Transcript: Michael Spence



The transcript from this week’s MIB: Michael Spence, Nobel Laureate, is below.

You can stream/download the full conversation, including the podcast extras on Apple iTunes, Overcast, Spotify, Google Podcasts, Bloomberg, and Stitcher. All of our earlier podcasts on your favorite pod hosts can be found here.


VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have an extra, extra special guest. His name is Michael Spence and this is a conversation just filled with wonky goodness. He is the winner of the Nobel Prize in Economics from 2001 effectively on information theory about how information impacts market structures.

We talked about asymmetries and gaps and really how digital economies are just changing the entire world. Spence had a number of really fascinating forecast that have all turned out to be quite pressing and he’s almost blasé about it. He describes them as all but inevitable.

This is really a fascinating conversation. If you’re interested at all in information signaling, in how economies develop and grow, about the impact of not just technology but government institutions and intellectual capital, you’re going to find this to be an absolutely fascinating conversation.

So, with no further ado, my interview with NYU’s Michael Spence.

VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

RITHOLTZ: My extra special guest this week is Michael Spence. He is the 2001 Nobel Prize winner in Economics for his work on the dynamics of information flows in markets.

He’s the former Dean of the Stanford Graduate School of Business. He’s currently a Professor at NYU Stern. He is a Senior Adviser at General Atlantic, a very large private equity firm which manages about $35 billion.

Michael Spence, welcome to Bloomberg.

MICHAEL SPENCE, SENIOR ADVISER AT GENERAL ATLANTIC: Thank you, Barry. It’s great to be here.

RITHOLTZ: So, I’m fascinated by the work you do. Your Nobel Prize, I want to take what is normally a somewhat esoteric research area and see if I can make it understandable.

SPENCE: Right.

RITHOLTZ: How people make decisions when critical information is hard to find? Is that a fair oversimplification?

SPENCE: Yes. It’s certainly part of it. Yes.

RITHOLTZ: So, tell us about that. What — how did you find your way into that space and what are the dynamics of information flows?

SPENCE: Well, so, I got interested in this when I was a graduate student. Probably a little color commentary.


SPENCE: By the time I had finished my general exams, which is the first two years of a PhD program, I’d been in school up through high school 13 years in Canada then I had four years at Princeton, these were all wonderful experiences, and two years at Oxford doing …

RITHOLTZ: When you were a Rhodes scholar, right?

SPENCE: Rhodes scholar. Yes. Doing mathematics eventually and then two years in a PhD program and I had about enough.


SPENCE: And so, I went to one of my advisers, he’s a great friend, Dick Zeckhauser, at the Kennedy School and I said, I think I going to quit, and he said, what are you going to do? And I said, well, I’m tired of talking to myself and sit in the library and stuff.


SPENCE: So, he said, the problem is you don’t have enough human contact. You should teach. And so, he did two things for me. He gave me a little bit of his course on social choice theory, which I screwed up royally, that’s my first outing as a teacher.

And the second thing he did is he made me what he called rapporteur of a faculty seminar in then new — one-year-old Kennedy School and it was extraordinary group of people. It was Francis Bator and Les Thurow who came down to visit …


SPENCE: … from MIT and Ken Arrow, Tom Schelling, just …

RITHOLTZ: So, there’s quite a run of Nobel laureates in that group.

SPENCE: No. No. It was pretty amazing. Not all of them had been recognized in that capacity then. And so, that was fascinating and that my job was to turn what was kind of general discussion, how those go all over the place, into nine pages that made it look like just brilliant linear …

RITHOLTZ: Exposition.

SPENCE: … exposition. So, I did that and I had a lot of fun doing it. Ken Arrow to his dying day said that that was the thing he thought was my greatest skill. It’s rapporteuring.

In the course, Les Thurow came down and started talking about what he called statistical discrimination. So, I don’t want to make this too nerdy but basically whenever you have …

RITHOLTZ: Nerd away.

SPENCE: Okay. When you have missing information then basically, you get people classified by what you can see or detect as opposed to what you don’t see. And Les’ idea — and that automatically produces discrimination.

So, what happens in any economic or social context is that the members of a group who are otherwise indistinguishable from each other, I mean, in your world, think of asset classes, okay.


SPENCE: It’s a little bit like this. Things get lumped into an asset class because they’re supposed to be sort of similar.


SPENCE: And tell the markets get deep information. You don’t see all the differences. So, they tend to be averaged, right? When you average a bunch of diverse entities that are in one of these silos that are distinguishable from other silos by what’s visible or detectable, then you basically get the people at the upper end of some quality spectrum, get treated as the average and that’s not good. And at the lower end, they get treated as the average and that’s great for them. So, your discriminating against the high-quality end of the spectrum and you’re favoring the low quality.

RITHOLTZ: So, this has to have huge implications for people looking at — let’s say, making investments in either private or public companies.

SPENCE: Absolutely. Yes. So, then — but then it gets complicated, I mean, for sure. So, what — the phenomenon that this gives rise to end markets is the one George Akerlof wrote about a lot of the insurance people have known it for years. It’s called adverse selection.

And what happens in that context is basically what I just described. This quality spectrum that has the unfortunate properties. You can’t tell the difference between the entities. It’s things for sale and differing in quality. Used cars is the example he used.

So, what happens in a market like that is that the price reflects the average quality and the people at the top end of the quality spectrum say, that’s not a very good price for me, right, and they take their product out of the market from the top end.

And then the average quality falls and eventually people figure that out and the price goes down and then the people at the top end of the remaining spectrum say, that’s not a very good price, I’ll take mine out, right?

So, that’s the origin of the term adverse selection. People are selecting in and out of the market and it’s adverse because the top end of the quality spectrum leaves first.

RITHOLTZ: Let’s talk about your book, “The Next Convergence” because it’s such a fascinating application of information flows. There’s a quote in the beginning that I just found absolutely mind-boggling. From 1750 to 1950, the average income of people living in countries that underwent the Industrial Revolution saw their incomes rise 20 to 40 times versus the non-industrialized countries and this was only 15 percent of the world’s population. Is that about right?

SPENCE: That’s about right.

RITHOLTZ: Twenty to 40X. That’s amazing.

SPENCE: Yes. So, the growth rates were breathtaking. Probably on the neighborhood of two percent in real terms. This is on a per capita basis. But if you do it for 200 years, you get a fairly big …

RITHOLTZ: The magic of compounding for sure.

SPENCE: Exactly. So, that was basically it. And then the other 85 percent are living in countries that we now call emerging economies, most of them, some of them haven’t emerged very much.


SPENCE: But that’s the other group and they were held back by essentially in a global economy that wasn’t really open and the colonial structure as the governance.

RITHOLTZ: So, the rest of the book, you basically say, well, 1750 to 1950 was the Industrial Revolution. The next hundred years, I think you referenced 1945 to 2045, 60 percent of the world’s population will join the affluent.

That’s a big bold number. We’re about halfway through that process, maybe a little more. How accurate was that forecast and how is this actually happening?

SPENCE: So, I think it’s well underway. I mean, I may have been a bit optimistic but China looks like it’s well on the way. It’s a high-middle-income country with a very good chance of being a high-income country admittedly at the low end of the spectrum and then another 10 to 15 years.

India is a bit further behind but they’re humming along. You had them — those two together and you’ve got two point — I think it’s seven billion people, which is a significant fraction of the world.

RITHOLTZ: Sure. That’s half of your 60 percent, right?

