restrict competition. But this is what the role of constitutions is, constitutions constrain governments, and it should be that governments don't mess around with that. We let this process unfold, at least if you want prosperity, government should stay out of the business of deciding the winners and losers in the private sector. That pure competition, I mean the competition, not the word pure because that's loaded, but competition between firms driven by the profit and law system that we should talk more about in a minute is really what should determine who wins and who loses the profit and law system that's driven by consumer preferences and purchases.

Juliette Sellgren 

How does this happen? How do we get there?

Russell Sobel (19.42)

I mean, that's what economic freedom is all about. That's what the capitalist economy is supposed to be founded on, is the idea that the government is this. It's like the rules of the game analogy. I know you guys at your age probably never played board games like Monopoly when we were young, that's all. There was no internet and everything else, so we played board games a lot. But whenever you were playing Monopoly or some other board game with some other kids, and there was a dispute, there was this rule book that you had to turn to figure out what the rule was and enforce it. And that's what the government does in our economy. It should not be an active player in the game. The game is between Burger King and McDonald's. Government shouldn't pick which one of those two outcomes is better, or whether a place that's more expensive and has higher quality products like five guys is better. Or whether the place in Vegas that sells $3,000 cheeseburgers, I kid you not, there's a place that sells $3,000 cheeseburgers in Vegas. {Editor’s Note: It’s actually a $6,000 burger.] It's gold leaf, this with Kobe, whatever. It's not the government's job. It's a consumer's job to decide these things. And that's what economic freedom is about, is organizing a society in a way where government is constrained so that what it does is provide the rule of law contract enforcement, a stable currency, predictable rules, and the main public goods that keep society running and leave the rest of the markets.

Juliette Sellgren (21.02)

So you've mentioned a lot of governmental institutions that are really essential for letting entrepreneurship flourish, but what are some cultural ones that are also necessary? Because I am thinking that sure, government enforcing contracts and the rules of the game and property rights is important, but if there isn't a culture that's receptive to this idea of change, how are you going to get there? And so could you give us some examples? How important do economists typically, how much weight do they put on other factors like cultural factors in the existence of entrepreneurship and then economic prosperity?

Russell Sobel (21.48)

Again, another fantastic question. Yeah. So there's an economist named Douglass North who defines institutions that we were just talking about these rules of the game that govern the way people interact with one another. And he puts 'em into two categories, the formal and informal institutions. The formal institutions are the ones that we were just talking about, the written rules like bankruptcy law, the logins, murder, contract law, all these formal, documented written kind of rules that we live under. But there's also this big body of informal institutions, the cultural norms, so to speak. A good example is that usually in America when you meet somebody for the first time, you shake their hand, is that written down anywhere? No, it's not a law or anything. It's just a cultural norm. And different cultures have different cultural norms and different things that they've inherited that have a significant effect on the behavior of individuals.

Some countries, for example, charging interest is viewed as immoral. And so that stands in the way of a lot of contracting. And people just profit seeking may be viewed as immoral, that being selfish and trying to earn money as a business person might be viewed as less desirable than being devote your life to religion, for example. So in very religious society, somebody who gives up everything under Buddhism and lives without much and just spends all their time trying to understand the way the world works are celebrated. And there's nothing wrong, not that one is norms and rules have a huge effect on people's willingness to take risk. And some cultures taking risks is very dangerous, and other cultures taking risk is much more accepted and those kinds of things. So those obviously have a large effect.

Juliette Sellgren

I am stuck on this socialism bit. So okay, let's say we have a culture, honestly, like America. I think America is a good example and whether, well, I would say maybe we have fallen a little on the Jupiter path maybe, but where there's a culture of entrepreneurship and prosperity and change, and also for the most part, governmental institutions that actually reinforce and uplift that, how do we get from point right now to point socialism?

