Tyler Cowen — Hayek, Keynes, & Smith on AI, animal spirits, anarchy, & growth

**Dwarkesh Patel** (0:00)
This is a fun book to read, because then you just mention in there what the original source is to read. You know, it's like the herald bloom of economics, right? You just like...

**Tyler Cowen** (0:11)
It's a book written for smart people.

**Dwarkesh Patel** (0:13)
Okay, so let's just jump into it.

**Tyler Cowen** (0:15)
Okay.

**Dwarkesh Patel** (0:15)
The book we're talking about is GOAT, Who is the Greatest Economist of all Time, and Why Doesn't Matter. All right, let's start with Keynes.
So in the section in Keynes, you quote him, I think, talking about Robert Marshall.

**Tyler Cowen** (0:29)
He says, Alfred Marshall?

**Dwarkesh Patel** (0:30)
Oh, sorry, Alfred Marshall. He says, the master economist must possess a rare combination of gifts. He must be a mathematician, historian, statesman, philosopher.
No part of man's nature, man's nature or his institutions must lie entirely outside his regard. And you say, well, Keynes is obviously talking about himself.

**Tyler Cowen** (0:50)
Because he was all those things and he was arguably the only person who was all those things at the time. He must have known that.

**Dwarkesh Patel** (0:57)
Okay, well, you know what I'm going to ask now. So what should we make of Tyler Cowen citing Keynes using this quote, a quote that also applies to Tyler Cowen?

**Tyler Cowen** (1:09)
I don't think it applies to me. What's the exact list again? Am I a statesman?
Did I later hold at the Treaty of Versailles or something comparable?

**Dwarkesh Patel** (1:18)
I don't know. We're in Washington. I'm sure you talked to all the people who matter quite a bit.

**Tyler Cowen** (1:22)
Well, I guess I'm more of a statesman than most economists, but I don't come close to Keynes in the breadth of his high level achievement in each of those areas.

**Dwarkesh Patel** (1:32)
Okay, let's talk about those achievements. Chapter 12, General Theory of Interest, Employment, and Money. Here's a quote. It is probable that the actual average result of investments, even during periods of progress and prosperity, have disappointed the hopes which promoted them.
If human nature felt no temptation to take a chance, no satisfaction, profit apart, in constructing a factory, a railway, a mine, or a farm, there might not be much investment merely as a result of cold calculation. Now, it's a fascinating idea that investment is irrational, or most investment throughout history has been irrational. But when we think today about the fact that active investing exists for winner's curse-like reasons, VCs probably make on average less returns than the market.
There's a whole bunch of different examples you can go through. M&A usually doesn't achieve the synergies it expects. Throughout history, has most investment been selfishly irrational?

**Tyler Cowen** (2:26)
Well, Adam Smith was the first one I know to have made this point that projectors, I think he called them, are overly optimistic. So people who do startups are overly optimistic. People who have well entrenched VC franchises make a lot of money and there's some kind of bifurcation in the distribution, right? Then there's a lot of others who are just playing at it and maybe hoping to break even.
So the rate of return on private investment, if you include small businesses, it's highly skewed and just a few percent of the people doing this make anything at all.
So there's a lot to what Keynes said. I don't think he described it adequately in terms of a probability distribution, but then again he probably didn't have the data. But I wouldn't reject it out of hand. Hmm.

**Dwarkesh Patel** (3:13)
Another example here is, this is something your colleague Alex Tiberk talks about a lot, is that innovators don't internalize most of the gains they give to society. So here's another example where, you know, the entrepreneur compared to one of his first employees, is he that much better off for taking the extra risk and working that much harder?
What does this tell us about, it's a marvelous insight that, you know, we're actually more risk-seeking than it's selfishly good for us.

**Tyler Cowen** (3:41)
That was Reuven Brenner's claim in some of his books on risk. Again, I think you have to distinguish between different parts of the distribution. So it seems there's a very large number of people who foolishly start small businesses. Maybe they overly value autonomy when they ought to just get a job with a relatively stable company.
So they're part of the thesis is correct, and I doubt if there's really big social returns to whatever those people do, even if they could make a go of it.
But there's another part of the distribution, people who are actually innovating or have realistic prospects of doing so, or I do think those social returns are very high. Now that 2% figure, that's cited a lot. I don't think it's really based in much real. It's maybe not a crazy seat of the pants estimate, but people think like, oh we know it's 2% and we really don't. So look at Picasso, right? He helped generate Cubism with Brock and some other artists. How good is our estimate of Picasso's income compared to the spinoffs from Picasso? We just don't really know, right? We don't know it's 2%, it could be 1%, it could be 6%.