SPENCE: Yes. That’s half of my 60 percent. And then you’ve got the rest of Asia that some of it came earlier, some of it came later and so on. So, it’s — I think this convergent process is going to be very hard to stop because people — because the structures are there to enable it and because people have gotten the hang of it that is actually possible.

RITHOLTZ: You discussed in the book that post-World War II, Japan was a very unusual example compared to other so-called developing nations. What made Japan so unique especially over that 1750 to 1950 era?

SPENCE: Yes. So, Japan is a kind of hybrid. So, most of Asia — by the way, in the — right after World War II, Asia was by far the poorest part of the world.

RITHOLTZ: Worse than Africa.

SPENCE: Worse than Africa. Yes. And the economists at that time when asked — development economists, when asked where was the real trouble going to be, they said Asia, many of them said Asia because Asia doesn’t have natural resource wealth on balance and Africa is by far the richest country.

RITHOLTZ: Minerals, oil and everything. Yes.

SPENCE: Minerals, oil, diamonds, you name it. And that turned out not to be a good guess because it turns out that the kind of real capital that enables this growth is people, provided they’re educated and so on, and not just mineral wealth.

Yes. So, basically, I think the situation was Japan was a hybrid because it had gotten to middle-income status and the reason it got there is that in 1868, the Meiji Restoration, it abandoned the policy of isolationism.

RITHOLTZ: So, they embraced trade and …

SPENCE: Embraced trade, embraced openness and they had started to modernize. Then, of course, World War II was in it and they were an imperial power …

RITHOLTZ: All over Asia, right?

SPENCE: All over Asia, you have China, Korea, et cetera. So, the World War II was a huge setback. But basically, they got back on track.

RITHOLTZ: So, over the same period, that postindustrial period, pre-war postindustrial period, how come China fared so much worse than Japan?

SPENCE: So, there’s two kind of crucial ingredients in the postwar growth that we’ve seen. And by the way, this is growth that we’ve never seen before. I mean, we’re talking about extended periods like two and a half decades of five, six, seven percent growth.


SPENCE: Even higher in China. Just never happened before. So, one of the things I was trying to do in the book is explain how you could do that, right, how could you have a max of two percent before that or two and a half.

RITHOLTZ: Right, in real terms.

SPENCE: How could you have — yes, in real terms. How could you have advanced countries growing at max three in real terms and these people are growing at seven, eight, nine.


SPENCE: And the answer is they’re catching up, right? All of that technology that you need to drive growth in the long run, the solo insight, was already developed. So, it just had to be brought in and adapted.

RITHOLTZ: In other words, this isn’t one country amongst many that are all emerging at once. When you take an emerging economy and they’re surrounded by developed economies, that’s an accelerant.

SPENCE: Provided they’re open. Yes. And provided they’re investing at high enough rates.

RITHOLTZ: Well, clearly, China is making massive investments. Do you consider them open enough to continue taking full advantage of what the rest of the globe can do for their growth?

SPENCE: At the moment, yes, and certainly historically once they decided to open in 1978 under Deng Xiaoping. Now, is it logically possible that they can close themselves off enough to put a major dent in their growth? Yes. It’s unlikely I think but it’s possible.

You asked about the history of China. So, China had a revolution in 1949, the Communists took over. The Communists on the positive side probably had the intention of making everybody better off, right, that you can find a lot of governing structures in the developing world where the governing elite, whoever they are and however they got there, are doing something other than trying to make people better off, right?

RITHOLTZ: Right. Lots of corruption …

SPENCE: Lots of corruption.

RITHOLTZ: … especially where there’s mineral resources royal.

SPENCE: Yes. All that kind of thing. So, if they’re doing that, nothing good is going to happen. The Chinese weren’t (ph) doing that and they did put a hell of a lot of resources given the low levels of income and the economy and the education. What they didn’t do is run a market economy.

So, for the first 29 years, they basically got nowhere but they built assets that were useful and when they changed the development model, the growth model to opening up and using markets initially selectively, then it just took off like a rocket.

RITHOLTZ: That was the post-Nixon era.

SPENCE: That was the post-Nixon era. So, it was — they date — the Chinese date, the reform process from 1978.

RITHOLTZ: Let’s talk a little bit about job market signaling. We discussed some of that before. You’ve done a lot of work on this. Tell us about the origins of job market signaling and how it’s evolved over time.

SPENCE: So, the origin of it was that discussion that we had earlier that had to do with informational gaps. So, the adverse selection problem is basically what happens in markets if you can’t close the gaps.

And then we talked about brands as a way of closing, what do markets do? They’re going to try to close the gaps. That’s one of the things that …

RITHOLTZ: Between buyers and sellers.

SPENCE: Between buyers and sellers is the best way to think about it. That second thing is signaling, the things that the sellers can do to convey actually accurate information in the market.

The third thing that we do collectively is regulate, right? So, financial markets have enormously large gaps in principle. So, it isn’t a great surprise that every set of financial markets in the world has disclosure requirements and they’re pretty stringent and the penalties are pretty high for violating it and when those disclosure requirements are not there or not enforced, then you get bad misbehavior in the markets, which you see in the developing world all the time.

RITHOLTZ: So, there’s — that’s interesting you bring that up because it makes me think of the way we approach regulation in some areas is to prevent a behavior and say, this behavior …

SPENCE: Right.

RITHOLTZ: … we’re not going to allow. There are other aspects where we say, well, we’re going to let you do what you want but you have to make these disclosures so buyers know.

Most people don’t read the fine print. They’re not reading the credit card disclosures. They’re not reading their brokerage account disclosures. Given that, how does that information make its way into the marketplace? Is the signal still there if 90 percent of us don’t read the disclosures? Maybe it’s 98 percent of us don’t read it.

SPENCE: Yes. No. The answer is no. It’s not. And then you need — it’s important to close that informational gap then you — and you can’t close it then you have to do something else.

So, we do all kinds of things. So, we assume that there are classes of investors who are not capable of understanding the risk characteristics of certain kind of asset classes and they’re simply precluded from it and …

RITHOLTZ: Meaning, if you’re not an accredited investor …

SPENCE: You’re not accredited …

RITHOLTZ: … you can’t go into a hedge fund or a venture capital.

SPENCE: Right. Don’t have assets of a certain size.


SPENCE: We assume you can’t withstand the kind of risk characteristics of that asset class. So, regulation in that sense has multiple avenues and they done properly, they tend to be pragmatic response to real human behavior as opposed to some kind of theory about it. Yes.

RITHOLTZ: Quite interesting. What about the impact of technology on both signaling in the job market and the impact of regulation?

SPENCE: Yes. So, this — when the Internet was sort of in its early stages, meaning a kind of public property, let’s call it the mid-’90s, people had all kinds of theories about what its impact was going to be and I got asked a lot of questions and the gist of which were, is this going to close informational gaps?

And my answer then is the same now but I underestimated something. So, my answer was it’s not going to eliminate private information, meaning information that I have because it’s me that you’re only going to get if I somehow transmitted to you.

But what the Internet does is it gives you so many — access it at very low cost to so much information that’s correlated with this kind of thing that I actually think it does close informational gaps. And the best example of that I think is what we see now in fintech.

So, in like Ant Financial and for example in Alibaba, you have a massive amount of data because they — basically, they’re half the mobile payment system in China. They can use that data to issue credit to little tiny businesses. There’s a partially owned subsidiary called MYbank that just won an award for this.


SPENCE: Using this data to make credit assessments and price the credit appropriately and these people are otherwise blocked away, I mean, they can only borrow from family and friends if bank can either assess the risk and/or it’s way too costly to assess.

