welcome very much the conversations were it's a pleasure to welcome to the program professor william bommel who eat with a professor currently at new york university of economics and hasn and lester is commit career and it's an honor sir to welcome you to conversations  terms of the honorary degrees and so forth but if you may i read the first short bio of him he was born five or twenty six in one nine hundred twenty two in new york city he received his b s f at the college of the city of new york in one nine hundred forty two and his d at the university of london in one nine hundred forty nine his honors an award includes it's his seven honorary degrees but i know as we spoke it's now nine having just received one from i believe princeton and the university of jerusalem recently the hebrew university re university in jerusalem he's the presidency of the american economic association to other professional societies and membership in the national academy of sciences he has served on many boards and committees and the list of boards and committees that he has served on is incredibly extensive he's a professor of economics and director of the c v starr center for applied economics at new york university and professor emeritus at princeton university where i believe you serve something like forty years you were forty two years congratulations and dr baumol is the author of numerous i believe thirty books and over five hundred articles published in professional journals and that's just a brief summary and welcome once again very very much to conversations and honored to welcome you here thank you so much you know at least stevenson once said yes to that kind of in production i can hardly wait to hear m speak ok well and that was the a bridge too we had a longer one that they had and it is really indeed you had you had an incredibly illustrious career and i'd am very pleased that you could be here with that's a summary of what i want to maybe you could share you were born in new york in you new yorker born and bred but you've spent a lot of time at princeton and if you could share a little of your own background in a personal sense then we could talk some about the economics as you see it now and some of the unique understanding of economics that you that you see in terms of the way markets and competition can be understood as we we think now in the year one thousand and nine but if you're on background please well as you said i was born and grew up in the toughest parts of new york city and then after military service in world war two i decided that it was time to see something of the rest of the world job at princeton where with stubborn persistency i held on for this ridiculous amount of time and incidentally just yes no but i was trained as a painter and sculptor and i gave courses and subject to princeton for a long time good for you you didn't no know what i am a great admirer of his work and even to the museo yes i hear the other day it's really beautiful oh yes i think every viewer of this program should rush to go see it man i'll second that for sure will consumers and so the in one sense we see these things that someone looking at the economy through a telescope from macro economics which in a sense is the invention of lord keynes puts things together looks at the big picture from a distance and so can more easily reach conclusions about big movements what is happening to unemployment as a whole and what is happening to inflation as a whole but there is a price i mean each has its virtues and vices the micro economics kind of hope to tell you how we can stimulate the growth of a new abrasion in a particular firm what why when the bell system was broken up it was predictable that bell labs would be transformed from that of something a macro economist does not do and we cannot do what they do and that is to look at this the huge major movements of the economy i see either not borrowings between them and what i would relate one to the other and you would have good conversations over coffee with one another and so for the absolutely nothing like the work i aren't we doing which is on growth of the economy yes it is in some sense a little of both than because i am talking about the growth of output of income in the economy as a whole not of any particular form or any particular individual i see if we if we were to look back over the it has this been a distinction is an important  micro macro in terms of understanding economics has it been a thinks it's been in the economic profession as it were for a long time i'm sorry asking this question is an important one for the layman to understand it difference between a micro economy in a macro economy view yes it is very important to understand it hasn't been in the profession officially for a long time in the profession it goes back to the nineteenth thirty's and the work of lord keynes and others who were in producing some associated ideas in sweden and now and in the united states and in other places where work on the urgent problems raised by the great depression was really for star attention to move to the big current issues which was the disappearance of jobs the collapse of income the collapse of production and that was a job for macro economics i think but today we have problems happily not nearly as serious as the problems of the thirty some but we have problems that call for both of these issues for example yes we see in the newspapers every day about the microsoft antitrust trial absolutely and that is a pure issue in micro we can know me how that's micro economics although it has case may be but do you think the that the case does talk to what macro micro going to mix is about in terms of the oh absolutely and also i think to this paper that you have it's about innovation which is how they're going to want to talk about yes but you see the two their analysis and have reached their conclusions diametrically opposed well fair to say it's not diametrically a call opposed because the basis for the analysis is the same but the issues are really novel here and you see one of the issues for example that is implicit is whether microsoft engaging in what is called in the business predatory behavior ok and predatory behavior is usually defined to mean doing something in which the firm that engages in it loses money in the hope that this will force competitors to the business and so that they will afterwards be able to raise their prices to monopoly levels and gain back all their washington's horrible winter in the valley for sure and i can tell you yes that the reason that his troops were ill fed ill clad ill how to use the roosevelt through the british lines a risky business as you can imagine and charging hefty prices for it until the authorities the cited that this was immoral  passed rules prohibiting the payment the bows prices and guess what happened the farmers the cited it wasn't worth the risk of getting shot by the british