City Journal Audio — "Who We Are: Economics" (March 4, 2026)

Host: Rafael Mangual
Guest: Allison Schrager, Senior Fellow, Manhattan Institute

Episode Overview

This episode of City Journal Audio is part of the "Who We Are" series exploring areas covered by the Manhattan Institute and City Journal. Today’s focus is economics — specifically, the meaning of being "conservative" versus "liberal" on economic issues, the underlying philosophy behind free markets, the importance of incentives and risk, the enduring relevance of foundational economic thinkers, and ongoing debates about regulation. Throughout, Rafael Mangual and Allison Schrager delve into both abstract theory and everyday examples, grappling with how ideology shapes economic policy.

Defining Economic Conservatism vs. Liberalism

• Traditional Conservatism: Historically, being conservative on economics meant prioritizing free markets, small government, and low debt ([01:49]).
• Contemporary Debate: There's an ongoing debate among conservatives about the appropriate size and scope of government, with some advocating for a larger role than in the past ([01:49]).
• Allison Schrager: "What we want and what everyone wants, I guess, is more prosperity. And I think if you're a conservative economist, you think the best way for that to happen is through free markets and for individuals making that happen for themselves rather than the government doing it for them." ([02:22])

The Meaning and Beauty of Free Markets

• Individual Knowledge: Free markets allow individuals, each with their distinct preferences and knowledge, to allocate resources efficiently ([03:23]).
  • Schrager: "Everyone kind of walks around with what they know, what's best for themselves... All these people with different preferences and ideas of what they want come together in this marketplace, and it's somehow out of all of this chaos... you come up with this market price that clears this and allocates goods." ([03:23])
• Market Price as Incentive: Market prices both signal scarcity and incentivize production and innovation ([05:47]).
• Role of Incentives: Incentives drive prosperity and ensure people remain motivated to innovate and work ([07:16]).

Incentives and Behavioral Economics

• Economics as Behavioral Science: Mangual suggests economics at its heart is about incentives and understanding motivations, not just numbers ([07:16]).
• Welfare and Work: Debate over welfare programs centers on how benefits can disincentivize work, highlighting the delicate balance between assistance and encouraging productivity ([08:27]).
• Personal Anecdote (Schrager): She relates her experience on a co-op board wrestling with resource allocation (basement storage) and shares how an economics-based approach (market pricing/auction) could resolve the issue more efficiently ([09:57]).
  • Schrager: "There is this mechanism to allocate a scarce resource that's in demand... I could even come up with a live auction..." ([09:57])
• Resistance to Market Solutions: Even among non-economists, market logic is sometimes rejected on cultural or emotional grounds ([10:32]).

The Invisible Hand and Limits of Central Planning

• Adam Smith’s Legacy: Celebration of 250 years since "An Inquiry into the Nature and Causes of the Wealth of Nations"; Smith’s concept of the "invisible hand" is foundational and enduring ([12:24], [13:13]).
• Friedrich Hayek’s Contribution: Hayek further developed the idea that prices convey vast, decentralized information, which no central planner can ever fully grasp ([13:55]).
  • Schrager: "He saw that... prices convey all this information which Adam Smith was sort of dancing around. And there's no way the government or any central planner could ever know all that information..." ([13:55])
• Anecdote: Schrager shares a memorable visit to see Adam Smith’s library at the University of Edinburgh and an interaction capturing the clash between economic history and activist art ([14:21]).

Risk, Humility, and the Left-Right Economic Divide

• Comfort with Risk: Mangual argues that conservatives are more comfortable with economic risk and accept that returns require bearing risk ([19:36]).
• Humility about Information: Conservatives also display more humility, accepting limits to human knowledge and government’s capacity to centrally control complex systems ([19:36]).
  • Mangual: "Hayek's best work was his essay on the knowledge problem... it's impossible for any central authority to have all of the information..." ([19:36])
• Trade-offs and Values: Societal choices about growth vs. security are ultimately value judgments, but people are often unaware these trade-offs exist ([22:10]).
  • Schrager: "There is no extra reward without bearing risk... The bigger the welfare state is, the more regulation you have, you're just going to grow less, you have more security." ([22:10])

The Culture of Risk Aversion

• Declining Comfort with Risk: Societal shifts in wealth, technology, and upbringing are making people less comfortable with risk ([26:09]).
  • Schrager discusses a forthcoming book on this theme and the importance of experiential learning in developing healthy risk tolerance ([26:09]).
  • Example: Risk in finance vs. physical risk (e.g., skiing, tightrope walking) — comfort is domain-specific and learned ([26:09]).
  • Impact of overprotective upbringing on young people's risk management skills ([27:44]).
• Intellectual Risk: Both speakers touch on the courage required to voice dissident views, with exposure fostering resilience ([29:26]).