RITHOLTZ: So, this day on this information effectively creates a whole new market.

SPENCE: It creates a whole new market. I mean, we’re talking — I mean, this — MYbank has 17 million small business customers. Average number of employees is five. No collateral. Nothing.

RITHOLTZ: They just look at their credit history, their transaction history …

SPENCE: Their transaction history, their payments history, and their online activity.

RITHOLTZ: So, let’s talk a little bit about growth and trade and I want to start with the project you did for the World Bank. Tell us a little bit about that. It was quite fascinating.

SPENCE: Yes. So, I’ve kind of stumbled into this because I had not been a specialist in development — growth related to developing economies. So, around about 2000 — in the early 2000, so, I got a call from some folks at the World Bank who become good friends and they said, would you come and give a lecture on investment and growth at one of the spring conferences, the Poverty Reduction And Economic Management, and I said, why me?

And they said, well, you’re sort of kind of a microeconomic focus and pay attention to these things. And so, I thought to myself, this is signaling your screening and I thought, okay. So, here you have …

RITHOLTZ: Meaning that you’re — they saw the Nobel and said, let’s have him talk about this. Is that what you mean by signaling?

SPENCE: No. No. No. It was the decision I made. So, I made the following decision, Barry. I said, I’m going to do this and there’s one of two outcomes, either it will be a disaster in which I’ll learn something that I shouldn’t be mucking around with the 10,000 people who are the experts in development in the world …


SPENCE: … or I’ll go, okay, and then I’ll learn something else, right? So, it was deliberately a screening device and it seemed to go okay and from that came a Commission on Growth and Development and the idea behind that commission wasn’t to do original research. It was approximately 15 years since the Washington Consensus had been enunciated.

RITHOLTZ: Which was?

SPENCE: It came out of Washington — I’ve temporarily forgotten that. John Williamson wrote it. It’s been much maligned and unfairly to be honest with you. The Washington Consensus is a perfectly sensible assessment of what it takes to kind of grow and develop in a developing growth.

RITHOLTZ: What was that assessment?

SPENCE: Well, there’s a list of things. There’s about 13 things that are crucial components. Some people interpret it as a kind of turnkey system. You can’t do that. Every country has idiosyncratic characteristics.


SPENCE: But the thing that gave the Washington Consensus a bad name is it was taken especially in Latin America and stripped down to liberalize, privatize, et cetera, and that gave rise to kind of excesses and not terribly good results.

So, we decided this — it was a good time. We had a lot of experience that have been accumulated in countries like China and India and others. Brazil had come out of its 25-year funk and looked like it was starting to grow, et cetera.

It was a good time to try to figure out what research, what experience and so on had taught us about — that was useful and could we kind of summarize it and give it back. So, that was the exercise. We wrote a 75-page report based on kind of two years of listening to people and thinking about it and it was meant to be an — none of these things are ever kind of definitive, right?


SPENCE: It was an update, right? Now, we know this that we didn’t know before. In the course of doing that work, we went and look for countries that are grown for — at seven percent or more for 25 years or more, not every year but on average, and there’s 13 countries.

RITHOLTZ: Really? Because that’s a giant number, seven percent.

SPENCE: Seven — but you double every decade at seven percent. And there’s 13 countries that have done that at various points. China is one. Brazil in the early postwar period was one. Korea, they won’t be surprise you.


SPENCE: The Taiwanese economy. Japan was in that group. There were some surprises. Botswana …


SPENCE: … is a member of that group. Yes. So, different sizes, different government structures. It was pretty interesting.

RITHOLTZ: Were there any consistencies across all 13 of those countries.

SPENCE: Yes. They’re basically all the same growth model which has come to be called the Asian growth model. So, it’s high levels of investment funded domestically openness, including especially foreign direct investment which is the one of the principal channels for inbound technology transfer and leveraging the big global marketplace.

If you try to do this on a standalone basis …

RITHOLTZ: It doesn’t work.

SPENCE: … it just doesn’t work. I mean, look at the demand in a country with a per capita income of $500. It’s kind of food, shelter, energy and not much else.


SPENCE: So, everything we know, specialization in the Adam Smith sense, taking advantage of comparative advantage, none of that works on a standalone basis. But even a country with the size of China, in the early stages …


SPENCE: … it’s a small relatively global economy.

RITHOLTZ: Small economy meaning.

SPENCE: Yes. Small economy. Not small number of people but small economy. So, they can grow at very high rates without really becoming a major presence in the market and starting to turn the prices against themselves.

RITHOLTZ: So, in the book, you write about China and remember, the book was 2000 or 2003, something like that.

SPENCE: No. No. The book is 2010 or ’11.



RITHOLTZ: You wrote, China is 35 percent of U.S. or EU economy. In 10 to 15 years, it will be the same or bigger. It looks like that’s a very pressing forecast. Where are we in the process of China passing the EU or the U.S. in terms of their economy not on a per capita basis but just on a gross basis?

SPENCE: Yes. I think they’re around 75 percent now on a gross basis., maybe a little bit more.

RITHOLTZ: So, we’re just a few years away.

SPENCE: Yes. It depends on — I mean, the trade war could put a dent in the kind of speed of the trajectory and a natural slowdown is occurring in China, too. I mean, countries, where their per capita incomes in the teens, meaning thousands, just don’t grow at seven percent anymore. Their catchup effect isn’t as powerful.


SPENCE: They’re generating — they’re becoming like advanced economies.

RITHOLTZ: Right. The law of big numbers just starts to really take event …

SPENCE: Yes. Exactly. Yes. They’re becoming part of the kind of global system that generates the technology that enables the growth for all of us.

RITHOLTZ: So, they mature into more of a developed nation.

SPENCE: Yes. Yes.

RITHOLTZ: So, let’s — you mentioned the trade war. Let’s talk about that. How much of the trade war and tariffs are hurting China? Is this really having a major effect and what is it doing here in the United States?

SPENCE: So, in China, it’s slowing them down because they still have some dependence on the export sector and it’s slowing everybody down through somewhat different channel which is uncertainty.

RITHOLTZ: You mean globally.

SPENCE: Globally. Yes.

RITHOLTZ: This is having impact on …

SPENCE: Globally. Yes. So …

RITHOLTZ: In other words, corporations are …

SPENCE: Holding back.

RITHOLTZ: … holding back and making and CapEx and hiring decisions because of the uncertainty …


RITHOLTZ: … how this resolves.

SPENCE: Yes. Where are we supposed to put our supply chains? Is this going to go away?


SPENCE: Right. There some things that are happening pretty fast. So, for example, China was in the process of basically moving the labor-intensive process-oriented manufacturing assembly, which was the early export growth engine out and the reason is — it got nothing to do with the trade war, it’s just their incomes are too high to be the …


SPENCE: … competitive place for that.

RITHOLTZ: They’re going to replace it with a higher-yielding …

SPENCE: They’ll replace it with a higher yielding thing and the activity itself to the extent it is not cut off by automation. Digital technology …


SPENCE: … goes to Vietnam.

RITHOLTZ: Vietnam, Turkey, Mexico.

SPENCE: Bangladesh, Turkey.


SPENCE: Maybe Turkey, Ethiopia.

RITHOLTZ: What about Mexico? Is that a …

SPENCE: Mexico is — yes. Is there — although Mexico is …

RITHOLTZ: Moving upscale a little bit?

