Episode Transcript
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Speaker 1 (00:00):
His name is Mike Munger, and he is the knower
of important things. He is a professor of political science
at Duke University, although I think of him more as
an econ guy than a political science guy, but really
he talks about the intersection of those, so I guess
I will call it political economy and just one of
the most interesting guys and has a fabulous podcast called
(00:22):
The Answer Is Transaction Costs and all.
Speaker 2 (00:24):
This is on my blog high Mike.
Speaker 3 (00:26):
Hey, great to be here.
Speaker 2 (00:27):
Yeah, it's it's really good to have you. I want
to share just a little bit of audio with you. You
probably heard this already.
Speaker 1 (00:33):
But Elizabeth Warren was on CNBC some a few days
ago with Joe Kernan, and she was talking about price gouging,
and she made a comment about how a Kraft's profit
went up over four hundred percent and then this happened
ice gouging.
Speaker 2 (00:48):
Can I tell you why that?
Speaker 1 (00:49):
Those are fallacious and misleading at best, and the craft
analogy is even why can't I tell you?
Speaker 3 (00:55):
Please?
Speaker 2 (00:56):
Let me tell you.
Speaker 3 (00:56):
Craft you say was four hundred and forty percent profit
in increase the example you.
Speaker 1 (01:01):
Used the prior quarter from the year before they had
a charge of one point three billion dollars, an accounting
change which wiped out profits. Then they earned what they normally,
they finished, they fought, they earned.
Speaker 2 (01:16):
And let me finished what at the day.
Speaker 1 (01:19):
So that's how it always goes with Elizabeth Warren. But
in any case, Mike, I spent a little bit of
time earlier in the show just talking to listeners about
cherry picking data points and so on.
Speaker 2 (01:27):
But I want to talk with you about price gouging, and.
Speaker 1 (01:30):
My first my first question to you is as much
philosophical as it is economic. Is price gouging even a
real thing?
Speaker 3 (01:38):
I'm actually working on some presentations about this. The answer
is long. Let me give you a brief and therefore
less satisfactory answer. Price gouging is when somebody pays a
higher price than they want to pay. And so from
their perspective, yes, because I would like to pay a
low price and I have to pay a high price.
Now it could be at the high price is a
(02:02):
result of price fixing, which is an antitrust violation, so
a contract and restraint of trades. Let's say two car
companies agree they won't charge below a certain price, or
two beer companies agree they won't charge below a certain
price and you think, dang, that's a really high price.
The authorities do an investigation and they learn that this
is a conspiracy to raise prices. That's a real thing,
(02:25):
but that's price fixing and it's a violation of the
Sherman Act. So let's take those out. So that's not
what she's talking about here. That's not what Elizabeth Warren
is talking about. She's talking about high prices. What is
her evidence that prices are high? Well, this company made
a profit. Well, golly, let's think about what prices do.
(02:45):
What prices do is they tell you about scarcity and
if there's increased scarcity. A few years ago, I became
briefly famous. There was an article in the New York
Times and the headline was egg shortage, very large and important,
but prices rise. Well, there's no butt. Prices rose because
(03:07):
there was an egg shortage. And if prices go up,
three good things happen. Consumers buy less, they leave some
for the next guy, Producers try to find ways to
make more, and entrepreneurs try to find ways to make substitutes. Now,
it's true that high prices are a signal to all
those three people to do the right thing. And so
(03:28):
that's the reason that I think price gouging outside of
price fixing is not real. It's actually just something that
people who have caused inflation by government policies are trying
to shift the blame to someone else. The reason prices
have gone up is the monetary and fiscal policies of
the administration.
Speaker 1 (03:49):
All right, I'm going to play devil's advocate for a bit,
just for the record. My gut instinct is that price
gouging in the absence of price fixing is not even
a real thing. But I'm going to play devil's advocate
for a minute. If you were to ask me to
name an example of price gouging or or a situation
where maybe there isn't price fixing but there isn't competition.
(04:12):
I think of Martin Schakrelly, who bought a company that
owns some that makes some drug. I forget what the
drug is. It's not a drug that millions and millions
of people use, but I think at least.
Speaker 2 (04:24):
Thousands and thousands of people use it.
