RoboPod and the Perpetual Money Machine - Cautionary Questions 2

Summary

Cautionary Tales with Tim Harford: "RoboPod and the Perpetual Money Machine - Cautionary Questions 2"

Release Date: November 22, 2024

In this engaging episode of Cautionary Tales with Tim Harford, host Tim Harford delves into pressing contemporary issues through insightful discussions with returning guest Jacob Goldstein. The episode intertwines themes of artificial intelligence, economic policies, financial crises, housing markets, microfinance, and career guidance, offering listeners a comprehensive exploration of modern challenges and potential solutions.

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1. Learning from Success: Salutary Tales

[02:07 - 02:17]

Tim introduces the concept of salutary tales—stories that highlight successful outcomes—as a counterbalance to traditional cautionary tales. He welcomes Jacob Goldstein, host of the Pushkin podcast "What's Your Problem?" and author of "The True Story of a Made Up Thing," to help address listener-submitted questions.

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2. The Impact of AI and Automation on Employment

[03:17 - 07:14]

The episode opens with a thought-provoking question from Karen, reflecting on Tim's previous discussion about the potential of AI and robots taking over jobs. Karen posits, "Whatever you're doing for a living, it's not all of you. It just takes most of your time," suggesting that retirement or a shift away from traditional employment might not be as bleak as feared.

Jacob expands on this by referencing a study by German economists which found that retirees maintained stable life satisfaction, contrasting sharply with the misery associated with unemployment. This raises questions about the societal and psychological impacts if AI were to displace a significant portion of the workforce.

Tim and Jacob ponder whether a future where robots perform most jobs would lead to a homogeneous society or if people would find new avenues for meaningful engagement. Jacob draws parallels with the evolution of chess, where despite computers outperforming humans, players like Magnus Carlsen remain celebrated. He optimistically suggests, "People would still be making art, and that will be fine," emphasizing the intrinsic human desire for creativity and connection.

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3. AI in Creative Industries: The Future of Art and Entertainment

[07:14 - 13:16]

A listener named Neil raises a critical concern: if AI surpasses humans in creating entertainment and art, what does that mean for humanity? Tim responds thoughtfully, acknowledging the advancements in AI-generated content, such as synthetic voices producing podcast scripts effectively.

Jacob offers a nuanced perspective by likening the situation to chess, where even though AI can outperform humans, the human element remains valued. He hopes that audiences will continue to appreciate human-created content for its authenticity, despite AI's capabilities. This dialogue underscores the delicate balance between technological advancement and the preservation of human creative spirit.

---

4. Climate Change and Economic Strategies

[13:16 - 17:25]

Julian from Vienna poses a question about profiting from climate change: "Isn't there a way to profit from climate change that would allow us to hedge against economic risks? Could you set up a fund that would act like a climate change insurance policy?"

Tim recounts an anecdote from a commodities conference where a speaker's objective presentation of rising insurance premiums due to climate change shifted the skeptical audience's perspective without overt persuasion. This highlights how market-driven data can effectively communicate the seriousness of climate risks.

Jacob concurs, mentioning venture capital initiatives like Bill Gates' Breakthrough Energy Ventures, which aim to invest in technologies mitigating climate change. However, Tim emphasizes that while insurance can redistribute risk, addressing climate change fundamentally requires proactive measures like adopting renewable energy sources.

---

5. Accountability in Financial Crises

[19:47 - 29:58]

Robert from Illinois asks, "Why did no one go to jail after the 2008 financial crisis?"

Tim explains that the lack of prosecutions stemmed from most actions during the crisis being legal, albeit ethically questionable. He highlights the structural issues within the financial system, particularly the rise of the shadow banking system, which operates with the inherent fragility of traditional banks but without the same regulations.

Jacob delves deeper, outlining how shadow banks mimic bank deposits and contribute to systemic risk without oversight. He underscores that financial crises often arise from complex, regulated frameworks that obscure accountability, making it challenging to pinpoint and penalize wrongdoing.

---

6. Housing Market Challenges and NIMBYism in the UK

[31:02 - 35:58]

Fred from an unspecified location addresses the issue of unaffordable housing in the UK and the pervasive NIMBY (Not In My Backyard) attitude that hampers housing reform. He asks, "How impactful do you think housing reform would be on the UK economy, and how would you deal with NIMBYs from a behavioral economics policy perspective?"

Tim agrees wholeheartedly, emphasizing that restrictive housing policies drive up prices and limit economic mobility. Jacob introduces the YIMBY (Yes In My Backyard) movement in California as a countermeasure, highlighting recent legislative efforts to override exclusionary zoning laws. This shift aims to increase housing supply and make homes more affordable, demonstrating that policy interventions can address structural economic issues.

---

7. The Evolution and Challenges of Microfinance

[35:58 - 44:40]

Benji from Brisbane inquires about the trajectory of Mohammad Yunus and Grameen Bank, pioneers of microfinance. Tim provides a historical overview, explaining how Yunus' initiative offered low-interest loans to impoverished entrepreneurs, significantly impacting their lives by providing affordable capital.

However, Jacob points out the complexities that arose as microfinance institutions became commercial entities. The balance between profitability and ethical lending became blurred, with some organizations charging exorbitant interest rates under the guise of microfinance. This evolution highlights the fine line between sustainable financial support and exploitative practices, underscoring the challenges in scaling microfinance without compromising its foundational principles.