and the food pricing and so what is that another exam there are many examples there were examples like that as the microeconomic of study that in particular detail and understand it in particular detail and you thought you said i thought i had said this on the unique about the situation of information technology or or the or the microsoft and there's this concept that they will get a new technology in a certain sense locked in where well but there's still no allow for innovation the way it would allow to to benefit the society overall well that that's not clear but well may show you where the dilemma rice is you see once you've created a new program a patent internet  what constitutes predation predatory pricing has to be looked at in a very different way than in a case where this is purely imaginary it ford motor company was cited to the steroid toyota or general motors by selling cars at fifty percent below the cost of producing them you see yeah with microsoft y greater that we just saw this thomas friedman has his new book out the lotus or the lexus and the outer and the globalization process which seems to be moving into a bringing new patterns in terms of what is between nations the competition between nations and that sort of does that is that something through ok right you see one of the big effects of globalization process is that the dangers of monopoly in most industries has it that that danger has to a considerable extent evaporated because general motors which primarily used to face the competition afford  and chrysler now faces the competition old volvo and toyota and mas the and the whole market of the world and that this is something that it we've always had east india we had trade we had some trade but it's coming in a new kind of way that we call globalization now and it's also facilitated by telecommunications or communications and if you look vastly expanded the possibility of linking it together what to call the global village but the transportation of things or adams as nigro ponty will say rather than bits of information but i don't know there's been a revolution in transportation that made this new kind of pattern possible in a qualitative new way or but more than that yes i mean you can get a group of innovators in silicon valley getting a new idea and the citing that to put it to work you need a box into which it will fit they can send an e mail to their subsidiary in india and get the indian peg nations to produce the blueprints and those blueprints will be there the next morning right yeah right yeah and that was not possible in time devers of the that's right at three months on a package ship or something yeah that's right the point is that until recently international trade was almost exclusively goods not services because services and in some sense are difficult to transport but know they are transported instantaneously computer services designs were look at publish an athlete you see here we are in a league in the old days the london symphony orchestra would come to new york but that was a major cost and a major undertaking couldn't be a tours would be groups would move from country to country but now the television programs are broadcast instant pena's really is the world that's right and now they're starting to stream as they call it on to the internet with multimedia sound and video again and i'm a new kind of world or someone into perhaps i'll tell you something yes or do the wii already have but more yes the article in the new york times which led you to get hold of me granddaughter have asked you that because we talk now and there's a great deal of talk now whether or not we we've had this week and we've talked some about your colleague or friend robert how brown has written on the worldly philosophers and so forth and that it began with adam smith in a certain sense in the new pattern and we've had this economics profession developing in a study of it with the great economists you know of the of the past week but now people are talking in a new kind of ways about the information environment that's emerging information economy does that bring in it does that bring something into the equation of economics that in a certain sense begins to differentiate us from the the traditional patterns of understanding economics that we've got over the centuries or is it an extension of that or how do you see the the implications of the information technology sometimes some people talk about it as the philosopher's stone that we've finally arrived at or something but could you put that in some perspective for well again you know if it's something that is century ago just think of what has happened to the labor force in washington stay approximately ninety percent of the labor force was engaged in agriculture here until very recently that's right yeah today ninety percent is about two and a half percent right and feed the world that's right in from agriculture the workers moved into manufacturing  labor saving technology has begun to eat into the number of jobs offered into the manufacturing right not by the str jobs but by transferring just as the jobs were transferred from agriculture to manufacturing in the last century they have now been transferred from to the services and i don't mean the services of hamburger flipping and dishwasher that's part of that's part of it but the bulk of the new jobs are in the information sector and estimates are about sixty percent of the labor force in the united states is engaged in jobs that are in some sense related to the information isn't so there is a revolution indeed and it means that the workers need more education than they used to and in fact one of the things that's happening in the past two decades is that the payoff to a college education relative to what you can get by say if you're a high school dropout as soon so that where twenty years ago there was a modest differential a modest payoff to going to college that pay off has gone up steadily and substantial sum and i see yeah so there is another example of a consequence of the information age i thought the information a that's a sense like the i was in detroit and the automobile industry would loomed large there and they were coming from all over the country to come into the automobile factories of mr ford and general motors and so forth and they did that and now they're going into these these and are is it true to say if we i mean it's not fair for me to ask if it isn't we've done something else but that our basic policy grounding statements are the nation's earn is the employment act guide the economy as well whole foreign policy said leader yes and yes i mean an essentially says that we would i think it was going to try and be called at one time the full employment act at the one nine hundred forty six but it generally is that we want to aim toward to you like we're at an unprecedented kind of successful stage as we sit and talk in june one thousand