SPENCE: Yes. It’s a middle-income country if you take an average but there are pockets …


SPENCE: … where it’s kind …

RITHOLTZ: It’s very lumpy distribution. It’s not evenly …

SPENCE: Yes. Exactly. So, that’s kind of — yes. That’s kind of where we are. I think probably for your listeners, the most important thing to understand is China would have been clobbered 20 years ago if something like this happen …


SPENCE: … because they were dependent on the export sector for the demand that enabled the growth. Now, they have this huge growing middle class with rising incomes …


SPENCE: … like United States. They can enable the growth with the domestic demand to a much greater extent.

RITHOLTZ: That’s interesting. My sense of China versus the way the United States has been approaching tariffs is that they play a much longer game than we do. We think in months and quarters. They seem to think in decades.

The response to head the soybean farmers and the heart of the Trump base seemed very, very calculated and not random at all. Are they just going to wait us out until the next president comes along or what’s their approach from your perspective?

SPENCE: Well, they’re probably a little puzzled because I think it’s hard for them and many of us to figure out what, with any precision, the current administration in the United States is really after. It seems to be a bit of a moving target.

But, no, I don’t think they’ll just definitively wait it out. They’ll see if they can make agreements where it looks like it’s sensible from both mutually beneficial to make an agreement.

RITHOLTZ: We have been speaking with Michael Spence. He is a Professor of Economics at the NYU Stern School of Business.

If you enjoy this conversation, well, be sure and come back for the podcast extras where we keep the tape rolling and continue discussing all things information structure related. You can find that at iTunes, Google Podcast, Stitcher, Spotify, wherever your finer podcasts are found out.

We love your comments, feedback and suggestions. Write to us at Give us a review on Apple iTunes. You can check out my weekly column on Sign up for my daily reads at I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio.

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RITHOLTZ: Welcome to the podcast. Michael, thank you so much for doing this. This is really fascinating stuff.

SPENCE: It’s a pleasure.

RITHOLTZ: I am absolutely intrigued and — when you talked about I don’t want to get too wonky. No. No. These listeners love going into the wonky weeds.

There’s a couple of things both from the book and some of your other writings that we didn’t get to that I want to discuss. But first, I was mentioning during the break that I thought the book really has held up very well. There’s nothing in it that’s outdated. What are you thinking about for your next book?

SPENCE: Well, on the …

RITHOLTZ: By the way, it takes about a decade to recover from writing a book. That’s my experience. About 10 years later, you’re almost ready to start.

SPENCE: Yes. Almost ready to start. Yes. No. I mean, on the development side, Barry, I would say the biggest potential shift is it does come from the digital technology side.

So, you have — we are either at or very close to the point where the digital technologies, which you know kind of high-fixed variable cost technology, software replication, zero marginal cost, et cetera, basically overtake the labor-intensive ones.


SPENCE: Replace. But that undercuts a very important part of the growth model that we saw being used essentially in every country that was really successful.

RITHOLTZ: Namely jobs?

SPENCE: Yes. Jobs. What are you going to do? What’s — so you got to sell something, a good or a service, to the global economy. That part hasn’t gone away. The question is if it’s not toys and assembled electronics and stuff and shirts and textiles and apparel is the starting point for most of these places then what is it?

RITHOLTZ: And all that stuff has gone robotic now.

SPENCE: It’s going robotic. So, I mean, it didn’t happen overnight but it’s happening pretty fast. I mean, so, textiles is difficult because the material is soft and robots have trouble kind of …


SPENCE: We actually go talk to the people to try to automate this and they say, we’re not quite there yet. We can’t saw the stitching straight on your shirt yet but that’s not that far away.


SPENCE: So, there’s a real question about this growth model and one of the things that — that part of the answer is probably going to turn out to be another aspect of digital technology which is you can create ecosystems, platform-centered ecosystems that enable entrepreneurs to create businesses and employ people and whatnot and an — sorry, and an international version of that would be moving in the direction of a partial substitute.

RITHOLTZ: So, when we talk about inequality, we used to talk about developed world inequality versus emerging markets or undeveloped world. Now, thanks in part to digital, even within developed worlds, there’s inequality that has apparently risen to levels we haven’t seen for a few generations.


RITHOLTZ: How much of this is based on information asymmetries and information gaps and how much of this is just the nature of capital and a sort of winner-take-all system that seems to have been evolved over the past few decades?

SPENCE: Yes. I think it’s more the latter. I mean, I think it’s more — the combination of globalization and the evolution of technology have — since about the late ’70s has basically reversed relatively benign growth patterns with respect to distribution.

So, the whole thing went — started to go south let’s say around 1980 and we had big changes and approach. I mean, that was the Reagan-Thatcher era, right? So, we probably had some deregulation and other things that might have contributed to that.

But basically, you’ve got something that’s by most people standard just gotten out of control and, of course, because — so, income — if you have income — rising income inequality for long enough, then it’s — on the wealth side, it’s self-perpetuating.

RITHOLTZ: Right. Once you get to a critical mass of wealth, you should theoretically retain it.

SPENCE: Yes. Yet in theory, unless you make big mistakes, you got to …

RITHOLTZ: Well, that’s the old — what is it? Shirtsleeves to shirtsleeves and in three generation.

SPENCE: Exactly.

RITHOLTZ: So, that raises some really interesting questions. We’ve always had income inequality and wealth inequality. It seems to be inevitable in capitalism.

What your — what I’m getting a sense that you’re referring to is when they reached extremes to the point where it threatens the social order, are we remotely close to that anywhere around the world? We look at the EU and the U.K. and the U.S., it seems there’s some signs of unrest but nothing like France before their revolution.

SPENCE: No. I mean, we’re probably not at that point yet, but were pretty late in the game because I think the people had been sideswiped by the way our economies have evolved. It’s a pretty large group and they’re pretty angry in part because it is my conjecture, anyway, because we didn’t do anything about it.

RITHOLTZ: Right. Well, what are supposed to do about — so, let’s back up a sec because that’s a fascinating subject. We’ve had globalization for a long time. There’s a reason why my iPhone is more powerful than what took us to the moon 45 years ago.

SPENCE: Right.

RITHOLTZ: And cost $30 or $40 a month, it’s because of globalization, it’s because of automation and technology. It’s given us a higher standard of living on average, but there are clearly winners and losers from the decline of unions, the rise of globalization, and the increase of automation. What are we not doing to moderate the negative impacts of that?

SPENCE: Well, I mean, probably not using the potential for progressive taxation on that — I’m not suggesting that’s the whole answer, but you know but it probably needs to be part of the answer.

There’s a — I think one of the reasons is coming into focus now. There’s a bunch of really good research.


SPENCE: With a long time horizon. Piketty, Saez, Zucman, Chetty, Raj Chetty at Stanford, that are bringing out dimensions of this and so it comes in cycles. Right?

RITHOLTZ: Right. So, in other words, this has been here for a while but now we really understand it better?

SPENCE: We understand it better and understand the history better and now are kind of rack grappling with the responses. So, I mean, we haven’t had a presidential primary season where people are talking about wealth taxes for a long time.

RITHOLTZ: Did we previously have this? This goes back post a depression or on that era?

SPENCE: I don’t know the history well enough to build answer that, whether we had an actual discussion of wealth …

RITHOLTZ: But it is new, this …

SPENCE: It’s new in the postwar era, I guess, is the way I would say it.

And — but we’re in the early stages of kind of think this through. I think the other thing that we learned from a wide range of both developed and developing countries is that — is that one of the things you want — so, there’s two ways to think about inequality. There’s what economist call ex post. That’s what actually happened.

