The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1996
James A. Mirrlees, William Vickrey
Transcript from an interview with Professor James A. Mirrlees at the 1st Meeting of Laureates in Economic Sciences in Lindau, Germany, September 1-4, 2004. Interviewer is freelance journalist Marika Griehsel.
Sir James Mirrlees, very welcome to this interview. We're very happy to have you here with us.
James Mirrlees: Thank you.
I just want to start off with some memories from 1996, the day that you were told that you were to receive the Economy Prize. What were your thoughts? I don't know whether the telephone rang or whether you were told in a different way, but what do you think? Was it a huge surprise?
James Mirrlees: So the telephone rang and I got the message. And I politely suggested that it didn't sound very likely and I needed some proof. But fortunately Assar Lindbeck was there too, so there was somebody I knew who could actually tell me it was true. So I thought it was very surprising. That was the first thought. Then I suppose I kind of wondered what was going to be the little problems of the day that followed from all of that. Was I going to be able to get away from journalists?
And were you? Not really.
James Mirrlees: No, I really didn't try to. But Cambridge wasn't awfully good at organising things. I did have a little press conference with some journalists, but most of them who wanted to get in touch with me were unable to do so, because I was somewhere else when they were trying to get hold of me.
You quietly disappeared somewhere.
James Mirrlees: They got me into the wrong place really and we weren't very good at communicating around the place. Difficult to organise. But then I decided it was really quite a nice feeling. I was appreciated in a way I didn't think I was. So it was nice to know my work seemed actually to be worthwhile.
Has it changed your working life in the sense that you are now demanded to answer questions about all sorts of problems that have to do with world economy?
James Mirrlees: Occasionally, but I'm not usually asked by people who really need to know the answers. I suppose I haven't been quite that kind of economist on the whole. But I find I have to give a lot of lectures on general topics to a much more general audience than I was ever used to talk to. And you feel an obligation to do that kind of thing. And you have to think about problems that are seen by ordinary people as really major economic problems, but on which I haven't done professional work. It's been quite a challenge and it's also quite interesting a lot of the time.
I read that you were very good at maths as a child, but it wasn't a straight road. You were also taking philosophy at university and you were interested in developmental issues, and you certainly liked, I read, to supervise research of the students that you worked with, you know. What was your main driving force during this development from your student years and forward? What was the main driving force for you?
James Mirrlees: I suppose that I wanted to know everything. It must have been something like that; a sort of a lot of curiosity. So that wasn't just curiosity to explain things, but curiosity to know what people had said. So I spent an awful lot of time reading in that period.
The force for that was just because one of the advantages of the Scottish university system is you do some subjects beside your major subject. And I did that and some English literature and some physics, although mathematics was the major subject. So I've the sense that somehow going through Edinburgh, looking back, I should really have been trying to do some serious mathematics research then. But I didn't, I just enjoyed doing the mathematics and learning more about it. So a lot of the time it was just learning. And then somehow in Cambridge there was this immense shift of deciding that I didn't quite see the direct point of mathematics, at least for me, then. So I wanted to do something that I thought would be more useful.
And I'm sure I must also have felt that it would be more interesting. And then I really got this feeling that there were problems I wanted to solve, I really wanted to do new things. And that I suppose was because there are just one or two papers I read that seemed to have a tremendous excitement about them. They would pose a problem, an interesting problem, and could actually solve it. They just seemed lovely examples of how you can get a fresh thought; something you would have no idea that you could really say anything sensible about. And one of them was about optimal taxes, which is what I then got very interested in professionally to run.
I know that you went to India. That was a sidetrack maybe. But what did it give you, because you have said that you wanted to do something useful and something new, and at that time there was this whole idea of helping the developing world to greater economy, to, you know, narrow the gap?
James Mirrlees: Yes. It became clear I wanted to be a development economist. I mean I said I wanted to work on the economics of poor countries. And I'd actually say that I don't think that was so much about narrowing the gap as about increasing their incomes, which means economic growth, which is really my prime interest. So it was very fortunate that I was able to go to India. It was arranged for me by Amartya Sen, who's also a Nobel Prize Winner, because we knew one another at that stage. And I was just a research student, he was a young research fellow but he had these contacts. And it was a marvellous opportunity to have to do with the Planning Commission there. I didn't feel that it was entirely useful for them, because I suppose I had a real sense that I didn't know quite what to do.
Looking back I don't quite know why that should have been so. But you know there's problems, you can see all the poverty and so on, but it's quite another matter to know what you can do about it. And some people are rather good at knowing that. But anyway I wasn't. And I spent a lot of the year really trying to think my way through to that.
