Alex Tabarrok - Prizes, Prices, and Public Goods

Grand Innovation Prizes for Pandemics:

• Current incentives for vaccine manufacturers are insufficient because companies typically wait for FDA approval before ramping up factory capacity due to the high risk of failure.
• Prizes (e.g., a $1 billion award for a vaccine meeting specific efficacy/safety criteria) or advanced market commitments (paying for at-risk manufacturing costs) are proposed to provide "extra juice" for speed.
• While prizes avoid the government picking winners/losers, upfront funding for manufacturing costs is being prioritized for current pandemic efforts as it is cheaper and faster to deploy "all guns blazing."
• The speaker acknowledges that this approach involves waste and funding failing projects (e.g., AstraZeneca's halted trial) but argues the trillions in pandemic costs justify a diverse portfolio of "shots on goal."

Critique of Current Policy & Congress:

• Congress is criticized for being "lazy, slow, and complacent," taking ages to fund testing and failing to spend allocated funds.
• Existing laws allow agencies to set up prizes ranging from $50 million to $50 billion without new legislation, yet these mechanisms have not been utilized.
• The speaker advocates for "state capacity libertarianism," stating a desire for a small government that is nonetheless capable of performing its functions during crises.

The Baumol Effect (Cost Disease):

• Prices in sectors with slow productivity growth (e.g., education, healthcare, repairs) rise inexorably because the opportunity cost of labor increases as the "progressive sector" (tech, manufacturing) becomes more productive.
• A string quartet today requires the same 40 minutes and four musicians as in 1826, but the cost is higher because those workers could earn significantly more in productive sectors.
• As the "Great Stagnation" slows productivity growth in the progressive sector, the rate of price inflation in stagnant sectors (like healthcare) should also slow, which aligns with recent data.
• Wage stagnation for unskilled labor is partly explained by the rising opportunity cost of skilled labor (e.g., PhDs), who are pulled toward high-paying tech sectors, leaving education and healthcare to pay a premium for these workers despite lower productivity gains.

Education and AI Disruption:

• The speaker argues for increasing educational attainment but rebalancing the mix: more high school graduates and vocational training (like German apprenticeships) rather than sending everyone to college for low-utility degrees (e.g., journalism, psychology).
• Online education (e.g., Marginal Revolution University, Georgia Tech's online master's) allows for massive scaling, potentially driving average teachers out of business while paying top-tier instructors like sports stars.
• AI and artificial tutors can pinpoint student errors and deliver personalized instruction more effectively than human tutors, though the "credentialing" function of universities remains a hurdle.
• Future models may involve "debundled" education: online lectures for instruction and human coaches for motivation and skill mapping.

Dominant Insurance Contracts:

• A "dominant insurance contract" solves public goods free-rider problems by offering a refund bonus to contributors if a funding threshold is not met, making it a dominant strategy to contribute regardless of the outcome.
• Unlike standard assurance contracts (e.g., Kickstarter), this mechanism ensures contributors are better off either way, potentially doubling the success rate of public good projects in controlled experiments.
• The mechanism does not solve problems regarding the optimal scale of public goods (e.g., how big a bridge should be) but solves the coordination of funding.
• The speaker suggests this, alongside blockchain governance experiments (e.g., "Futarchy" prediction markets), could allow for new forms of collective organization and alternative institutions outside of traditional democracy.

Innovation Stagnation and Future Strategy:

• Research productivity faces diminishing returns; for example, the semiconductor industry now requires 18 times more engineers to achieve the same Moore's Law growth rates as in the past.
• The US must shift from a "warfare welfare state" to an "innovation state" by reducing military and welfare spending shares in favor of R&D investment.
• International competition (specifically with China and India) is viewed as a necessary catalyst to reignite US innovation and avoid falling behind in critical fields like biotechnology and AI.
• Globalization expands the market for innovation, but the speaker notes that "low-hanging fruit" in past technological eras (electricity, combustion) have been exhausted, suggesting we are in a period of grind before the next quantum leap.

Advice for Young People:

• 20-year-olds should pursue education in fields complementary to technology (e.g., computer science, data science, electrical engineering) rather than competing against it.
• Skills in extracting meaning from data, causal inference, and design (combining artistic impulse with tech) are identified as high-value areas.
• The speaker notes that the advice of older generations is becoming less useful as the world changes faster, but the "return of skill" remains a powerful trend.