And on that front, I think most people agree with what you just said which is it’s okay, people understand we’re not going to be …


SPENCE: … of the same incomes and stuff. But it can get out of hand. The extremes are not okay.

And then there’s what the Americans call equality of opportunity which is ex ante. That is do you have a fair shot …


SPENCE: … on a level playing field at whatever this distribution out there is, right?

RITHOLTZ: And people have been complaining that’s been — what’s been contracted.

SPENCE: They are and it’s connected if the income inequality gets sufficiently extreme, then the lower end of the spectrum doesn’t have the resources to invest in getting to that playing field.

RITHOLTZ: Right. Which is probably why this whole Ivy League pay-extra-money-to-get-your-kids-in has resonated so much and outraged people so much, have they been under illusion that there is equality of opportunity or was there genuinely equality of opportunity for most of our history?

SPENCE: No, I mean, relatively speaking, I think yes. But not perfect equality …

RITHOLTZ: Of course.

SPENCE: … of opportunity. That’s unachievable. The — this — gosh, we’ve got to get in to USC or Harvard or whatever, Stanford, puzzles me. I mean, I’ve always thought — I grew up in Canada. Canada’s more like other countries in that there’s a — most of the higher educational institutions are publicly — largely publicly funded.


SPENCE: And there’s a few of them and you know it really matters if you get into the right ones. In America, we’ve got hundreds. We’ve got public and private institutions. We got all kinds of really top ph colleges, a lot of your friends and mine went to these colleges and whatnot.

RITHOLTZ: I went to a state school here in New York. I went to a state — Stony Brook. Yes.

SPENCE: It’s — I don’t quite understand what the kind of — where this self-imposed pressure to get in to these elite institutions comes from because my sense is a kid gone to any one of a huge range of institutions has a pretty good running shot at a pretty …

RITHOLTZ: Well, let me …

SPENCE: … attractive future.

RITHOLTZ: Let me push back at you.


RITHOLTZ: You went to Princeton.

SPENCE: I did.

RITHOLTZ: You went to Oxford. You went to Harvard. There’s not a slouch in that — you taught at Stanford, teach in NYU.


RITHOLTZ: You’ve been affiliated with fairly elite institutions. Are you suggesting that you could go to a — I don’t want to say a lower tier school, but a next tier school and still have the same sorts of opportunities that you would get at the best of the best of the best? Is that …


RITHOLTZ: … the concern from so many people? The snowplow parents want to remove every obstacle to their kids’ success?

SPENCE: I think what — let me — I’m going to guess at what they’re thinking. So, one of the benefits you get from going to these schools is the education and the signal. The other is the network.

RITHOLTZ: Of course. Okay.

SPENCE: And so, if you believe the network is crucial, then — and that — that’s the main thing, then I can start to understand. So, the Princeton network in New York or the Yale network in New York and Washington, maybe know you’re desperate somehow to make sure your kid is part of that and the opportunities that — that that opens up. That that’s the part that I think is perhaps real, but it’s also worrying, right?

I mean, you don’t want to think that if you wrote any of those networks or all of them, that the meritocracy has failed to a point where you don’t have access to top government jobs or whatever. So, to the extent that’s true and that parents are right, then I think we have to start worrying about this dimension of equality of opportunity.

RITHOLTZ: So, on that note, let me ask you some questions I didn’t get to that I think are relevant.


RITHOLTZ: One of the quotes in the book, and I don’t want to mangle this. “Adversity is surprisingly awesome in the birthplace of successful change.” What is it about adversity that leads to change? And you also talk about the change in dynamics during a crisis where the entrenched interests lose a lot of their hold on power.

SPENCE: Yes. So, it’s not a sure thing that a crisis produces good results, but it does create at least an opportunity because it essentially weakens the vested interest power to maintain the status quo. And that’s why you get routine statements like never waste a crisis.


SPENCE: Et cetera. And there are examples. I mean, one of the members of the commission is a Turkish citizen, always at the World Bank and elsewhere was finance minister and when Turkey had a crisis and was able to put through some reforms that arguably just you couldn’t do, in quote, “normal times.”

RITHOLTZ: Normal times.


RITHOLTZ: Well, a lot of the post Depression Great Crash era reforms, we’ve never seen anything like before a sense ph.

SPENCE: Right.

RITHOLTZ: In the United States. One of my favorite comparisons in the book, Singapore versus Cuba. Here are two countries relatively the same size, two island nations, similar populations, enormous different in — enormous differences in economic outcomes. What it explains those differences?

SPENCE: Well, it’s basically the choice of this — it’s the development strategy that explains the difference. So, I mean, there’s a kind of literature, that goes back and forth between policies and institutions from the development literature. And I think the sensible sort of assessment that is institutions do matter but policies matter as well.

But Singapore, basically, was relatively autocratic but they were pretty clever.

RITHOLTZ: In what ways?

SPENCE: Well, for example, they figured out early on — first of all, they have a multiethnic structure.


SPENCE: So, they have Malays and Chinese and Indians. And they — probably, Lee Kuan Yew figured out that if those people got at each other’s throats, that would kind of …

RITHOLTZ: Problem.

SPENCE: … rip the place apart.


SPENCE: So, they set out to get — to make the growth patterns inclusive, really from the get go and anybody was out — not on board now, was simply marginalize.


SPENCE: Kicked out. And they figured the most important part of that was housing.


SPENCE: So, they went after housing. So, housing, the two critical elements were housing and education. So, the education is stunningly good over a long period of time and housing is subsidized. So, you don’t really ever have a problem with where you’re going to live and whether it’s affordable and stuff like that.

And then they left things like saving for your retirement up — more or less up to you. So, there’s not a lot of pension big liabilities and pension funds but they — but that crucial piece, they got right — they did one other thing which is I asked a senior person who was a partner of Lee Kuan Yew in the early days of development. I said what the secret to success and — in Singapore?

And he said, well, there were two things. He was a little tongue-in-cheek because there were a lot of things. But he said there were two things. One, we were really harsh on corruption. We basically stomped it out.


SPENCE: So, he — we took care of that problem …

RITHOLTZ: So, rule of law really matters.

SPENCE: Yes. Rule of law in the sense of that part that has to do with corruption. Civil servant is — has just got to be clean. And when — and when there was a violation of that, we really stomped hard.

And so, I said, I understand that part. And they said the second part was luck.



RITHOLTZ: They acknowledge that?

SPENCE: Yes. And so, I said what do you mean? And he said, well, he said — this isn’t really luck. This is sort of pragmatic opportunism, responding to things that you can’t anticipate in advance. So …

RITHOLTZ: Which sometimes is indistinguishable from luck.

SPENCE: It was indistinguishable from luck. In this case, what — it was in the postwar period and during the Cold War, a system that came to be called the Multifiber Agreement was set up and what it was was an attempt to make sure that the textiles and apparel industry globally was spread out across a bunch of countries. And because they wanted those countries to thrive and stay on, quote, “our side.”

And so, there were quotas, basically, and early major center of textile manufacturer was Hong Kong. And they hit the quota. And the entrepreneurs in Hong Kong were no slouches, started looking around the world …

RITHOLTZ: Hey, let’s go over there.

SPENCE: Yes. And Singapore went …

RITHOLTZ: We’ll volunteer.

SPENCE: We’ll do that.


SPENCE: That’s what he meant by luck. So, I mean, you don’t plan to have a Multifiber Agreement where the major player hits the quota and you’re just about ready to take it on. But it’s …

RITHOLTZ: But they’re really not a big textile non-manufacturer anymore. They, very quickly, morphed towards technology in another industry.