Russell Sobel (24.07)

Well, yeah, Joseph Schumpeter points to several other things, one of which some viewers, or listeners I should say, not viewers, will resonate with and others might disagree with. But really it's the disagreement with whether we're down that path yet or not, whether it's something that Schumpeter was writing in the early 19 hundreds, so this is not recent stuff. And he said that in the old days, if you go back to the 18 hundreds, almost everybody was an entrepreneur. This is before the Industrial Revolution. Everybody had a farm or they had their own little place where they hung their hat and they did some sort of work for other people painted houses or was a printer, or everybody was like an entrepreneur. And what happened with the Industrial Revolution and the creation of these large firms like the Apples of the world and Walmarts of the world and Amazons of the world, is that the average person now works for a big firm and they get removed from this very process of entrepreneurship.

So you have fewer people who are actually entrepreneurs running businesses and understanding how that works. Instead, they find themselves in these large bureaucratic firms, and so they start losing touch with the value of entrepreneurship, the difficulty of it, and the amazement of it. And it quit celebrating entrepreneurs as the heroes of society. And it said, look at them and their wealth in as envious ways and as evil ways. But also one of the other things is very interesting is that Karl Marx thought that capitalism would end because it would impoverish people socialism, but for the opposite reason, he says capitalism is going to make it so that we don't have to struggle 40 hours or 20 hours a day to grow food for ourselves, that we end up producing so much food and other things that production allows us to produce so much stuff with so little resources.

It frees up so many people to go into this new intellectual class of academics, of journalists, of lawyers who don't actually produce the things that we eat and consume. And that once you create that intellectual class, those very people start turning on the very foundational things that make capitalism work. They become non-private property, they become, and I mean, if you start even looking at the James Bond movies, which also probably predates you in the old days, the villains in those movies were Soviet spies, right? Or some foreign government. Now it's business people or the villains in all these movies. And you can see this anti-business, anti-wealth mentality. You can see college campuses where the students are now more in favor of socialism and capitalism, and a lot of these intellectual environments are indeed becoming less or more hostile towards capitalism, which is exactly what Joseph Schumpeter predicted.

Juliette Sellgren (26.51)

Let's say we're on this path, who knows? Well, I have an opinion, but that doesn't quite matter. Okay, let's say for example or for hypothetical, we're on this path. What are things that we can do to, I don't want to say force people, but force people to get their hands dirty and to kind of experience and have firsthand knowledge of the benefits and kind of glory of entrepreneurship as owning a business for yourself or actually creating something new. I used to think the way to do it was to scare people about the USSR, and there's probably some merit to that, but maybe part of it is just to show people the benefits of being the one to be the creative destroyer.

Russell Sobel (27.47)

Yeah. Well, I think obviously the kind of things that you're doing are extremely important. That is people who try to have podcasts and other ways in the media to try to get some of these ideas out. I mean, there's a lot of people on the TV and radio who are more political, but there's real academic logic here and real academic evidence of what institutions work. This isn't an opinion. This is if we can look across the world and look at these different economic systems and we can see what life expectancy is, what infant mortality is, what economic growth rates are, what the income levels of the poor are across these different countries. And it is clear that reliance on free trade, more market institutions, monetary stability, leaner environment, more equal rights for minorities and people of all genders are, I mean, it's just thing after.

It's not just economic wellbeing. All these things improve with more economic freedom, and we know that, and the data clearly show it. And I think one of the problems, so I guess the first part of my question or answer was that I think that things like your podcast and other things in this realm are vitally important to help get some of these ideas out. And so I commend you very much for being a person that's trying to do this. Did one of the things that I think is, I kind of really wish it wouldn't have failed. Now in retrospect, the problem is that I think there's a lot of people out there who think, wow, we've just never tried socialism in the world, and they don't know what things were like. I mean, the Soviet Union at its heyday in the 1980s was a full blown, centrally planned socialist economy that was horrible, and it failed over and over.

And we could see that on the news. People would come here from Russia and they would talk about, it's like there was an example of how bad it was, and you could go visit somewhere like that and see how it didn't work. And the problem is with that gone, it's very hard to do it. There's really only a few places left on the face of the globe that are that way, North Korea being one that's a Soviet style socialist country, and you can't go visit there. But I'll conclude it by saying we have a professor, Dr. Bill Trumble, who's actually been with me my entire career at a couple of different universities who teaches a course on the economics of Cuba. And he has for years been taking students on State Department approved trips over spring break every year as part of that course to Cuba.