nine hundred nine it certainly is unprecedented to have this long a period of high employment and no sense we've been having technological breakthroughs since the beginning of the nineteenth century and we've seen no trends towards increased a sentence there you said that for one thousand and a half or five one thousand five hundred years from the end of the roman empire the growth rate of the western economy was approximately zero that is correct and if you could address that and put it into perspective just how much of the prosperity or growth has been it has just been an event of these last relatively you know couple hundred years or something well let me just give you one figure which is  to try and figure out what it means i can't than i've done a lot of research i mean any doubt you can imagine every american family having one tenth the purchasing power that it has today yes passed around the table yeah that when people died they'd left one suit of clothing if that they spent ninety five percent of their income on food clothing and shelter there was no such thing as  break ation you worked six days a week you were twelve hours a day and wallowed around in the mud of poverty for the most part for the greatest number of people young and now do you know that in the nineteenth century writing poverty yes in the nineteenth century it was considered normal in the homes for you think to freeze in the ink well a really when three really made it a little hard to do for th question that has not been addressed in a systematic way by economist since the beginning of the century there were two economists who dealt with that one was communist manifesto written by him and angles in eight hundred forty seven he has phrases that are almost poetic about the yeah yes and just getting started and just getting started yeah and so here we have an economy a form of economic organization which has all sorts of sure coming it brings depressions it brings inequality it can harm the environment kind not here as a propagandist for the free enterprise economy because it has like any other type of economy it's short come but it seem credible virtue is which makes it the envy of all the non kept a list world and that would all they're trying to understand that's right which led to the collapse of communism which led china to adopt capitalist methods of production the retaining its undemocratic form of political system is the incredible ability of the capitalist system to produce to grow economically to raise standards of living to heights that were never dreamed of in human history why was it able to do that and i make note of the fact that you said of china democracy is it possible to have capitalism with an is is there a linking between capitalism and somehow and democracy can you have a political democracy of the early industrial revolution yes then you look at the end of the nineteenth century electric power ac d c electricity itself is like tree only one hundred year old a little bit  battle is not a swipely lower price or a little better advertising but a new product a better product innovation a revolutionary product and a new proceso that  bles you to make that product more cheaply more reliably more effectively and that it as you have just said is in effect invention and innovation that's right and it comes out of a certain kind of a sociological set that allows this to happen we had in the arts we had certain periods with the renaissance we had certain periods that were blooming periods there were times where long is there a comparison of that there's a condition that allows for this inventiveness and also the innovation it's important that they be implemented because inventions like in ancient china they had inventions of paper and so what but they didn't have a commercial way of building wealth and were interested in the creation of and forward movement and expansion of wealth  progress in that certain sense in terms of material progress that has been attended to these last couple hundred years or so by and to understand that is what we are concerned with our shine particular light on this do you think if i may i don't want to intrude here at home but you you said you had not read in one of the in your article that you had not read from peter for some forty years in your illustrious career when you found his quote about you know macbeth without hamlet that was kind of interesting and so forth but has he been overlooked do you think by no there's a comment much less by the general society as somebody that we should understand if we want to try to understand the realities of concern over the world not just the economists and the economists quite rightly and justifiably were driven to move their attention away supply should create its own demand but we're never but schumpeter what was his what was his take is that we would say in modern parlance and what does that set him apart and where does he fit in and why was there not models or you know you know you know a practical application of his thinking to the degree described the innovation process in the earlier stage of capitalism in a book that he wrote in the first decade of the century in which he said the competitors would be forced to imitate or to produce counter integrations and so there would be temporary profits to the innovator the initial that because in the an abrasion process is basically an arms race between for or among firm rather than building tanks guns and airplanes as nations do i think for the the firms in their arms race invest in r and d laboratories hire technicians scien nineteen forties recognized the firms being unwilling to take chances in this arms race began to route to nice and bureaucra will make at the same time the decision as to how much to invest in advertising how much to embarrass them clone pany quitman and how much to invest in r and d r and d and if they come up with a great in the traditional way of thinking there would be competition between them are indeed development innovation is very important to production gains and so forth is very important but it becomes too risky for them to be alone in that process so they will set up patterns of  licensing and you know agreement between them that if someone discovers a new thing they will be able to license the set fee for the certain built in cooperation between the people that are within an industry let's say is get together and say let's set up a laboratory we're all looking for a way to prevent white from leaking into account or or whatever it is and  it will benefit all of us if there is a breakthrough on that score so let's all invest ten million dollars in setting up this lab and we will  rights to the in a basin that comes out of that is similar to cartel or how do we do with it i mean and you're a consultant to major corporations in our economies as the you understand as well it's is it like a  cooperation cooperation can sometimes be very harmful to