SPENCE: No. So, you don’t see this much in Hong Kong. You don’t see it much in Hong Kong, you don’t see it much in Singapore. The hand-off process is interesting. So, when it went to Korea and to some extent to Taiwan and then their incomes rose to the point. They had to move again, move to China.

Some of it was in Indonesia for a while. Vietnam, for sure.


SPENCE: Now, China is handing it off again. I mean, this passing the baton is a natural part of the dynamics.

RITHOLTZ: I have a friend who used to be located in San Diego and ended up in Vietnam and he said Vietnam is, today, the wild west of capitalism. The — just the purest expression of let’s try an idea and see where it goes, what do you see is Vietnam’s future in terms of future convergence?

SPENCE: They haven’t quite hit the seven percent club mark, but it’s basically — there were — their part of the process. They’re on the way.

I mean, if you wanted to be skeptical, what you would say, well, the tensions in the South China Sea area are sufficiently high. They’ll get into a fight with China and some bad will happen or something like that but on — at least on economic grounds, I don’t see any reason why Vietnam won’t be continue to become more and more prosperous.

RITHOLTZ: So, you recently wrote about three megatrends driving structural shifts. Digital transformation which we talked about, growing EM purchasing power, and then rising nationalism and popularism. How are these three all colliding?

SPENCE: So, I think they’re connected with each other. So, you have — digital, I think, we understand it. It’s not one thing, it’s many things. So, it has the potential to generate benign and highly inclusive growth patterns but it will give rise to difficult transitions as people retrain to do different things, so that’s kind of coming into focus. And we’re just going to have to sort of amplifiy the benign part and deal as best we can with the other part.

Second, the rise of these emerging economies means they’re powerful which means that the governance structure of the global economy which for many, many years was essentially the G7.


SPENCE: In terms of priorities this isn’t going work anymore.

RITHOLTZ: Now it’s closer to G20, right?

SPENCE: It’s rise G20 and the G20 is more heterogeneous and harder — it is harder for them to kind of reach conclusions that you know aren’t just milquetoast and stuff. And so, we’re get — we have a kind of the part of the consequence of the rise of the emerging economies and Asia is a kind of set of centrifugal forces with respect to governance and whatnot.

And then this partly — economic part is social phenomena that I think people are seriously studying but I don’t think it’s perfectly understood which is people are really aren’t uncomfortable living in a world where the — where the unit is designed — is called the global economy, right?


SPENCE: They just aren’t. And some of it’s kind of — they get sideswiped into economic terms and some of it is culture. I mean, we’re not …

RITHOLTZ: So, also history from — all human history except the last half century.

SPENCE: Right. Right.

RITHOLTZ: It was always local. Maybe was regional at most.

SPENCE: Regional at most. So, you’re getting — so you’ve got — so you’re getting a got a really powerful reaction.


SPENCE: Against the kind of postwar kind of trance. And if it’s strong enough, then it’ll sort of dismantle. It’s including some things that we don’t want to dismantle it. It come from the benefits of an open global economy and specialization and all that kind of thing.

So, I mean, nobody knows where that’s going to take us but this is a world I would say that has more centrifugal forces and more tensions than that I can remember for a long time.

RITHOLTZ: There’s a quote in the book that I was fascinated by. And I want to get your thoughts on it. “Sustainable wealth creation is ultimately built on people, human capital and knowledge, on continuous structural change in the economy and on systems of economic and political organization that permit the productive deployment of those assets.”

Now, when I read that today, that seems pretty obvious, pretty self-evident. I get the sense when you wrote that, that it wasn’t quite as obvious. What’s your key takeaway? Why is it human capital and not natural resources or oil or things that we used to think of as so important to the economy or at least to the local wealth creation?

SPENCE: Yes. So, you — one doesn’t want to overstate these things. So, if you take an economy that’s rich in human capital and take away its energy, it’s not going to do very well, right?


SPENCE: So, we’re talking about complementary inputs and probably that and statements like it are a bit of an overstatement. What I was doing, it was trying to counter you know this notion that you know there’s some source of wealth that’s really important — comparable importance to the kind of knowledge and technology base.

So, let me tell you the way I used to think about them myself. And I sometimes do it in class. I say, so I’ll give you a choice that you know is completely hypothetical.

You have an economy, it’s doing very well, it’s quite advanced and choice one is you destroy essentially all the physical assets or substantial fraction of it. But everything is in people’s heads or in the libraries or in the scientific community. A huge range of stuff.

All the traffic engineer still know how to run traffic …


SPENCE: … and stuff like that. That’s one.

And two is everybody gets amnesia and you lose all right.


SPENCE: And I say which one would you take? And the students always destroy the physical assets. And they’re right. There — it’s hard …

RITHOLTZ: Because you could always rebuild that.

SPENCE: You can rebuild that and the other thing is centuries of accumulated knowledge and wisdom.

RITHOLTZ: So, what do we think of certain countries and we’ve seen this in — Iran is a good example. Were they throw out half of their intellectual class. They throw out around the time of the revolution, they throw out all the educated professors and the doctors and the lawyers. And does that set them back decades? It takes that long to recover?

SPENCE: Yes. I think so. Yes. Definitely. Especially if it’s an environment where it’s hard to get people to come back.

And in some of these developing countries the export people in the early stages to go get an education and then they and people …

RITHOLTZ: They don’t return.

SPENCE: And for a while, I don’t return. And then if you get lucky and once you’re further down the road, the opportunity start to come and then they start to come back because the opportunities are there.

RITHOLTZ: That’s China today. They used to send people here to get educated. They wouldn’t go home. Now, a big chunk seems to be …

SPENCE: They want to go back to Shenzhen.

RITHOLTZ: That’s where the opportunity …

SPENCE: Shanghai.

RITHOLTZ: … lie.

SPENCE: Yes. So, that’s I mean, that’s a tough one to — a multiyear thing to navigate through but that’s — that’s an example of that.

Yes. I mean, Europe, coming in to World War II exported an awful lot of talent. That was a pretty important part of the advancement of the American.


SPENCE: Sure. I mean …

RITHOLTZ: Well, you look at our nuclear program …

SPENCE: Nuclear program.

RITHOLTZ: … came from Germany …

SPENCE: … scientists, engineering talent, Einstein, Von Neumann and Morgenstern game theory. I mean, it goes on and on.

So, yes, it’s not a good idea to export talent and it’s not a good idea to underinvest in things that keep that kind of person around. So, I live in Italy part of the time.

RITHOLTZ: Where in Italy?

SPENCE: Milan.


SPENCE: Milan. Pretty well put-together city.


SPENCE: And but a general problem in Europe, and their falling behind in this, but especially in places like Italy is that we don’t invest enough to keep the top biomedical scientists and whatnot. It’s not that — I mean, they want to stay, right, but you got to have the research funding you have to have the programs and stuff or they’re going to — these are the most mobile people in the world.


SPENCE: They’re going to end up in United States and Britain or something like that.

RITHOLTZ: It’s not just for career — for money opportunities, it’s for research observations …

SPENCE: It’s the research opportunities …

RITHOLTZ: And everything beyond that.

SPENCE: … just getting the work that you love to do done. Yes.

RITHOLTZ: And so the top talent ends up leaving. Is that strictly a problem in Europe or where else do we see that problem coming up?

SPENCE: Well, I mean, no, it’s not confined to Europe. I mean, I think Europe has relative to the income levels, the kind of problem they’re falling behind especially in the digital area.

I mean, when you think about it, the really influential entities in this world, a subset of them are the mega platforms.