---

8. Career Guidance for University Students

[44:40 - 44:40]

Ella, a second-year physics student, seeks advice on career paths beyond academia. Tim encourages a "go with the flow" approach, reminiscing about his own uncertain career trajectory before finding his calling in journalism and writing. Jacob reinforces this by assuring that physics graduates possess valuable problem-solving and analytical skills highly sought after in various industries, including finance and consulting.

Together, they emphasize that exploring different opportunities and being open to new experiences can lead to fulfilling career outcomes, alleviating the pressure to have a definitive career plan early on.

---

Conclusion

In "RoboPod and the Perpetual Money Machine," Tim Harford and Jacob Goldstein navigate through a tapestry of critical issues facing modern society. From the transformative potential of AI and the urgent need for housing reform to the nuanced dynamics of financial accountability and the ethical complexities of microfinance, the episode provides a rich, multifaceted exploration of economic and social challenges. Additionally, practical career advice rounds out the discussion, offering listeners both macro and micro perspectives on navigating today's evolving landscape.

Notable Quotes:

• Karen's Insight on Job Loss and Identity:

  "Whatever you're doing for a living, it's not all of you. It just takes most of your time." [04:19]
  (Tim Harford)

• Jacob on Human Connection vs. AI:

  "Even if AI makes a better podcast than us, people will listen just because people like people." [12:40]
  (Jacob Goldstein)

• Fred on Housing Reform Necessity:

  "Houses are incredibly expensive in the UK. Fundamentally, if you let people build houses, the cost of a house is going to fall to the cost of building a house." [31:54]
  (Tim Harford)

• Ella's Career Advice:

  "Just make up an answer and know in your heart that you're going to figure it out. And people love hiring physicists." [44:24]
  (Jacob Goldstein)

This episode serves as a compelling reminder of the intricate interplay between technology, policy, and human behavior, urging listeners to thoughtfully consider the paths forward in an ever-changing world.

Transcript

[Tim Harford]

Pushkin.

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[Tim Harford]

Listeners, Tim Harford here. As loyal listeners will know, Cautionary Tales is a podcast about learning from the mistakes of the past. But it also seems to me that we can learn from things that have gone well in the past. For example, getting Jacob Goldstein on the show Jacob is Jacob is back for an episode of Cautionary Questions. Hello Jacob.

[Jacob Goldstein]

What's the opposite of a cautionary tale?

[Tim Harford]

A salutary tale.

[Jacob Goldstein]

A salutary story?

[Tim Harford]

Yeah, I guess. We salute you, Jacob.

[Jacob Goldstein]

We can do better. Let's try and punch that up.

[Tim Harford]

We'll work on it. For those of you who don't know, Jacob is the host of Pushkin podcast what's yous Problem? Which is a brilliant show about people who are trying to make technological progress. He's also the author of the book the True Story of a Made Up Thing, and he's the perfect person to help me answer all of the questions that you lovely people have been kind enough to send in so, Jacob, wonderful to have you back. Of course, our virtual mailbag is bursting with queries on topics as varied as climate investing and careers advice. So, Jacob Goldstein, are you ready?

[Jacob Goldstein]

Yes.

[Tim Harford]

Let's do it.

[Jacob Goldstein]

So, Tim, we're going to start with a couple of emails that came in after the last time you and I talked on the show. And one of the things we talked about was, what happens if AI and robots take all of our jobs? So the first question about that, which is, frankly, really more of a comment, but a lovely comment, comes from Karen, who writes, dear Tim Harford, I was, as usual, enjoying your recent Q and A episode with Jacob Goldstein.

[Tim Harford]

She's a woman of taste. I like how this starts.

[Jacob Goldstein]

I like her already. And your lively discussion about what happens when everyone loses their jobs to AI. At one point you said, quote, how would we react if our desire for mastery, our desire for meaning, our desire to feel useful, if all that had to be satisfied without having a job? And what would we do? And could we cope? And I don't know. Well said, Tim Harford. Karen writes, you could just have easily asked, what do people do after they've retired?

[Tim Harford]

Fair.

[Jacob Goldstein]

She goes on. My work was very meaningful to me, too. I led policy teams that advised government ministers. It was fast paced, exciting, fun, challenging. I loved my job. So when I retired, I wondered about all the things you expressed concerns about on your show. Here is the truth as I see it. Whatever you're doing for a living, it's not all of you. It just takes most of your time. All the other parts of you, all those pushed down by the demands of capitalist discipline emerge once your time has been freed. Then you find out what else you are, what else makes you happy, and what else gives you meaning and purpose. So there is really nothing to fear from our robot overlords. My very best regards, Karen.

[Tim Harford]

Wow. Way to start the show with our best question. The other questions can't possibly be as good as that.

[Jacob Goldstein]

It's really lovely, right?

[Tim Harford]

It's really lovely. And I agree with all of the stuff about what we do for a living, is not all of us. It's a very interesting thought, though. Is retirement the same as living your entire life not working because a robot took your job? And we have some evidence on this point.

[Jacob Goldstein]

Tell me, what is the finding?