And I was lucky enough to go with him once, and every student who comes back from that trip says the same thing. They're like, wow. I mean, going to go visit and talk to people who live under socialist central planning. You come back going, wow, I was completely wrong about everything. I thought this stuff was good. These people are miserable. They want freedom. This stuff doesn't work. I didn't realize that was the way it worked. I mean, the hallmark of socialism is you can't own private property. My students are like, what do you mean? I'm like, yeah, I want socialism. In Cuba, people can't own the home they live in. You're assigned a home by the central government, and if you want to move, you got to be connected enough to be able to schmooze somebody in politics to move you to a new home.

Is that what my students want? Who say they want socialism? They're like, no, isn't what I meant. Well, I'm like, dude, the hallmark of socialism is the nationalization of all property. Do you think people shouldn't be able to own restaurants? No. I think that socialism means that government owns all the productive assets. And I think that the problem is there's this view of socialism being some ideal without really thinking about what it really is. And you start pushing people on what they really want. And what they really don't want is socialism. What they want is just government intervention in the markets to try to make things better. And that's a whole ‘nother debate than whether we want socialism.

Juliette Sellgren 

Yeah. Well, so Schumpeter is, I don't know, would you describe him as a pessimist? I think at this point I would. And then I guess, do you agree with him in his pessimism or do you find yourself to be more optimistic?

Russell Sobel (31.49)

Yeah, I think the best way to look at Joseph Schumpeter is that he's an economic historian. So what he spent his entire career doing is trying to understand, we're so prosperous. How do we get here? What is responsible for the progress that we've witnessed in human history going from, I mean, life expectancy and has gone up by 30 years in the last century? I mean, people are living 30 years longer than they were a century ago. It's amazing in levels of income or health outcomes, all these things are improving so drastically. What's responsible for that? And that's the capitalism and the process of creative destruction and driven by the profit and law system that's responsible for that. And this monopolies replacing monopolies kind of aspect, but really is the right word, prognostication for the future in terms of how the economy would go is just obviously a prediction.

And predictions can be right or wrong and for lots of reasons. And so he didn't believe that it could last forever. So I don't know what to make of that. Is that true or not true? I don't know. It's one of those things that hopefully, at least in my lifetime, we're not going to see the end of capitalism, but we've got government spending in the United States of America that's like 40% of the economy now in total; we're so far away from what you would define as a true free market economy. It's not funny. And a lot of people say, well, look how the United States is failing. I mean, almost half our economy is government spending in the United States. I would hardly call that a free market.

Juliette Sellgren (33.20)

So what needs to happen? I mean, there are a few things that seem pretty obvious, but along with government reforms, what are some cultural things that need to change in order to prevent against that?

Russell Sobel (33.33)

Well, I think right now we've got an environment where everybody wants more government, they want government to do more. And whenever there's a problem, they immediately think we need to turn to government to solve those problems. And I think that that environment is one which breeds a situation where the political process is always pressured to do more to keep expanding its role in the economy. And there's a lot of reasons behind why that's the case, but one of which is the way we allocate our tax burdens in the current income tax code, only about a half of the people at America who file tax returns actually have, and I'm not talking refund here, I'm talking about a positive tax liability at the end of the year. So you're going to just basically get everything refunded. I mean, we're in an environment where the vast majority of people who pay the federal income tax pay zero at the end of the year once they get the refund back.

And so when you think, well, okay, if government expands by a couple billion dollars, how much burden is that on me? For the average person, a median voter in America faces zero tax bill from expanding government. And so we're in an environment where 50 years ago, that was not the case. 50 years ago when government expanded, the average person's paycheck fell a lot. So there was a lot more resistance to government expansion. And now we're in an environment where government's viewed as a free lunch and the things that government are doing as a free lunch and not to pick a particular policy, but we just had that bridge collapse up in Baltimore, what horrible shame that was, but…

Juliette Sellgren 

I drove across it the day before.