And I think it worked quite well, because I suppose I decided that the main issue was how people should decide what to do sort of rather indirect, and got into the idea that instead of planning you should have a systematic way of deciding what kind of new projects to start. In other words a much more piecemeal thing, much more like Western economy. Which at that stage in India was not. India thought that you could actually deal with economic problems by building a model and then seeing what it said you should do and doing it.
And it didn't really work did it?
James Mirrlees: No, no. No, you can't just say do this and it happens. Or it may happen in a much too expensive and wasteful way. But it actually took me a while to really understand how wasteful the whole process was.
There has to be incentives for people to pay tax somehow. When I look at the optimal taxation model, the idea is that you need to feel that you're getting something back you know so that you actually pay, if I'm not simplifying it too much. Would you just tell us a little bit about the way you see the taxation system? From that point of view it may be forwards. You know where are we today, the so-called Western world? And certainly not all people feel that they are you know wanting to pay as much tax because they don't feel they're getting back what they should get.
James Mirrlees: Yes, I suppose that there are lots of excuses about tax and I know it makes people rather unhappy.
When I had the sort of little film interview that they do after the prize as part of a general film, the cameraman on that occasion said to me as we were walking across the court in Trinity, "Since the taxes you pay are going to be spent on things that the Government does, which are good things like the health service and education and so on which you surely value too, doesn't that mean that you should be very happy to pay taxes and there should be no incentive problem?" So I thought that was a nice argument and I liked it and I wish that people felt like that about taxes. But of course the work I've done has mainly been recognising that people do not feel like that about taxes and that it apparently even got to the point of discouraging quite a lot of people from earning as much as they might have, which in particular I mean they no longer pay as many taxes as they should. I suppose that I'm forced to see that high tax rates do induce quite a lot of people to find ways of avoiding them, or evading them.
And I think that's also part of it. In the Western countries, still the total tax take is pretty high and I think on the whole it's going up again in most countries. And that's for perfectly straightforward reasons that more and more is needed for things that, at least in Europe, the state does, like education, which is necessarily something that gets more expensive, and very notable in Britain the health service. The rate at which we spend on health is going up a great deal, and I think that's pretty much the picture in the European countries as well. And actually I'm not as concerned as lots of people are about the marginal tax rates which they think are quite high. I think in effect in most of the European countries the total marginal tax rate is over 50 percent; that's to say add on other taxes like VAT to the income tax. So yes, people are paying rather a large proportion of their income above the basic to the Government to use for this and that. But I suppose I don't quite understand why they don't think they're getting a lot of it back, because actually a lot of the benefits do accrue to the better off as well. And then there are lots and lots of people in the country who are not so well off. And I would think clearly a majority of the population are getting or can expect to get more out of the system than they're putting in on taxation. So I think that's what it's about. It's about ensuring that the things that are needed for everybody, certain basic things which cannot be conveniently left to people to buy for themselves, should be available for everyone, but they are mainly going to have to be paid for by the better off.
How do you see the issue around the ageing population in the Western world, and the fear that there will not be enough tax coming in to actually pay for pension schemes and for the care of the older population and so on and so forth, including education and all the other things that we are used to that the state would provide for the population in general?
James Mirrlees: Yes. I mean certainly for the main continental European countries there is quite a big issue there. I suppose I believe it's a bit exaggerated because economic output, which is what we are needing here, gets created by capital as well as by people, and that's even true of things like medical services and to some extent of education. So that you need workers of course but you also need other things like capital. And so you can ensure that there is more output available in due course by building up capital by saving.
So I do think that these demographic changes imply that it's rather important for the European economies to do more saving. And indeed some of them have moved over to doing that, but I think not rapidly enough; they're not doing enough of that. And some of the birth rates are really remarkably low. And this will have a variety of effects. What people are worrying about now is the period when there will be a lot of retired people and not all that many people working. I must say that I still think while people might find themselves, an average person, might be paying nearly half their income over taxes and so on, that's very different from paying 90 percent. And when you think what it's being paid for, health, education and pensions, these seem rather valuable things.
Well of course.
James Mirrlees: So I think it's a little strange people should be quite so troubled about that. But of course this is against the backdrop of a situation where these European economies have not been growing very fast. Incomes have been rising a little but not a lot. I'd like to be able to say, "Well, you know maybe what's going to happen is that the workers in 20 years time will not be able to spend more on current consumption than the workers today can do." Which after all isn't bad. And I think it should be close to that. In other words, people will be spending more of their income on taxes in order to pay the current pensions. And that part will grow quite a lot. So they look at the proportion and so on. So I suppose I think that people should look back and think that you know ‘Why should I be spending more on consumption than my parents,' who were probably pretty happy with it.