[Tim Harford]

So these three German economists published this research just over a decade ago, looking at people's life satisfaction. Turns out people are quite happy being retired. And if you have a job and then you retire, nothing happens to your life satisfaction. You were fine before you're fine after. But if you're unemployed, you're miserable. And if you then retire from a situation of unemployment, your life satisfaction goes up. I mean, it's the same thing, right? Like, you go from not having a job to not having a job, but there's something about your identity as a retired person versus a person who is looking for a job and can't find a job. It makes a huge difference to how people feel about themselves.

[Jacob Goldstein]

Unemployed in the data does not mean a person who doesn't have a job. Right. It means a person who wants a job and doesn't have a job. And that's an important difference. And so I wonder in that study if that difference is actually quite significant. Right? Like, if you want a job and don't have a job, you're going to be unsatisfied in that dimension. Whereas if you don't have a job and don't want a job, it's fine. That sounds fine. Yeah.

[Tim Harford]

Yeah. So I think that's right, Jacob, and I think a lot of this depends on what people's expectations are, their expectations of themselves, what they think other people expect of them. But I would guess there's a huge difference in the scenario where the robots take everyone's job and we're all basically just doing, you know, hobbies, whatever we want. Our living standards are taken care of by the robots and everyone's in the same B.O. versus a situation where a lot of people lose their jobs to the robots and a lot of other people don't, which I think is more likely.

[Jacob Goldstein]

So traditionally, we thought of technological unemployment as happening to people with lower job skills, right? People with less education, strong people who were getting replaced by machines. Plainly, the new wave of generative AI threatens you and me, which is what.

[Tim Harford]

Makes it existentially threatening.

[Jacob Goldstein]

It does. People losing their jobs to technology are more broadly drawn from across the income spectrum and the education spectrum. How does it change the sort of social implications? Because on a fundamental level, what we're really talking about is whether you have a job or not. And how you feel about that is largely determined by social norms. Right? That's actually what's going on here. It's a status game to some significant degree, and it's uncomfortable to call it that. I don't think I like my job because it gives me status. I think I like my job because it's fun and I'm contributing something to the world. But obviously, we all care about status.

[Tim Harford]

And it does give you status. You have one of the best jobs in the world. You're a podcaster.

[Jacob Goldstein]

Listen, we're walking right up to the next question in a very elegant way from Neil. Hello, Tim. During your recent cautionary Questions episode, Jacob Goldstein jokes that if AI takes everyone's jobs, the two of you will still do a free podcast together. I understand the jest, but it begs the question, by the time AI is good enough to take over most jobs, won't it also be better than us at creating entertainment and art? I think we as humans don't want to admit that is possible, but it's definitely the goal of AI developers all over the world at this very moment. I'm curious what that possibility could mean for humanity and what we might do to avoid or prepare for it. Thank you for all your excellent content. The robots have nothing on you yet.

[Tim Harford]

Yes, Jacob, have you heard the podcasting software that Notebook LM have just released? This is a Google product, Tim.

[Jacob Goldstein]

Not only have I heard it, I uploaded a chapter of my book about paper money in China and queued up a moment of it to play for you right now.

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[Jacob Goldstein]

Centuries ahead, to be exact.

[Unknown Advertiser]

We're talking paper money, folks. Yeah, centuries before it ever showed up in Europe.

[Jacob Goldstein]

It's wild. It really flips the script on how we usually think about financial history.

[Unknown Advertiser]

Absolutely.

[Jacob Goldstein]

So just to be clear, I just uploaded a chapter of the book, clicked whatever, make a podcast, didn't make any choices, didn't tell it to do anything but that. And that's what came out.

[Tim Harford]

And these are two synthetic voices reading a script that was created by a generative AI in response to your wonderful book Money, the True Story of a Made Up Thing. And it was pretty good. It's pretty good.

[Jacob Goldstein]

It's definitely good enough to be very scary.

[Tim Harford]

I've heard worse human podcasters for sure. So, I mean, maybe this is all happening sooner than we think, but what Neil is basically driving at is by the time the robots take our jobs, won't they also be better than us? So they will make a better podcast than we will, they will draw better pictures than we will, they will write better prose than we will, they will compose better music than we will, and so on. And is that a problem? I'm not sure that's the problem I'm worried about. The computer already draws better than I do. And low bar. Respectfully, very low bar. And it's great. I'M like, wow, I can create art for my hobby projects. That's great. I'm not doing anybody out of a job. But now my own creativity is unlocked by the computer. Of course, maybe there comes a time where I don't need to do any of that. I just press the button and the computer just produces everything, and it's better than what I could produce. Does that matter?

[Jacob Goldstein]

I want to add a wrinkle.

[Tim Harford]

Wrinkle away.

[Jacob Goldstein]

When I was talking about making a podcast with you after the robots take our jobs, part of what I was imagining was that somebody would listen, right? Like, not that we could make a living out of it, but that we would be doing it for some audience. Right. My hope, although I really don't know, is that even if AI makes a better podcast than us, people will listen just because people like people. And one interesting case to consider is chess, Right? Chess has this history where first people were better than machines, and then for a long time, computers could beat people, but a person working with a computer was better than just a computer.

[Tim Harford]

Yeah.