Speaker 1 (04:26):
And he bought the company and multiplied the price of
the drug by like fifty overnight to a price that
maybe some people legitimately couldn't afford.
Speaker 2 (04:36):
Is that price gouging?
Speaker 3 (04:37):
Yeah, sure it is. And the reason is was that
Martin Screlly had a monopoly on the ability to produce this.
Now where would that monopoly come from. Why wouldn't someone
else say, well, look at that really high price. Because
remember I said two things, three things. One is consumers
will buy less. But your example is a good one.
(04:57):
I need this drug. I can't buy less. I can't
economize on buying this drug. Why not the second thing?
Then why don't Why don't producers make more? So the
answer is that go ahead, the Obama administration at that
time at a restriction on generic drugs. They wanted to
(05:18):
increase the regulation of generic drugs, and in effect, in
order to produce this drug, you had to get the
permission of the existing producers, and of course Martin Screlly
sued to prevent that, so he had this artificial monopoly
that prevented the second of my three part response mechanism
from working. So it is absolutely true that you can
(05:39):
have price gouging if the government prevents producers from making more,
But that's not market's fault.
Speaker 1 (05:46):
Right, Okay, So I guess we're adding that even that
price fixing is in a way a form of price gouging.
But even in the absense of price fixing, you can
have the effective equivalent of price fixing if somebody has
(06:06):
monopoly power for any reason, whether it's due to monopoly,
whether it's due to nobody else wanting to it could
be for any reason. So in so price fixing, as
you said, is already illegal. In the Martin Skrelly example,
do you think it is the proper role of government
to say that Martin Skrelly should not be able to
(06:28):
raise the price by fifty x overnight.
Speaker 3 (06:32):
Yes, given that they caused the problem in the first
place by creating an artificial monopoly, they have to regulate
the price. It's just like the electric company. So if
the government has taken in action that creates an artificial,
in this case, unjustified monopoly. It's not even a patent.
This was a generic drug. They just raised entry barriers.
(06:54):
Usually price gouging comes when there is an emergency, So
thirty four states have anti price gouging laws, and in
my state, North Carolina, the law is that in an emergency,
if a governor has declared a state of emergency, then
you cannot raise the price. And I just looked this up.
The limit is it cannot be unreasonably excessive under the circumstances.
(07:18):
So it can be unreasonable or it can be excessive,
but it can't be unreasonably excessive. What does that even mean? Well,
the answer is it's something like five percent. So after hurricane,
we need ice, milk, we're short of things, there's no
stores that are open. You can't raise your price more
than five percent because there's this temporary emergency and we
(07:39):
want people to be able to get stuff right.
Speaker 2 (07:42):
Or going into a hurricane.
Speaker 1 (07:44):
What if you want to raise the price of lumber
and generators and water, And let's talk about these for
a second, because the Martin Skreley thing is is an
extreme example, and I actually don't like to make connor.
Speaker 3 (07:56):
I was price gouging, though you're right, that was price gouging, okay, So.
Speaker 1 (08:00):
But I also the extreme cases can be interesting, but
they're not common.
Speaker 2 (08:05):
So let's talk about the common cases.
Speaker 1 (08:07):
So what about when you know such and such lumber store,
I don't want to put a name on anything, is
going to double the price of the big boards that
you would use to board up windows, going into the hurricane.
Speaker 2 (08:19):
Why is that not wrong?
Speaker 3 (08:22):
Well, they want to double the price, now, why don't they?
And the answer is that there's competition. There is more
than enough lumber given the number of people that want
to buy it at the existing price. Now there's a
hurricane coming. All of us want lumber to be able
to put four y eight sheets of plywood over our
windows so that they don't get broken. Because that's really expensive.
(08:44):
We all go to the store at the same time.
There's not enough four by eight sheets of plywood. How
should we decide who gets it. One way we can
do it is to have prices be kept artificially low
by government policy, and the first person in line says, wow,
this price is really low. I'm going to buy all
(09:05):
of it because I have a big house. Or we
could say we don't have enough of this stuff. Let's less.
Let price signal to people that other people need this too,
because that's literally what prices due a high price tells you.