Russell Sobel (35.04)

Yeah. Well, again, I'm only going based on headlines here, so I hate to do that without being as informed as I should be. But apparently President Biden got on and said the federal government is paying for that. Right? And that's great, but I thought the ship ran into, if my car runs into your car, you don't pay for the repair to your car. I pay for it. The one that caused it. Why isn't the discussion why the shipping company's insurance doesn't pay for that bridge? I mean, it's like a lot of darn money, but it's like the first thing we want to do is just spend a bunch of government money, whether it's send it to another country to help them with their problems or paying a bunch of people during all this is viewed as a free lunch and it's created a huge national debt, this deficit spending.

So I don't know. I don't know how to solve these problems. I can't do that. I can't solve the problems. But I can tell you that it's really important that we have a society full of creative people who change the way we live, and that's our main form of progress. And the more freedom these people have, the people like Elon Musk to make money and innovate and driven by the profit and loss system, the better off we're going to be. If you want to live to be 150, it's possible, but we need to free people up to experiment and roll the dice and try new ways of doing things and leave people to be free.

Juliette Sellgren (36.15)

Something I'm thinking about. So on the one hand, you want more and more creative people because that can only bring more entrepreneurship, more innovation, more benefit, but you also want people to take stock of what burdens they're creating for other people because someone is going to have to pay that eventually. And the thing is, if it's not you, it's your kids. And fewer people are having kids than ever before. I think I might be wrong about that. I think this is a worldwide thing. I'm pretty sure. So maybe part of it is just honestly impressing upon people that even if you're not paying for it, people down the line are paying for it. And if you care about things like the climate, which is a more long-term thing, and I guess this pulls weight with my generation, if you're going to be worrying about something long-term, worry about the fate of humans too. But the issue is some people just think we'd be better off without humans. And so then you kind of come to this point where you're like, well, should we eradicate ourselves? Obviously not, and these people who advocate for this stuff, so there's a contradiction there, but I'm just trying to work through the different ways to not incentivize, but to really show what needs to happen and what will happen if we don't account for the cost of things as they are.

Russell Sobel (37.46)

Yeah. Well, I tell you this, I do know that the environmental quality is a normal good, all other goods. {Editor’s note: This should be luxury good.] And the richer you get, the more you can spend on it, and the more people care about it. You go to these third world countries where people are starving to death, and the last thing they're worried about is the cleanliness of the streets, right? When I was a kid and America wasn't as rich as it is today, LA was filled with smog every day. You couldn't even see there. It was on the news every night about how smoggy LA was. Our rivers were dirty. I mean, rivers today in America are much cleaner. Our air is much cleaner. As we've gotten wealthier, we're willing to spend more on products to not pollute as much, but that's partially an outcome of development. But it's one of those things where prosperity helps.

It gives us more resources to try to help clean up the environment and to do things. And there's entrepreneurs every day trying to invent new ways to do that. But obviously there's these problem areas. There's areas where private property rights aren't well defined. Who owns the air? Who owns the oceans? And there's these problems of how do you stop the pollution in the oceans, the overfishing of the seas and environmental pollution that is up in the environment. These are big areas where there's a lot of unknown resources, and there's a whole field of economics called environmental economics that deals with that. And there's a couple of graduate programs and centers around the United States that specialize in just thinking about how entrepreneurs and entrepreneurship can interact with that and solve these kind of problems. And I think that would be a wonderful topic if I might suggest it for a future show of yours. In fact, if you want afterwards, I'll follow up with an email with you, and I know there's some great people you could have on that could talk more about these environmental problems, but that's a little bit outside my particular area of economics. 

Juliette Sellgren 

Yeah, that would be awesome. Something I am wondering about though that you kind of sparked in this is the topic of entrepreneurship being taught in schools. I guess my main question is can it be, there are a lot of programs, here's that teach it, but I'm wondering what's being taught?