SPENCE: They’re all in the United States and China.

RITHOLTZ: Mega platforms like Alibaba or Facebook or Google or go down the list.

SPENCE: Amazon or whatever. Yes.

RITHOLTZ: And that’s what’s attracting all the intellectual capital.

SPENCE: Well, it — and kind of epicenter of a lot of applied innovation. So, artificial intelligence in its modern form is a highly data intensive activity, tends to occur around lots of data, cloud computing power.


SPENCE: And ability to attract talent. I mean, if you and I were talking 10 years ago and I said to you what — what are the the odds that this — the autonomous vehicle business is going to be driven forward by Google? You would’ve said are you crazy? But a lot of that technology is coming over to Baidu and Google and it’s everywhere.

RITHOLTZ: It’s data and engineering skills.

SPENCE: Data and engineering skills and computing power.

RITHOLTZ: And software. Yes. Quite interesting.

Before I get to my favorite questions I ask all my guests, I have to ask one question because I’ve had several previous Nobel Prize winners and everybody seems to have a charming little story about that phone call they get an and we’re in that time of year right now. What was your experience like?

SPENCE: I never got the call.

RITHOLTZ: You never got a phone call?

SPENCE: No, no. They tried. But they phoned my home in California and we had taken a little trip to Hawaii.


SPENCE: So, what happened was they couldn’t get through and they can’t wait forever. So, then if some minutes later they post this on a website.


SPENCE: And I had a friend, actually more than one, who A, was up in the morning. This is probably on the West Coast.


SPENCE: Four-thirty or five in the morning. So, he saw it flash up on the screen and knew where I was. So, the phone call I got was from a friend of mine.

RITHOLTZ: Right. That’s hilarious. And how do you know no one’s really pulling your leg or by that point it’s on the news and you …

SPENCE: It’s — by that point, it’s starting to get to be the news. So, you can — I was not expecting it. I mean, I was completely …


SPENCE: Yes. Well, because it’s not a lifetime achievement award but I had been in academic administration up until 1999, for 15 years.


SPENCE: Not kind of toiling away and …

RITHOLTZ: Ongoing research.

SPENCE: … toiling away. Yes. And whatnot. So, I thought, well, I’m — that was a choice I made. I don’t regret it but I’m not going down that road anymore. So, that came right out of the blue for me.

RITHOLTZ: Quite interesting.

So, let me jump to my favorite questions, our speed round. This is what I ask all of my guests.


RITHOLTZ: Sometimes it’s revealing. We’ll start out easy. What was the first car you ever owned? Year, make, and model?

SPENCE: So, it was a Chevy Nova. And I think the — it was yellow. My parents bought it for me and I don’t remember the exact year but it’s got to be 1961 or two.

RITHOLTZ: They’re collectible now also.


RITHOLTZ: What’s the most important thing people don’t know about Michael Spence?

SPENCE: Gee, I don’t know. Not much, I guess. I mean, I don’t think of anything that — I mean …

RITHOLTZ: Some people are — people don’t know that they’re about a secret hobby or something. You’re an open book?

SPENCE: I’m pretty open book. I mean, there’s probably lots of things that people don’t know. Maybe I wanted to be a professional hockey player and stuff like that. But …

RITHOLTZ: Well, that — you’re from Canada.


RITHOLTZ: You already so we just assumed that’s the case …


RITHOLTZ: Right. Tell us about some of your early mentors. Who influenced your career and guided you early on?

SPENCE: Well, there were a lot of them. I mean, I went to a school that’s like the lab school in Chicago, in Toronto, attached to the University of Toronto with a very charismatic and influential coach, coached us in football and in hockey and other things. Just a guy who made a big difference in our lives, the values and the kind of the way we went about doing things.

And I have been blessed with really wonderful teachers. But I think you know vis-à-vis, what I finally became, an economist, I would say my thesis advisers which are Dick Zeckhauser, Ken Arrow, and Tom Schelling who are just enormously — they’re not only influential, they were supportive.


SPENCE: I mean — so I can imagine thesis adviser’s telling a young person who is sort of mucking around with something it didn’t sound like what other were people were doing, probably you should do that later, it’s a bit risky, don’t do that for your Ph.D. They never said that to me. They said …

RITHOLTZ: Well, was it risky what you were doing?

SPENCE: Well, it could have turned out to be nothing. So, I guess in that sense, yes. But at that point, I was prepared to quit.


SPENCE: Yes. Well, to me, getting a Ph.D. and going in their academic life was an experiment, not a decision that I was going to stick with through thick and thin.

I mean, it turned to be an experiment with a great outcome from my point of view but …

RITHOLTZ: And Ken Arrow, potentially himself wins a Nobel prize in economics as well.

SPENCE: Well, he was well before me. He was one of the early ones. The one that was — I don’t know if Dick Zeckhauser received a Nobel Prize. He’s very, very smart. But Tom Schelling came after me.

RITHOLTZ: Who was one of your advisers?

SPENCE: Who was one of my advisers. So, that was a bit odd.

RITHOLTZ: That’s interesting.

Let’s talk about economics and an economist in general, who influenced the way you think about information theory?

SPENCE: Same group of people.

RITHOLTZ: Same guys?

SPENCE: Yes. Same guys. I mean, I would say — I mentioned Lester Thurow but Dick Zeckhauser, for sure, I wrote things with him. Tom Schelling, because he had — how do I say it? A really creative mind and a different way of thinking.

RITHOLTZ: So, Schelling, as you know, was responsible for a kind of branch of applied game theory in which — that was really important in the Cold War and nuclear deterrence. It — very unconventional, kind of not — not completely formal. And I spent a lot of time with him. He — that was a very big influence on me.

RITHOLTZ: Let’s talk about books. What are some of your favorite books? What do you like to read when you’re not writing your own books?

SPENCE: Well, sometimes I just read for relaxation. I started to like my kids — some of the kids books are kind of fun. The sort of sagas like …

RITHOLTZ: Give us an example.

SPENCE: Well, there’s a book, series of books, the last one is apparently coming out in the spring written by S.D. Smith called “Green Ember.” It’s about rabbits.


SPENCE: Every once in a while, there’s a saga about rabbits that comes out So, they’re kind of fun.

RITHOLTZ: “Green Ember.”

SPENCE: “Green Ember.” Yes. My — one of my favorite books when I was growing up was “The Agony and The Ecstasy.” It’s a historical novel about the life of Michelangelo. I just found that A, fascinating, and B, inspiring. And I’ve had a lifelong kind of fascination with the Renaissance.


SPENCE: Mainly because so many things blossomed at exactly the same time. Architecture, sculpture, finance, banking there was just this explosion of innovation around that.

RITHOLTZ: Irving Stone?

SPENCE: Irving Stone. That’s right.

RITHOLTZ: Right. So, in “The Next Convergence,” you referenced that era, you say previous to 1750, there was a long period where not a lot happened.

SPENCE: Right.

RITHOLTZ: So, I mean, it’s almost in passing you reference. The book that I’ve found intriguing about that was — I don’t know if you’re familiar with it, “A World Lit Only by Fire” explains for 1500 years, other than the windmill, nothing was invented. It was just a dead period, at least in Western civilization. China and parts of bright Muslim, Turkistan area were progressing.

SPENCE: Different. Yes.

RITHOLTZ: But the western world, no forward progress.

SPENCE: That’s right. And to the extent — the only modification to that is that there was probably in the latter part of that period, some scientific progress that didn’t translate into technology and economic outcomes directly, right, only with a leg. But that that’s basically right.