You know, the person behind you and the person who's
going to come here tomorrow, they really need this. Think
(09:25):
twice about whether you need it, and so only the
people who really need this lumber are going to buy it.
They will leave some for the people behind them. So
high prices surprisingly are a signal for people to do
the moral thing, which is to take account of the
needs of others. But if you keep price artificially low,
in no time, there's no lumber. So I come in.
(09:46):
I really need lumber to board up my windows. I
have a hard time of getting there the first day,
but the second day I get there, I'm going to
buy it. I've got my truck. There's no lumber left.
What is the price of lumber? To me, it's infinity.
It would be better if there were a high price
and I could buy some than a posted price that's low.
(10:09):
But empty shelves. I don't care what the posted price
on empty shelves is. I need this stuff, and high
prices help achieve that. Also, your example is a good
one because suppose that I can raise price in the
onset of a hurricane. Well, this lumber store, they have
a warehouse full of four x eight sheets of plywood,
(10:31):
which they're paying the additional storage costs for because they
know in the event of a hurricane they'll be able
to sell this at a high price.
Speaker 1 (10:39):
Right, And if they can't sell it at a high price.
Then they won't stock the extra because there's costs to
stock the extra, and therefore it won't be available at all.
We're talking with Mike Munger, who is a guy who
makes me wish I was back in college so I
could take a.
Speaker 2 (10:53):
Class from him.
Speaker 1 (10:54):
He teaches at Duke University and as an occasional Libertarian
candidate for office. Tell you a very quick story, Mike
and my listeners have heard this before. I'm gonna just
tell the shortest possible version of it. I with some
friends I went scuba diving in Russia north of the
Arctic Circle, many hours train ride north of Saint Petersburg,
out of a town called Condolacsha. This was I guess
(11:16):
it was still the Soviet Union. I don't think it
had broken. I think it was before the wall came
down and we needed more gasoline for the compressors that
were filling our scuba tanks. Actually the compressors were East
German and didn't work very well. They were new East
German compressors and they didn't work. The motors that were
driving them were a US Army Signal Corps motors from
(11:39):
World War Two, and they worked perfectly. But because the
compressors didn't work. We needed more gasoline. Now. We had
come out of a town called Condolacca, and there were
a bunch of cars driving around, and I said to
my Soviet minders, why don't we just take a boat
and a couple of gas cans over there to Condolacia
and we'll just give someone a dollar or two and
(12:00):
we'll just siphon a couple of gallons out of their
car and we'll just bring the gas back and we'll
be fine. And the Soviet answer to me, and you
will appreciate this more than most, Mike, the Soviets answer
to me was, no, gasoline is very cheap in condo Loacha.
There just isn't any. Yeah, that was a quote. That dude,
(12:21):
that's a quote.
Speaker 3 (12:22):
They were serious.
Speaker 2 (12:23):
They were serious.
Speaker 3 (12:24):
They were serious. It would be wrong for us to
pay a lot for this because it's really cheap here,
isn't There.
Speaker 2 (12:31):
Just isn't any Isn't that amazing?
Speaker 3 (12:33):
Uh?
Speaker 1 (12:33):
Okay, So let me do one more Devil's advocate thing.
I have a listener who texts at me all the time,
and I assume this listener is somewhat left of center
and is convinced that corporate greed explains almost all of
the inflation that we've seen, and his latest thing for her,
I don't know if it's a man or woman. Latest
example is Target and Walmart and a few other companies
(12:57):
saying they're cutting prices on thousands and thousands of items,
and my listener says, this just shows that our inflation
was due to corporations raising profit margins, and now that
you know things are settled down a little, they're cutting
them back. So it was all corporate profits all the time.
I have two responses.
Speaker 3 (13:17):
First, I believe that it is a novel psychological theory
to learn that corporations become greedy in twenty twenty one.
So apparently they had not been greedy and then they
became greedy and that's why we had inflation. In fact,
corporations always try to charge the highest price they can.