[Jacob Goldstein]

And then a few years ago, that ceased to be the case. And obviously, many, many computers can beat every single human being on Earth. But chess players still, like, are famous among nerds. Right? Magnus Carlsen is like, Magnus Carlsen's a rich guy. He's a superstar, and people pay lots of money to watch him play worse chess than a computer. So my hope is we can be, if not the Magnus Carlsens of podcasting, the whoever is, like, you know, way worse than Magnus Carlsen, but still a pretty good chess player.

[Tim Harford]

Sure. And you may be right. But I think my point is it's worth playing chess even if nobody watches you, even if it's just you and a friend.

[Jacob Goldstein]

Yeah, but is it worth making a podcast? If nobody listens, then what are we bothering with the microphones for? Then you could just call me. Yeah.

[Tim Harford]

Yeah, okay. We could have this thing. It's a podcast that nobody listens. It's a phone conversation.

[Jacob Goldstein]

Welcome to the podcast for no one. I'm Jacob Goldstein.

[Tim Harford]

If people weren't listening, it would be different, but I think people would still be creating stuff. People would still be making art, and that will be fine. So that's my answer to Neil.

[Jacob Goldstein]

Okay, Tim, we're going to go from the robot apocalypse to the climate apocalypse with our next question from Julian, who writes. Dear Tim, lately, more and more news breaks of climate change harming the economy. For example, I remember a recent story about home insurance premiums rising steeply in hazard zones for flooding Storms or landslides. That made me wonder, isn't there a way to profit from climate change, too, that would allow us to hedge against these economic risks? Could you set up a fund that would act, in effect, like a climate change insurance policy? Excellent show, by the way. Deep insights told via gripping stories. All the best from Vienna.

[Tim Harford]

Julian, It's a very interesting question. The thing that immediately springs to my mind is I once saw one of the most amazingly persuasive pieces of rhetoric ever that was not intended to be persuasive. And it was at a commodities conference. It was a bunch of guys who trade agricultural commodities and therefore have a big interest in climate variability, but at the same time were culturally Midwestern and therefore climate skeptic. And the guy giving a talk at this conference was a rather professorial Germanic character. I can't remember if he was German or Austrian or Swiss, and he was from one of those big reinsurance companies. He just gave a talk explaining how they were raising all of their insurance premiums because of climate change and showed loads and loads of data about climate change and how they were changing their pricing model. And this bunch of people who I think were politically predisposed to be climate skeptics were like, huh? This guy is not Hillary Clinton and the Dems coming to take away our freedoms. This guy doesn't want to persuade us of anything. He's just telling us that the price of insurance is going up, and here's why. And I really felt the mood in the room change because of that talk. It was fascinating. And what that gets at is that insurance gives us a kind of truth about the risks that we face, because insurance companies operate in a competitive market. They want to offer the most expensive premiums they can get away with, but they're forced by competition to keep the premiums low. And so as the premiums rise and rise and rise, that generally indicates that the risk is rising and rising and rising too. So to return to Julian's question, is there a way to profit from climate change? I mean, your podcast, what's your problem? Jacob, you've talked to many entrepreneurs who are hoping to make money while also saving the planet.

[Jacob Goldstein]

I was thinking about that. It is encouraging to talk to these people who are very smart and I think truly believe that the work they're doing will mitigate the damage from climate change. And the progress has been extraordinary. Right? Like the fall in the price of solar power in particular. It's staggering. You know, people are making batteries better, and there are really hard parts of the problem, like Cement and planes, and people are working on that. And, you know, Bill Gates started a venture capital fund called Breakthrough Energy Ventures. That is exactly what Julian is asking about. Right. Like, the point of this fund is to profit from climate change by helping to solve or mitigate climate change.

[Tim Harford]

So I think there are all these hopeful stories, and it is very encouraging. But fundamentally, to come back to this idea of our kind of inverse insurance policy, I think the answer is no. Fundamentally, insurance moves the cost around. So the person whose house got burned down or the person whose home was destroyed in a hurricane, they don't have to pay for rebuilding it. Instead, the insurance company pays, but somebody still has to pay. And insurance moves that risk around, and that's very valuable, but it doesn't make the cost go away. And climate change increases these costs. And all the insurance in the world is not going to reduce them in aggregate. It'll shift them to different people, but it's not going to reduce them. For that, we need your solar panels.

[Jacob Goldstein]

Jacob, you know, when you put it that way, like what we really want in terms of moving the economics is you want the people who are consuming the fossil fuel, who are flying on the plane, who are eating the hamburger, to pay the full cost of that. Right. You want to internalize that cost, which is now not in that transaction. And you can do that with a carbon tax. Like, it's a great idea. You can even have a carbon tax and then just give everybody the money back. Right. The government collects money from people for consuming carbon, essentially, and then sends a check to everybody in the country at the end of the year. So the government doesn't even have to take more money in the aggregate. And like, it's super elegant and it's just politically doesn't really seem to be happening, but it is, in a way solving the problem fundamentally.

[Tim Harford]

Absolutely.

[Jacob Goldstein]

All right, that's enough about that. We'll be back in just a minute.

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[Tim Harford]

We are back. I'm Tim Harford. I am talking to the amazing Jacob Goldstein. And this is another of our cautionary Questions episodes where you have been sending in your questions and Jacob and I are going to try and answer them. Jacob, what have you got for me?