RITHOLTZ: It’s amazing any other books you want to mention?

SPENCE: Nope. That’s it.

RITHOLTZ: Okay. Here’s always an interesting question. Tell us about a time you failed and what you learn from the experience?

SPENCE: It’s hard to choose. It’s a very long list. I mean …

RITHOLTZ: We often find that failure can be more instructive than success which is why I ask the question.

SPENCE: Yes. No, that’s true. I mean, when you’re doing research, there’s a lot of — they’re not big, kind of eye-catching failures, but there’s a lot of dead ends and you do learn from those. So, that — I mean, in the sense, when I kind of aggregate all those up, those are probably the most influential ones.

In Silicon Valley, where I lived for quite a long time, I learned overtime that, A, failure is something that is important. And B, a culture that penalizes it will kill entrepreneurship and innovation. And third, I learned that the venture capitalist like entrepreneurs that had a failure provided was the right kind of failure.

RITHOLTZ: So, it’s funny bring that up. I’ve spoken to colleagues in Europe and elsewhere and I’ve heard multiple times when we have discussed the difference between the United States and Europe, they’ve said the United States is a country that not only doesn’t penalize failure but practically rewards it and that’s very different than Europe.

SPENCE: Yes, that’s correct. And a lot of other places.

I mean, this is — it’s really — I mean it’s a little fuzzy but it’s really important. Yes. So, that’s deeply embedded in our culture. And it makes it — it makes us, I think, more dynamic.

RITHOLTZ: I totally agree. So, what do you do for fun?

SPENCE: Well, when you get older, that sort of changes. So, I grew up playing sports.


SPENCE: Hockey, in particular. That’s the reason I ended up at Princeton.

RITHOLTZ: To play Hockey?

SPENCE: Yes. Right. They — well, I made a mistake. But …

RITHOLTZ: I think they’re okay with that decision.

SPENCE: They were okay with it. Yes. But anyway, so obviously …

RITHOLTZ: You mean made a mistake because you turned out not to be a great hockey player?

SPENCE: Well, there were a bunch of us. So, I think they thought they were going to have a great hockey team but we weren’t quite as good as they’d hoped for. We were — we were the Saturday night entertainment.


SPENCE: The joke about us was we could we — we routinely snatched defeat from the jaws of victory and — but we were fun to watch.

RITHOLTZ: But no hockey anymore?

SPENCE: No, I played it for a while and then when the kids skated for a while. But at some point, it’s — I don’t like the way the professional game is gone. When we — when I started playing hockey, this is not necessarily a good thing. We didn’t wear helmets and then we wore these small helmets just to protect you.


SPENCE: And we were pretty careful about where our sticks went and what we did.


SPENCE: Now, these guys are dressed up like warriors.

RITHOLTZ: And go to war.

SPENCE: And go to war.

RITHOLTZ: And I just — I like the international games, the bigger rink. More premium on skating skating of the type that you saw with Bobby or in Wayne Gretzky. I mean, it’s just a prettier game.

RITHOLTZ: The — it’s funny you mention that because I there’s an — and I think it’s an information issue. Every time we add a safety device to cars, the accident rate doesn’t go down because people think I have an airbag and a crumple zone and ABS and a three-point safety belt, I could drive faster.


RITHOLTZ: And so, we end up with safer cars but no decrease in automobile deaths at all.

SPENCE: Yes. That’s a general principle. I mean, it’s sort of like Malthus, right? Malthus said every time we — our income score for productivity goes up, we’ll have more people to use it all up. And …

RITHOLTZ: No net benefit.

SPENCE: No net benefit.

RITHOLTZ: He didn’t adjust for inflation, that was his big problem.

SPENCE: Right.

RITHOLTZ: So, let’s talk a little bit about these information gaps and structures and markets. What are you most optimistic about regarding information gaps and asymmetries and what are you most pessimistic about these days? Basically, your work and how it applies/

SPENCE: So, I think on the optimistic side, I think properly deploy that this digital technology does close gaps in a sort of startlingly important and inclusive way. So, it is a huge opportunity and it seems to be happening.

I mean, this digital divide sort of semi-vanished. The mobile Internet, the mobile phone and mobile Internet has kind of taken over the world.

RITHOLTZ: Leapfrogging …

SPENCE: Leapfrogging everything. I mean, it just looks like it’s — just a huge winner.

But on the same score, I mean, there are these informational gaps and powerful to tools like these can be used to exploit the vulnerable as well. So, you got more ways to cheat sort of grandmothers out of their savings …


SPENCE: … than you used to. You use to have to actually go to the front door and knock. So, there’s a — like most things, there’s a kind of flipside always coins. But I think that’s not an impossible problem to deal with.

RITHOLTZ: And if a recent college grad came up you and said they were interested in a career in either academia or economics, what sort of advice would you give them?

SPENCE: Well, I mean, I’d say try it. I mean, I think that — I mean, people are very different from each other. So, you just don’t know. So, you got to experiment. I would experiment and without kind of pre-determining what the outcome is.

And the other advise that I tend to give that’s not necessarily what everybody else would give which is I think planning one’s career beyond a certain point is not really a good idea. I think a certain amount of following one’s nose, going to the next thing is really interesting because I think the most important thing people do, happy people, are not not achieving some goal but enjoying the process of getting there, doing something they love every morning. To me, that’s your family life in and not a career so much as a vocation.

RITHOLTZ: Right. It makes a lot of sense.


RITHOLTZ: And final question, what do you know about the world of economics and information theory today that you wish you knew 40 or so years ago?

SPENCE: Well, I wished I knew 40 years ago what — the coming digital revolution. I think that’s the thing I would’ve liked to seen a snapshot of — not — for two reasons. One, it — it’d be just be fun and interesting to know this is coming and to kind of get ready for it, but the other — but the other is a maybe even accelerate it.

But the other one is that it brings into relief some things that — let me put it this way, Barry. Economic theory always involves simplification, right? And so, what you do in good economic theory is you sort of throw out a bunch of stuff and focus on the things that are important.

What happens in the course of that is that there are sort of embedded implicit parameters that are never made explicit, things like transaction costs and whatnot that don’t change very much. And then every once in a while, something comes along and changes them. And then the models aren’t okay because the parameters are visible.


SPENCE: Right. I think that’s what’s happening to us now. We have network structures and economies that are only barely starting to be modeled in the sense that you capture the essence of the way the economy …

RITHOLTZ: We’re still ignorant about these changes.

SPENCE: Yes. We’re …


SPENCE: Mostly. We’re in the process of trying to build the conceptual structures that allow us to think carefully about these things.

RITHOLTZ: Quite fascinating.


RITHOLTZ: Thank you, Michael, for being so generous with your time. We have been speaking with Michael Spence. He is a Professor of Economics at NYU Stern School of Business and Senior Adviser at General Atlantic Partners, a giant private equity firm.

If you enjoy this conversation, well, look up an inch or down an inch on Apple iTunes and you could see any of our previous 300 or so such conversations we’ve had over the past five years.

We love your comments, feedback, and suggestions. Write to us at Go to Apple iTunes and give us a review. Be sure and check out my weekly column on Follow me on twitter @ritholtz. I would be remiss if I did not thank the crack staff that helps put together these conversations each week. Karoline O’Brien is our audio engineer. Michael Boyle is our booker/producer. Atika Valbrun is our project director, Michael Batnick is my head of research. I’m Barry Ritholtz, you’ve been listening to Masters in Business on Bloomberg Radio.



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