That's literally their finutionary duty to their stockholders is to
(13:40):
try to make profits, so I don't think there was
any change in the level of greed. The other point
is they say they're cutting price. I think that confuses
cause and effect. It could be that the reason prices
went up was the corporations were greedy, or it could
be that the prices went up because of inflation and
(14:02):
now that inflation is coming down. It is true that
the corporations are rather cynically advertising, oh, look at us,
we're cutting price because inflation's coming down. But that's not
evidence that they weren't greedy in the first place. So
it always surprises me when people on the left want
to invoke a greed storm somehow there's been a recent
(14:23):
increase in greed. There's a heavy greed front over the
mountains near Denver, and it's going to come in and boy,
there's going to be greed over the weekend. That's always true.
You can't use changes in greed to explain something you
don't like. So it is at corporate greed, and the
fact that they're advertising that prices are coming down is
(14:45):
just the fact. And this is true, measured inflation is
coming down. Finally, the huge increase in spending and money
supply increases we saw in twenty and twenty one, some
of that we're backing off on, but that doesn't mean
that it was caused by greed in the first place.
Speaker 1 (15:02):
Right, and I'll add to the listeners, we've seen a
modest decline in the price of oil lately, and we've
seen a more significant decline in the price of certain
grains commodities.
Speaker 2 (15:10):
So inputs into some things.
Speaker 1 (15:13):
That grocery stores sell are coming down, and they're passing
some of that along not out of the goodness of
their heart, but because the other guys is cutting prices
to gain market share, and.
Speaker 2 (15:22):
So this guy has to cut prices too.
Speaker 1 (15:24):
A listener, I give me like a one word answer
on this, Mike, and I just I don't know why
the word therefore is in here. I'm not sure what
the listener is exactly referring to what do both of
you think farm subsidies are therefore bad? I don't know
exactly what therefore means there, but my answer is yes.
Speaker 3 (15:42):
It could be that the farm subsidies are a way
to try to pay off voters. It could be that
we're worried about having sufficient food supply. I think farm
subsidies generally are a mistake. Therefore is a little bit confusing.
Prices are going down because farms are becoming more efficient
(16:06):
and good for them. All right.
Speaker 1 (16:09):
You know, I was going to do a bunch of
topics with you today, but I think we're going to
be stuck pretty much on price gouging, and we're about
out of time, so we're going to ask you one
more question from this might be the same liberal listener
I was mentioning to you before. I'm not sure, but
this person's concern seems to be in a world where
we allow the lumber to go up, and the water
to go up, and the generators to go up in price.
Speaker 2 (16:30):
Doesn't that mean only rich people will be.
Speaker 1 (16:33):
Able to buy the stuff and poorer people will be
just left without in a situation where they really need something.
Speaker 3 (16:41):
Isn't that surprising because if only the first of my
three responses were true, it would mean that only wealthy
people could buy stuff. But remember, high prices signal producers
to make more so in the event of an emergency.
Want is for people inland, let's say North Carolina, we
(17:04):
need generators. People in Kansas say, well, I have a generator.
Oh but wait, there's a price gouging law. I can't
sell it for more there than I can here. What
happens if you don't have price gouging laws is that
a huge river of people try to find ways to
bring a lot more of this stuff to the beleaguered city,
(17:24):
to the place that needs it, and the result is
that the price quickly comes down. So a lack of
understanding of economics means you don't understand the following thing,
which seems paradoxical. The only way to have low prices
is to allow high prices. High prices are a signal
we need more of this stuff, and people respond quickly
(17:45):
to that. So the only way to get low prices
in an emergency is to allow the high prices that
signal other people to bring it in. So actually the
people who benefit most are poor people who otherwise would
have no way of acquiring this This is by far
the cheapest, fastest way, So it is poor people who
(18:05):
should be arguing against price gouging laws precisely become because
high prices cause low prices.
Speaker 2 (18:14):
Love it.
Speaker 1 (18:15):
I mean, look, guys, this is why you wish you
went to Duke and had a class with Mike Munger.
Not very many overtly libertarian professors at top flight universities
like Duke, and they're very lucky to have you.
Speaker 2 (18:30):
And I don't know if you feel like.
Speaker 1 (18:31):
You're banging your head against the wall sometimes, but you've
told me you don't actually feel too abused by others
because of your correct politics.
Speaker 2 (18:38):
So that's pretty good.