the public interest and sometimes very helpful let me give you  know what suppose there were only three and they got together and said let's the side on price jointly yeah you can be pretty confident that that price would be a hell of a lot higher than it is clearly against the public interest and that's why the courts have ruled rightfully considered price fixing that is the the citing of price jointly by horizontal competitors to be illegal per se there is no excuse there are no extenuating circumstance market must be free for competition for would it be free for open entry or for unlimited entry or care for but as long makes a difference it makes a difference and i agree yeah but as long as four and chrysler and general motors do not call one another up and say you know enough of this foolish competition why don't we double our prices or do it if you do and what if they say that on the sixteenth green playing golf it's still illegal all right and if they can still go to jail for it and be fined heavily and so on ok and that it is very legal per se that's interesting that's in the that's in the area of price which is one of microclimates has really been focusing on large but that comes up in your paper you're saying this innovative process or the the process of is one that is very much more perhaps important in terms of creation of wealth and so what and it's been overlooked more than it should be in terms of what  how the economy's going to be organized and that's true but the point also is no you know what you said is correct but also this is a field in which cooperation sometimes improve the results can sometimes help to get you new products and new procedures these where coordinated efforts might not get them and as a result throughout the world the antitrust authorities who are allowed no cooperation on and yet right have really intervened when there has been cooperation and innovation interesting and what is your take as we say on that that we should understand this first of all and where would our understanding appropriately lead us in the common will be unser is our understanding should indicate that there is a danger the danger is  three firms in an industry that are cooperating on innovation could conceivably say look why should we take those risks and work so hard and i won't turn out any new products if you don't turn up and the new products they see then that could happen ok and that of course would clearly not be in the public interest nor would it be in the interest of understanding growth and the theory of growth and the theory that we were talking about how successful we've been in the last couple hundred years we want to understand that and encourage that because a growing economy is one the best thing for people at all levels of society through the growing and expanding economy exactly ok so we don't we want to make sure we don't discourage that that's right ok on the other hand as has been happening in practice if i will let you have every innovation in say computer screens that we come up with in the next five years if you let us have every innovation this is all made up but this is bad sorry it's a scenario it touchy representatives will say we recognize that you're expected in a basement will be more valuable than ours so we will not only give you our innovations but we will pay you thirty million dollars for an equalization fee ok and then i b m will say that's ridiculous thirty million dollars isn't it is worth at least seventy million i see in the negotiate and they'll negotiate over and they begin to get us some idea into that balance out and then well it's more than that and see that means haven't got i got nothing to bring i got it right yeah yeah yeah so that form of negotiation ensures a very powerful stimulus more each form to work as hard as they can to prove not only to be first with the innovation but the have more in abrasions to bring to the bargaining table and that can contribute to growth and to the creation of this as a natural development of the free market economy i think we might just say that he did say that he thinks that capitalism good through five and he said in the long run he thought it claim that we can foresee the future now what he did not foresee is that the route in his asian instead of undercutting the growth process would good territory when we pick up and read now to try to understand things mr schumpeter is there something new coming in is there a variation on the am or where do we go in order to get a sense  of philosophical underground underpinning to understanding both policy leaders or intellectually interested people the direction in which this whole interrelated spaceship earth should be trying to turn in order to maximize the konami process to the benefit of the whole human side well there is a group of economists very bridgend very creative who are studying the made major contributions to our understanding they have worked primarily at the macro economic side of the growth story and you had recently others have begun well in order and just let's as the british would say muddle through or move along with what we've got we've got the the fix there's some people who say we've got the system now we understand everything's in place and let's just do it or do we need new vision or new we need we do still new vision paradigm vision or not we do need further insights further analysis because and this is where the line about a performance of pamela with the princess diana mark missing yeah comes in did you you would come up with that and then you went to his writing would come up with their forty years before it's actually it goes further than that ok it was it was a common way of expressing things in england i think in the nineteenth thirties you know i was through it by a great scholar but anyone who claims to know the original source of many thing still one crime maybe more but at least one crucially missing part of the story and that is what is it that is different about the free market economy that puts it so far ahead of any other form of the economy in this one respect in terms of the incredible abundance that produces for society well said i'm sorry we're out of time maybe this could be chapter one we can do another day after we're just starting it has been your pleasure the other perceptions i william bomb then he said the new york university macroeconomic economist extraordinary thank you very much for the lesson and for learning i appreciate very much not only your coming into conversations in manhattan that work for all you work i congratulate and thank you very very much for for that and for coming into the program and thank you for the opportunity not at all my pleasure is your pleasure to his perceptions we invite you to and we'll be coming back again next week on conversation same time that's it for now thank you very much for viewing once again for us a ball thank you for coming in until next time ok