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Alex Tabarrok - Prizes, Prices, and Public Goods

Alex Tabarrok is a professor of economics at George Mason University and with Tyler Cowen a founder of the online education platform http://MRU.org. I ask Alex Tabarrok about the Grand Innovation Prize, the Baumol effect, and Dominant Assurance Contracts. Episode website: https://www.dwarkeshpatel.com/p/alex-tabarrok Apple Podcasts: https://apple.co/3TGYbIz Spotify: https://spoti.fi/3ADoIxq Follow me on Twitter to be notified of future content: https://twitter.com/dwarkesh_sp Follow Alex Tabarrok: https://twitter.com/ATabarrok Alex Tabarrok's and Tyler Cowen's excellent blog: https://marginalrevolution.com/ Timestamps: 00:00 Intro 00:34 Grand Innovation Prize 08:45 Prizes vs grants 14:10 Baumol effect 27:50 On Bryan Caplan's case against education 31:35 Scaling education online 48:50 Declining research productivity 52:15 Dominant Assurance Contracts 58:40 Future of governance 1:04:05 On Robin Hanson's Futarchy 1:06:02 Beating Adam Smith 1:08:35 Our Warfare-Welfare State 1:19:30 The Great Stagnation vs The Innovation Renaissance 1:21:40 Advice to 20 year old

Alex TabarrokguestDwarkesh Patelhost
Oct 18, 20201h 26mWatch on YouTube ↗

At a glance

WHAT IT’S REALLY ABOUT

Alex Tabarrok on Prizes, Public Goods, Baumol, and Better Government

  1. Alex Tabarrok discusses how better incentive design—especially prizes, advance market commitments, and dominant assurance contracts—can dramatically improve innovation and the provision of public goods, with COVID-19 vaccines as a central case study.
  2. He explains Baumol’s cost disease and its implications for rising costs in education and healthcare, then explores how online education and AI tutors could turn education into a high‑productivity, scalable sector.
  3. Tabarrok and host Dwarkesh Patel examine coordination and governance innovations (prediction‑market futarchy, blockchain governance, new public‑goods mechanisms) as potential ways to overcome inadequate equilibria.
  4. They close with concern about US state capacity, arguing for an “innovation state” that can actually execute in crises, and advising young people to build complementary skills to technology and data.

IDEAS WORTH REMEMBERING

5 ideas

Use large, well‑designed prizes and advance market commitments to accelerate critical innovations.

Firms underinvest in speed for socially vital innovations like vaccines because they face high failure risk and limited upside; big prizes, guaranteed purchase prices, and paying for at‑risk manufacturing can align private incentives with social needs.

Combine upfront manufacturing support with portfolio diversification in crises.

In pandemics, governments should fund multiple vaccine candidates and pay early for factory capacity, accepting some waste to massively reduce time‑to‑deployment and hedge against clinical failure (e.g., AstraZeneca–type setbacks).

Prizes and low‑friction, fast grants are underused tools where experts have stalled.

Prizes open the field to nontraditional actors and “crazies” who may not pass committee filters, while flexible grants like Howard Hughes and Fast Grants show that giving talented people money with fewer strings can yield outsized research returns.

Baumol’s cost disease reframes why healthcare and education get more expensive.

As some sectors (tech, manufacturing) become much more productive, wages rise economy‑wide, making labor‑intensive, slower‑productivity sectors look costlier—even if nothing “goes wrong” there; higher prices partly reflect overall progress, not just dysfunction.

Online education and AI can convert teaching into a scalable, high‑productivity sector.

Top instructors can reach hundreds of thousands of students globally via video and AI tutors, reducing the need for many marginal teachers while expanding roles for coaching, tutoring, and guidance; institutions with strong brands (e.g., Georgia Tech) can scale degrees online at much lower cost.

WORDS WORTH SAVING

5 quotes

Now is the time to throw money at the problem.

— Alex Tabarrok

I want a small government. But I want a government to be able to do what it's supposed to do at the time it's supposed to do it.

— Alex Tabarrok

Prizes are particularly good when the experts have run against the wall and you need to get the crazies in.

— Alex Tabarrok

Whoever cracks [scalable online education] is going to do incredibly well because you go from one person teaching 30 students at a time to literally you could teach the entire world.

— Alex Tabarrok

This solves the public good problem… Paul Samuelson said this problem was impossible to solve.

— Alex Tabarrok (on dominant assurance contracts)

Innovation incentives during pandemics: prizes, advance market commitments, and at‑risk manufacturingPrizes versus grants as funding mechanisms for scientific and technological progressBaumol’s cost disease and the rising costs of education, healthcare, and servicesThe future of education: MOOCs, AI tutors, and global scale teachingDominant assurance contracts and new mechanisms for funding public goodsGovernance innovation: futarchy, blockchain experiments, and RadicalxChange ideasState capacity libertarianism, U.S. institutional failure, and the need for an innovation state

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