Why Many Prefer Regulation and Central Control

• Psychology of Regulation: Many people find psychological comfort in the idea that "someone is in charge" during crises, and trust government bureaucrats over market actors ([32:11]).
  • Schrager: "Feeling like someone's in charge I think gives them a sense of peace..." ([32:11])
• Bureaucratic Benevolence: Tendency to ascribe greater virtue to government actors than market players, despite evidence to the contrary ([33:56]).

Status, Inequality, and Zero-Sum Misconceptions

• Hostility to Wealth: Resentment of the wealthy is particularly strong among the "upper middle class" who are close to, but not part of, the richest strata ([34:44]).
• Fixed-Pie Fallacy: Many mistakenly believe wealth is a zero-sum game — if one person gets richer, someone else must be getting poorer.
  • Schrager: "The economy is not zero sum. In fact, that person in finance... is helping allocate capital more efficiently. And that grows the economy." ([37:48])
• What Is Wealth Creation?: Economic growth (GDP) arises from ideas that make labor and capital more productive; growth is made possible by financial markets effectively allocating capital to risky, innovative ventures ([38:33]).
  • Notable explanation: "Economic growth is roughly GDP, and what goes into GDP is how much stuff we make... There are inputs... But when we come up with a new idea, we can get more from both of those. And that is what we call... sustainable growth." — Schrager ([38:33])

The Case for (Some) Regulation

• Balanced Approach: While ardently pro-market, both acknowledge a place for government:
  • Financial regulation to prevent systemic risks and ensure negative externalities aren’t socialized ([42:02])
  • Welfare state for basic protection against extreme poverty ([42:02])
• Regulating Risk Externalities: Preventing individuals or firms from taking risks whose adverse consequences are borne by others ([42:38]).
  • Schrager: "You want people to take risks... The problem is sometimes those risks can end up harming other people." ([42:38])
• Non-Economic Gambling/Drug Risks: Both discuss the rapid liberalization of gambling and drug policy, arguing society should not ignore negative externalities ([43:53]).

The Price Gouging Debate

• Why Prices Spike in a Crisis: Higher prices during scarcity (e.g., snowstorms, pandemics) signal where goods are urgently needed and incentivize suppliers to procure/produce more — ultimately helping society allocate limited goods most efficiently ([46:05]).
  • Schrager: Story of a local merchant sourcing expensive supplies during COVID, only to be fined for "price gouging" ([46:05]).
  • "You create a bigger shortage... You also reduce the incentives for suppliers to procure those goods." — Schrager ([47:28])

Predictability, Regulation, and Growth

• Predictability Not the Goal: Government should provide a basic welfare "floor" but not eliminate risk, as risk is required for growth ([49:49]).
  • Schrager: "The government, it's not their job to create predictability... If you have no risk, we have no growth." ([49:49])
• Policy Volatility and Investment: Excessive regulatory unpredictability (frequent rule changes, executive orders, court rulings) can deter investment and economic activity ([51:44]).
  • "People are less predictable than markets. So in that way, I think you're better off with less government..." — Schrager ([52:24])

Memorable Quotes & Moments

• "Incentives matter. Oh, two incentives matter and there's no growth without risk." — Schrager ([53:26])
• "I consider myself a financial economist because I initially did macro and then switched to finance, which is the study of risk. And there's this one central truth in financial economics I think left wing people often forget and that is there is no extra reward without bearing risk." — Schrager ([22:10])
• "You don't necessarily have to know how a complex system works... the economy is just something you can trust in to sort of balance itself and reach an equilibrium on its own." — Mangual ([16:11])

Notable Timestamps

• [01:49] — What does it mean to be economically conservative?
• [03:23] — How free markets work and why they're effective
• [08:27] — Practical example: incentives and welfare
• [09:57] — Schrager's co-op board anecdote on scarce resource allocation
• [13:13] — The invisible hand, Adam Smith, and Hayek’s insight
• [19:36] — The right-left divide: risk and humility
• [22:10] — Risk, reward, and the limits of security
• [26:09] — Cultural trends: declining risk tolerance and upbringing effects
• [32:11] — The psychological appeal of regulation and central planning
• [38:33] — What does it mean to "create wealth"?
• [42:02] — Why some regulation is necessary: finance and welfare
• [46:05] — Price gouging, scarcity, and incentives
• [49:49] — Predictability versus risk in government and markets
• [53:26] — Closing advice: "Incentives matter and there's no growth without risk."

Takeaways

• Being "conservative" on economics entails a belief in free markets, personal liberty, and the creative, equilibrating power of decentralized decision-makers.
• Risk, incentives, and humility are central to understanding how economies work and why overregulation can stifle prosperity.
• Some regulation — to limit systemic risks and protect the vulnerable — is necessary, but overreliance on central planning reflects a misunderstanding of market dynamics and human behavior.
• Societal aversion to risk is increasing due to shifting culture and technology, possibly undermining long-term prosperity.

Final Words:
"Incentives matter and there's no growth without risk." — Allison Schrager ([53:26])

Future Teaser:
Allison Schrager will return for a deeper discussion when her new book, centered on societal risk aversion, is released.