[Jacob Goldstein]

Tim, this is a throwback. It's from Robert, who writes. Hi, Tim, Why did no one go to jail after the 2008 financial crisis? I remember the savings and loans financial crisis during the Reagan presidency when Charles Keating was jailed. Love your show. Robert from Illinois.

[Tim Harford]

Yeah, and a throwback because we first met each other shortly after the financial.

[Jacob Goldstein]

Crisis in 2010, when the question on everybody's lips was who's going to jail?

[Tim Harford]

Yeah. I mean, it's not literally true that nobody went to jail. Bernie Madoff went to jail, for example. I mean, I think the short answer is if you want people to go to jail, then first they have to commit a crime. And the weird thing about the financial crisis is I don't think many people did commit crimes. All of this crazy stuff that happened and all the outrageous things that people did were, I think, mostly legal, which is, of course, the real scandal.

[Jacob Goldstein]

Yeah. You know, everybody talked about housing and crazy sliced up bonds built on mortgages. Right. That was the sort of part of the story that everybody heard and told. And that part of the story is true. But there is another piece of the story that I actually think is a really fundamental driver of the crisis that you didn't hear as much because it's a little more abstract and a little nerdier. And that is basically that starting a long time before the crisis, starting in like the 1970s, there arose in the United States what came to be called a shadow banking system where because of regulations on banks in the US that were set up after the Depression, when there was a giant banking crisis, clever finance people came up with financial structures that looked like banks but weren't regulated like banks. And in particular, they looked like bank deposits. Right. So a bank deposit is a weird thing where you put your dollar in the bank and you have your deposit and it's worth a dollar and then the bank takes your dollar and lends it out to somebody else or your thousand dollars and lends it out to somebody else for a mortgage that doesn't have to be paid back for 30 years. And so then there is this inherent fragility in that system. Right. Because if we all come back and ask for our money, the bank won't have it. And it's not because the bank is greedy or evil or incompetent. It's because of the fundamental structure of banking. That fragility is inherent in the fundamental structure of banking. And what happened in the financial crisis is that there were billions of dollars that were deposit. Like, they weren't exactly deposits. They weren't insured by the federal government, but they were in money market mutual funds, which people may be familiar with, and were explicitly set up to be like a bank deposit, but could pay higher interest and weren't regulated. And in the repo market, which is like a weirder version of the same thing, let's say, and everybody came and asked for their money back in 2008. And of course, the shadow banks, which were not called banks or shadow banks, didn't have it. And that was a core driver of the crisis. And it wasn't illegal, as you said. But it's like that is what all financial crises are. They just have like different flavors, different skins.

[Tim Harford]

Yes. I mean, you said it wasn't because the shadow banks were lazy or incompetent or greedy. I mean, I think they probably were incompetent and greedy as well.

[Jacob Goldstein]

Fair. Well, greed. I shouldn't have brought greed into it. Greed should be fine, but greed, like.

[Tim Harford]

Incompetence, is not illegal and neither is greed.

[Jacob Goldstein]

Yeah, they certainly didn't break the rules. Right. And in fact, one of the key under the radar failures that weak in September in 2008 when Lehman Brothers, the investment bank failed and then everybody else failed and the government bailed everybody out. Was the very first money market mutual fund that had been created 40 years earlier and was very much like a bank and suddenly couldn't give everybody their money back. And so it's totally understandable that everybody is angry when one industry blows up the economy. And by the way, all the people in that industry are getting rich. And it's not obvious what they're providing to us, but it is in fact, a really hard problem to solve. Like, banks are inherently unstable. And people love making things that look like banks and are inherently unstable.

[Tim Harford]

Thank you, Jacob, for reminding me of the concept of shadow banking. It's like Real banking. But their headquarters are in Mordor. It's just such a great. Yes. Oh, good times, Good times. Jacob, there are more questions in the mailbag. Would you mind if I were to read the next question to you? Because I want to hear your answer. Because you are the author of Money the True Story of a Made Up Thing. And I feel like this question is made for you. One of my friends posted this on Facebook. But is it true? This is the Facebook post. This is why I keep telling the younger generation to stop avoiding cash. I have a 50 pound banknote in my pocket. I go to a restaurant and pay for dinner with it. The restaurant owner then uses the note to pay for the laundry. The laundry owner then uses the note to pay the barber. The barber will then use the note to pay for shopping. After an unlimited number of payments, it will still remain a 50 pound value which has fulfilled its purpose to everyone who used it for payment. But if I go to a restaurant and pay digitally via card, the bank fees for my payment transaction charged to the seller are 3%. So around £1.50 for the £50 payment. This will also be the case for laundry payment, payment to the barber and so on. Therefore, after 30 transactions, the initial £50 will exist at only £5 and the remaining £45 has become the property of the bank. That's not actually how percentages work, but that's fine thanks to all the digital transactions and fees. Use it or lose it, folks. Once it's gone, we won't get it back. Cash is king. Okay, so the arithmetic on this is wrong. We don't need to bother with that. But Jacob, what about the economics? What's your reaction to this?

[Jacob Goldstein]

So that was from Wendy, right? And she says if you pay with a 50 pound banknote at the restaurant, the restaurant owner then uses the note to pay for the laundry and so on.