But is there a lack of dialogue, maybe, between politicians who are now forced to make the savings and, you know, more opportunistic politicians, maybe, who rather, you know, use people's fear? I mean it's difficult to discuss these issues, because they are quite complex and rather, you know, people are really just looking into their own pockets and not seeing the bigger picture.
James Mirrlees: Yes, and yet in a way I think people may sense what's at issue here. Suppose you were to increase savings substantially, this would be a way of putting down people's consumption now, like increase the taxes now rather than have them in the future. And probably people have a sense that that's what's at issue. And you shouldn't always think of things in terms of proportions. It's just absolutely saying, "Ah, now it looks as though the current generation should now cut its standard of living significantly in order that its children should in the future be able to enjoy a standard of living, consumption level ..., probably quite a bit higher than the current generation." And I say that partly because I actually think that the rate of economic growth is going to accelerate again. It's not going to stay at 1½ percent.
You are fairly positive?
James Mirrlees: Yes, I don't see why not. I mean there are some problems I know, but that's partly looking at the overall picture of the European economies where I mean in an area like where we're sitting now, which is pretty much the centre of a rather large circle where unemployment is low and economic growth is going on quite well, it's just there are these other regions where it's not. And it's a very interesting question as to why say Western France, Southern Italy, Northern, Eastern Germany are performing quite badly.
If we look at the world at large, we have this idea, although we see problems, that economic growth is possible, it will continue. But if you look at the world at large, the amount of natural resources is limited for example. Can we expect a continued growth though, I mean if you look at the whole picture? What is necessary?
James Mirrlees: It's very interesting to look at it like that, and I think it wouldn't be a bad idea if somebody were to try to picture what the pattern of our consumption might be likely to be towards the end of the century, certainly because of the limits on the natural resources. We should be doing much less travelling then or our grandchildren should be. You know planes should become very expensive because they're using fuel. I dare say that there will methods brought in. But things like heating and air-conditioning and so on I'm sure we'll be able to deal with by other methods other than hydrocarbons.
Transport I suspect will get quite a lot more expensive. So we will spend our time in different ways. I think perhaps more holidays at home or closer to home again. And since we think of going away to the other side of the world for our holidays as somehow characteristic of the world we've moved into we may think this is a great loss. It's a loss, but there are going to be other tremendous compensations; I don't see why not. Certainly resources will put some limit on it. Of course I'm aware I remember a paper that I wrote years ago with a friend on natural resources. We remarked on how there had been all these tremendous concerns about how Britain was going to be in a pretty bad way because it soon run out of trees. And what will we do then? Of course that was just as economic growth was beginning and it turned out that it was no issue. Now, one of these times this sort of typical economist's optimism will prove to be unjustified. The world's been pretty good at coming up with new ways of doing things.
The need will create new disciplines, new ideas, new questions to solve. Do you see ...
James Mirrlees: Well, yes and it has done that and in a way it's a little mysterious what's happened. Like we would have thought by now that probably fusion energy would be generating most of our electricity and so on, and it hasn't happened at all and there's really no prospect that it will. So things are not going the way we might have expected. But I still believe they will.
Eventually, yes. If you were a young economist today, or you were to advise a person to go into this field, what to look at to be very busy? What would you if you were to start afresh again?
James Mirrlees: I would think of different things each day more or less because I think I don't have a persistent large vision about what exactly one should do. But it seems to me that the way that we reason, and how that leads to what we do, which sounds more like psychology than economics, but it's a very economic kind of activity and this involves the sort of information we get from others. I think that as yet we have not found good ways of measuring that and recording that objectively.
So I really believe that the development of theories or models, whichever way you want to call it, of human behaviour is just beginning, and that there's a lot of scope, both empirically in doing descriptive measurement of things of a kind that people have simply not done up to now – the way we form expectations and the way we work out our decisions, that's just desperately needing to be done. And there's actually a tremendous intellectual challenge in connecting these up with issues of economic policy ... interested in about how taxes operate, how people respond to them, how we think about issues, the sort that you've been raising earlier.
Well that's fascinating and I've really enjoyed speaking to you. Is there anything from your long academic work that you would like to share with us that makes you specifically, you know that you really think could be of good advice professionally?
James Mirrlees: Encourage your own curiosity, pursue the problems based on that. Don't get diverted by trying to do things for your own advancement. In other words, don't be lured into responding to incentives.
Well that's great. Thank you so much. I've really enjoyed speaking to you. Thank you.
James Mirrlees: Thank you.
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