Russell Sobel (39.54)

Yeah, that's one of the things. It's very hard to teach entrepreneurship. There's actually some literature on this and a debate about this. I mean, it's very hard to teach people to be creative. That's not something that you can really do. What we can do is that there's a lot of creative people, and not all of 'em have the skills to run a business. And so the one thing we can do is help creative people who have ideas, develop those ideas, improve those ideas, and learn how to turn 'em into real businesses. And that's a much easier job than trying to teach people to be creative. So that's how I view my job, is to try to help people learn how to maybe turn their ideas into a profitable business and open a business and run a business, and the things that really matter for that and how to keep that business afloat in an environment where creative destruction's constantly happening around them.

I think those things are a lot easier than teaching people to be innovative. But interestingly enough, that might dovetail into this, there's a paper I worked on with one of my former graduate students looking at the impact of school choice programs like vouchers and other kinds of school choice. And the typical student in America, at least when I grew up, went to a public school that was a monopoly school system run by the government where the schools weren't competing with one another. Your school was your school, you were assigned, and you couldn't move schools. And this environment we have today in some areas, in some states and in some counties where schools are competing for students and the school's trying to keep you there instead of losing you if you're a good student and you see your school being competitive and you see having a choice. It turns out that students from areas with school choice programs are, I think it was about 50% more likely to become entrepreneurs when they than our students from the monopoly public school system. So for what that's worth, maybe the environment in which kids are going to school matters. If you have a school that's a big public sector government bureaucracy, that doesn't really lend itself to teaching you how to be a private sector entrepreneur as much as if your school is a much more innovative entrepreneurial type of environment.

Juliette Sellgren 

So I guess entrepreneurship and agency beget more entrepreneurship and more agency. That's awesome. I have so many more questions and I wish we had more time, but I want to thank you for taking the time to come on the podcast and for sharing your wisdom and all. I definitely will follow up with more questions, but I have one final question for you today, and that is, what is one thing that you believed at one time in your life that you later changed your position on and why?

Russell Sobel (42.24)

Wow, that's a really hard question. I think that, wow, that's an extremely hard question. Well, I'd mentioned one at the beginning, which is this thing of family versus work. I think that when I was in my twenties and thirties, spending 80 hours a week at work and not really worrying as much about all the family stuff was a much more important aspect of life for me that I've changed my opinion on. Now, not that I don't love to work, I love to work, but as you get older and you see people around you dying and your parents dying, and you're like, by the end of my dad's life, there was only one person that was sitting there beside him. It was me, and I'm sure he was very glad to have me there. And you start thinking, wow, one day when I die, who's going to be around me loving me, and it's not going to be my dean at work.

So it's one of those things where you feel that way and I don't know. So just value your family and make sure you nurture those relationships is something that I changed my, and relationships is being able to forgive quickly. I think I used to hold grudges a lot longer than I do now, and I think that being resilient and being able to move on and live, it's this thing. My daughter's a yoga instructor and I think she's helped me quite a lot in terms of you got to live in the present, right? Your brain constantly wants to remember all these things that happened in the past and worry about all this stuff that's happening in the future, and you do need to do that to some extent, but it really gets in the way of just being happy. Being happy is about living in the present moment and appreciating and being grateful for the things that you have and what you're doing at the moment.

You're always rushing to get somewhere else or worried about something else. If you're not going to be happy now, when are you going to be happy? Is it going to be tomorrow, and it's always tomorrow that you're going to be happy? Try to just live in the present, and I'm not always as good about it, Juliette, as I wish I was. My daughter always has to help me when we go on trips together, when the flight gets canceled. Not to freak out, but that's why I love hanging out with her because she does. She's like, dad, it's okay. Maybe this is an opportunity for us to do something else or to go see another city, or whatever.

Juliette Sellgren 

Once again, I'd like to thank my guests for their time and insight. I'd also like to thank you for listening to the Great Antidote Podcast. It means a lot. The Great Antidote is sound engineered by Rich Goyette. If you have any questions, any guests or topic recommendations, please feel free to reach out to me at Great Thank you.

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