[Tim Harford]

Yeah, and the note never gets used up. It just goes around and around.

[Jacob Goldstein]

Right. So at the risk of being pedantic, I think it is relevant to say that is not in fact what happens. There is a cost borne by the restaurant of dealing with cash. Right? They pay somebody to count it, they pay somebody to take it to the bank. And so there is a cost to cash. So the relevant question is how does the cost of cash compare to the cost of a credit card and also to the cost of a debit card? Those two things feel the same to us as customers, but as it happens, they are not the same to merchants. And for the most part, and it varies from country to country, debit cards are the cheapest for merchants, then cash is in the middle and credit cards are the most expensive. So, like, the most efficient mode of transaction for the merchant in most countries is the debit card, basically, because you compare the cost of dealing with the cash, of paying people to count the money to take it to the bank, et cetera, to the fees they have to pay to use credit cards and debit cards. And you know, from a sort of first principles perspective, if you just step back and think what is most efficient, it should be that a card is cheaper, right? Like it's obviously costly to deal with cash. It's a security risk. You have to actually physically move it around. And so on one level, we should ask, well, why is a card ever more expensive, right? And they're paying some amount for credit, right? Because a credit card, there's a risk that the bank won't get paid back because it is, in fact, credit. There's a risk of fraud. And so that cost is borne. Debit should be really cheap because you can just have the computer at the restaurant ask the computer at the bank, hey, does this person have the money in their account? And the bank says, yes, and the payment goes through and it should be very cheap. So there is a question, why does it cost anything for debit? One answer to why is because Visa controls a huge percentage of the debit card payment system in the U.S. and in fact, the U.S. department of justice, the federal government, is suing Visa for basically monopolistic practices in the debit card business.

[Tim Harford]

I mean, there's a lot wrong with this Facebook post, but there is a grain of truth in that there is a monopolistic provider or allegedly monopolistic provider of these payment services and they're raking off a disproportionate fee. On the other hand, I mean, Visa, just like the barber and just like the laundromat owner and just like the restaurant owner, Visa is also a business. So if they take the money, well, they can also spend the money back into the economy. I mean, it may feel a bit unfair, but I mean, the money still goes around. I mean, this Facebook post is acting like the thing that's scarce is the money. Like the 50 pound note is the thing that's potentially scarce, but actually you can always make more 50 pound notes if you are the central bank. So money is in fact, not the thing that is scarce. What is scarce is laundromats and restaurants and chefs and all of these real resources in the economy and the money, whether it's digital money or whether it's paper money, is just a way of kind of keeping track of things. And then which gets back to your question, which is which is the most efficient way of keeping track of things? And that's an open question, I think.

[Jacob Goldstein]

I mean, efficiency gains are good, right? Like the question does matter in the sense that we want to spend as little as possible on payment rails. That's fundamentally what this is about. We can all get more stuff we like more restaurant meals and nice haircuts if we're spending as little as possible moving the money around, right? And so we want technology to make it cheaper to move money around. Ideally, there should be a cheaper way to do it than cash, and we're getting there.

[Tim Harford]

So don't get your economics from Facebook posts, get your economics from Jacob Goldstein. Thank you, Jacob Cautionary Tales we'll be back after this break.

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[Jacob Goldstein]

Happy riding, Tim let's talk about housing. Sure, Fred writes. Hi Tim, I absolutely love your podcast. It scratches the itch of economics in society and every episode is a great lesson. My question is about housing, NIMBYs and the impact on the economy. I've long been a believer in the housing theory of everything and find it appalling that as nearly everything has gotten more affordable in real terms, housing has become completely out of reach for younger people, particularly in the uk. Quite beyond the ethical implications, I'm interested in your view of its impact from a macroeconomic angle. How impactful do you think housing reform would be on the UK economy. How would you deal with NIMBYS from a behavioral economics policy perspective? Thanks, Fred.

[Tim Harford]

I think Fred is completely right. I think the UK economy desperately needs housing reform. Fundamentally, we've just made it very, very difficult to build houses. And if you make it very, very difficult to build houses, that makes houses very expensive. And that's a problem in its own right because people need somewhere to live. But it also damages the economy because people don't get to move around to where the jobs are. And it's also inequitable. So it means that people who are older have a lot more money than people who are younger, disproportionately because they've just sat in houses that they bought when they were cheap, and those houses have got more and more expensive. And it's also inequitable within generations because, not to put too fine a point on it, if you are the only child of parents with a house, you're going to inherit the house, which is hugely valuable. If you're one of three or four children or if your parents never had a house in the first place, you're not going to inherit. And it becomes incredibly difficult to afford a house. And so there are a huge number of different economic problems being caused by the fact that we're just not willing to let people build more houses. And in a nutshell, I mean, houses are incredibly expensive in the uk. Fundamentally, if you let people build houses, the cost of a house is going to fall to the cost of building a house. That's how much it's going to cost you to buy a house. It's like whatever it costs to build a house, which is a lot less than the market price of a house in the UK at the moment.

[Jacob Goldstein]

As you may know, houses are also really expensive in many parts of the United States and for similar reasons. But one really interesting and encouraging and surprising thing to me is that there has actually been some progress on this in the United States. Not enough to solve the problem, but enough to suggest that the problem is at least somewhat solvable. Fred referenced NIMBYs, which means not in my backyard, which is people who say, don't build apartment buildings on my block or whatever.

[Tim Harford]

They're better than bananas, Right? You know what banana stands for? Build absolutely nothing anywhere near anybody.

[Jacob Goldstein]

I like that. In the US and starting in the Bay Area, as far as I know, you know, in the San Francisco Bay Area, where houses are extraordinarily expensive, we have had the YIMBY movement, the yes in my backyard movement, which has in the past decade or so scored some real victories in California. And one of the really interesting things to me, you know, Fred says, how would you deal with NIMBYs from a behavioral, economic, slash policy perspective? We haven't heard that much about the Yimbys, and I have a theory for why. And that is, as you may have heard, America is a rather politically polarized place these days. But the YIMBY NIMBY fight is not particularly polarized. It is not left coded, right coded, the way immigration or capital gains tax rates or many other things are, which I think is actually great. It means you can have a rational as opposed to tribal discussion about it. So that's one piece of it. And the other piece of it is somewhat wonkier, but it is this, at least in the U.S. the rules about housing, we call it zoning, are typically locally imposed. They're imposed basically at the city level. And there's a sort of political economy reason for that, which is homeowners care a lot. And they show up at the city council meeting and they say, don't let anybody build apartments in my neighborhood because that'll lower the value of my house. Right?

[Tim Harford]

Homeowners want the value, which is the point, Right?

[Jacob Goldstein]

It's the whole point. Right? There's this weird thing, we're like, yes, houses are too expensive. We need to lower the value of your house. So instead of dealing with it at the city level, the Yimbys went to the state and got California to pass laws overriding cities. That said to cities, you basically can't do exclusionary zoning anymore. You can't say there can only be single family homes. But in most of California now you can build what are called ADUs, additional dwelling units. You can build a little apartment over the garage or in your backyard, for example. And other rules like that have passed the state. So there is encouraging progress, though houses are still too expensive.

[Tim Harford]

It's a problem that can be solved.

[Jacob Goldstein]

Okay, Tim, this one is for you. It's from Benji from Brisbane. He writes, hi, Tim and all. Appreciate you taking the time to read my question. What happened to Mohammed Yunus and Grameen Bank? There was so much promise with microfinance as a tool for good in helping the underbanked in developing economies. Kind regards, Benji.

[Tim Harford]

So the short answer is, Mohammad Yunus is now a senior advisor to the government of Bangladesh and won a Nobel Prize not for economics, but for peace. So he's doing fine. So microfinance is basically the idea that you give very small loans to entrepreneurs in very poor communities at low interest rates, and they can use that to build their business. So Eunice was famous for saying, all people are entrepreneurs. And the founding story of Grameen bank, which is the microfinance outfit that he started, he was an economist. He went to a village near the university in Bangladesh where he worked. And he found that these local women were weaving baskets and selling these baskets, and that's how they made their money. But they had to borrow money from the village moneylender to pay for the materials to make the baskets. And the village moneylender was charging them 10% a day, just an astonishingly high interest rate. I did the maths once. That interest rate would turn $0.01 into larger than the entire US government debt over the course of a year. So it's a very high interest rate. And Eunice came in and said, I'll lend you money, I won't charge you much interest. These women borrowed money off him and they paid it back and it was fine. And suddenly not having to pay 10% on top of your costs every single day was the difference between grinding inesc poverty and the chance to build your own small business. So it's a lovely idea. The development economists came in and said, well, this sounds great, but does it actually work? And they found mixed pictures. So it was a really interesting study in South Africa, which was conducted by Dean Carlin and Jonathan Zinman, two development economists. And they found that people borrowing money from what seemed pretty much like a payday loan company at very high interest rates. I think it was 200% annual percentage interest rate. They randomized it so that some people who this company were going to turn down for loans at random, some of them were offered loans anyway. And the people who at random were offered the loans versus at random were not offered the loans. The ones who got the loans were doing much better six months later. So really interesting randomized trial. So even this very expensive credit was great because what they were doing was they were using the loan to, I don't know, buy a suit, to go to a job interview, or to fix their bike in order to stay in employment. But other research was more mixed. And I think the fundamental idea that the reason why people are poor in poor countries is because they don't have access to cheap loans. I mean, there's so much else going on, so it's only ever going to be a part of the story. The other really interesting thing is the commercial companies came in. So there was one called Compatamos in Mexico, which was just a huge business that was Lending money at pretty high rates and making a lot of money. And it was just about to do an ipo, I think. And that made all the founders of this organization very rich. And Eunice was like, this is outrageous. He was trying to excommunicate them from the microfinance movement because they were too commercial. But the problem is, there was always shades of gray between nonprofit microfinance and the moneylender who Eunice was originally worried about. Even nonprofit microfinance, they're not lending people loans at zero interest. Even the nonprofits are often lending at 50, 60, 70% a year. And the reason is you're making such small loans for such a short period of time, like, maybe you're lending somebody like $50 for three months unless you charge a big interest rate. Your fee on that is like 50 cents. And it's just not enough to cover your costs. And so it's this fine line between what is abusive money lending and what is nonprofit microfinance. It's harder to draw that line than you think. So it's a fascinating area, but that is what happened to Mohamed Yunus and Grameen Bank.

[Jacob Goldstein]

Clearly, people are deeply, deeply uncomfortable fundamentally, with the idea of lending money at interest. Right? Like, we've gotten used to it in the developed world with a mortgage or a car loan. But if you look historically, historically, lots of places, there were rules for thousands of years that said nobody's allowed to lend money at interest because it's fundamentally bad. It's unnatural. Right. And you don't have that with most other businesses. And I think that's part of what is going on here. Like, lending money at interest makes people morally uncomfortable. And so when you have someone riding in and being morally righteous by lending money at interest, it's going to get complicated.

[Tim Harford]

Have we got time for one more question, Jacob?

[Jacob Goldstein]

We do. Our last question, Tim, comes from Ella, who writes. Hi, Tim. I've been listening to your podcast for a while now. I'm a big fan, and you seem very insightful across a range of topics. So I was wondering if you could help me out with a problem I've run into recently. I'm in my second year of uni studies, physics, if you're curious. And I keep getting asked what I want to do for a career path, aside from further academics. I'm not really sure what there is that I like the sound of. And I know eventually I will have to finish my education. I do know that I'm in the right field. I just don't know what jobs are waiting for me on the other side of my studies, do you think I should be worrying about where I'm going to end up? Or is a more go with the flow attitude fine for something this serious? Thanks for the help, Ella.

[Tim Harford]

So this is where I hope that Ella's parents aren't listening to this podcast, because I'm going to tell Ella not to worry. I think Go with the flow is fine. I mean, physics is such a desirable degree. I'm sure you'll have no trouble finding somebody to give you a job in the end, Ella. So Jacob and I are collectively over 100, so we're basically two old geezers. We're probably not really very well qualified to give you advice. But when I look back at my career, I didn't know what I wanted to do when I went to university. I didn't know what I wanted to do when I left university. I didn't have any particular plans to become a journalist or a writer. And in fact, I didn't become a journalist or a writer until I was nearly 30. And I think all of the things that I did in my 20s, some of them were mistakes, some of them were not, but they all kind of contributed to who I am now. If there's something that you're really passionate about and you've got this vision, you want to chase it, that's fine. But I think it is also fine to experiment and to try different things and to see if you like them. What do you think, Jacob?

[Jacob Goldstein]

Certainly, I agree. I mean, I majored in English, which, unlike physics, gave me no fundamentally useful skills except for living. Right. Like, I still think all the time of stuff that I read in college, and I'm certainly glad that I studied English. But I think this. When you're in college, people say, oh, what are you studying? And then you say what you're studying. And then the next question, in a sort of robotic way, is, what do you want to do with that? The thing I wish I had known when I was in college is the people asking don't actually care. Yeah, right. Like, I felt all this pressure of, like, oh, my God, everybody wants to know what I. I'm gonna do. They don't actually wanna know. They're not really thinking that much about you. They're just making conversation. They're just talking about the weather. Right. I mean it in a good way when I say other people don't care. Everybody is mostly thinking about themselves.

[Tim Harford]

I would phrase it slightly differently. I would say there's no pressure, there's just curiosity. They're just interested.

[Jacob Goldstein]

They're not even that interested is my take. They're just making small talk. And like, recognizing small talk as small talk is a hugely empowering thing. And it's fine. Like we're just social animals following norms and asking a college student what they want to do is just what people do. So I would say to Ella, just make up an answer and know in your heart that you're going to figure it out. And people love hiring physicists. Wall street is full of physicists, and consulting firms are full of physicists. Anybody who can think hard about the most difficult problems in the world in a quantitative way is going to be eminently employable.

[Tim Harford]

And, you know, another thing you can do with an undergraduate degree in physics is a postgraduate degree in economics.

[Jacob Goldstein]

Twist.

[Tim Harford]

Jacob thank you so much for joining me, Tim.

[Jacob Goldstein]

It's so fun. I truly would do it for free even if nobody listened.

[Tim Harford]

Thank you so much, Jacob. And thanks to all of you for sending in your questions. We will be back again on our regular schedule with another classic episode of Cautionary Tales. But in the meantime, Happy Thanksgiving to our U.S. listeners. And if you have a question for us, please send it in to talesushkin fm. That's T A L E S talesushkin fm. Thank you. We love hearing from you. Cautionary Tales is written by me, Tim Harford with Andrew Wright. For a full list of our sources, see the show [e-mail] the show is produced by Alice Fiennes with Marilyn Rust. The sound design and original music are the work of Pascal Wise. Sarah Nix edited the script. Cautionary Tales features the voice talents of Ben Crowe, Melanie Gutteridge, Stella Harford, Gemma Saunders and Rufus Wright. The show wouldn't have been possible without the work of Jacob Weisberg, Ryan Dilley, Greta Cohn, Eric Sandler, Carrie Brodie, Christina Sullivan, Keira Posey and Owen Miller. Cautionary Tales is a production of Pushkin Industries. It's recorded at Wardour Studios in London by Tom Berry. If you like the show, please remember to share, rate and review. It does really make a difference to us. And if you want to hear the show ad free, sign up to Pushkin plus on the show page on Apple Podcasts or at Pushkin FM plus.

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