Speaker 3 (18:40):
I'm I feel rewarded. I get to teach my classes,
I get to talk to students, they get to talk
to students, and may the better argument win.
Speaker 1 (18:50):
Mike Munger's brilliant podcast, which will be coming out slightly
less frequently now during the school year and then we'll
go back to more frequently after the school year, is
called The Answer is Transaction Costs. It is a fantastic
economic podcast. The Answer is Transaction Costs. You can find
all of this on my blog at Roscomminsky dot com
if you forget any of it. Mike, that was fabulous
(19:11):
as always, Thanks for wearing the sport code even if
you're not wearing pants, and we'll talk again soon.
Speaker 3 (19:19):
It was a pleasure. I gotta go get those pants.
Speaker 2 (19:21):
See you all right. By Mike
His name is Mike Munger, and he is the knower
of important things. He is a professor of political science
at Duke University, although I think of him more as
an econ guy than a political science guy, but really
he talks about the intersection of those, so I guess
I will call it political economy and just one of
the most interesting guys and has a fabulous podcast called
(00:22):
The Answer Is Transaction Costs and all.
Speaker 2 (00:24):
This is on my blog high Mike.
Speaker 3 (00:26):
Hey, great to be here.
Speaker 2 (00:27):
Yeah, it's it's really good to have you. I want
to share just a little bit of audio with you. You
probably heard this already.
Speaker 1 (00:33):
But Elizabeth Warren was on CNBC some a few days
ago with Joe Kernan, and she was talking about price gouging,
and she made a comment about how a Kraft's profit
went up over four hundred percent and then this happened
ice gouging.
Speaker 2 (00:48):
Can I tell you why that?
Speaker 1 (00:49):
Those are fallacious and misleading at best, and the craft
analogy is even why can't I tell you?
Speaker 3 (00:55):
Please?
Speaker 2 (00:56):
Let me tell you.
Speaker 3 (00:56):
Craft you say was four hundred and forty percent profit
in increase the example you.
Speaker 1 (01:01):
Used the prior quarter from the year before they had
a charge of one point three billion dollars, an accounting
change which wiped out profits. Then they earned what they normally,
they finished, they fought, they earned.
Speaker 2 (01:16):
And let me finished what at the day.
Speaker 1 (01:19):
So that's how it always goes with Elizabeth Warren. But
in any case, Mike, I spent a little bit of
time earlier in the show just talking to listeners about
cherry picking data points and so on.
Speaker 2 (01:27):
But I want to talk with you about price gouging, and.
Speaker 1 (01:30):
My first my first question to you is as much
philosophical as it is economic. Is price gouging even a
real thing?
Speaker 3 (01:38):
I'm actually working on some presentations about this. The answer
is long. Let me give you a brief and therefore
less satisfactory answer. Price gouging is when somebody pays a
higher price than they want to pay. And so from
their perspective, yes, because I would like to pay a
low price and I have to pay a high price.
Now it could be at the high price is a
(02:02):
result of price fixing, which is an antitrust violation, so
a contract and restraint of trades. Let's say two car
companies agree they won't charge below a certain price, or
two beer companies agree they won't charge below a certain
price and you think, dang, that's a really high price.
The authorities do an investigation and they learn that this
is a conspiracy to raise prices. That's a real thing,
(02:25):
but that's price fixing and it's a violation of the
Sherman Act. So let's take those out. So that's not
what she's talking about here. That's not what Elizabeth Warren
is talking about. She's talking about high prices. What is
her evidence that prices are high? Well, this company made
a profit. Well, golly, let's think about what prices do.
(02:45):
What prices do is they tell you about scarcity and
if there's increased scarcity. A few years ago, I became
briefly famous. There was an article in the New York
Times and the headline was egg shortage, very large and important,
but prices rise. Well, there's no butt. Prices rose because
(03:07):
there was an egg shortage. And if prices go up,
three good things happen. Consumers buy less, they leave some
for the next guy, Producers try to find ways to
make more, and entrepreneurs try to find ways to make substitutes. Now,
it's true that high prices are a signal to all
those three people to do the right thing. And so
(03:28):
that's the reason that I think price gouging outside of
price fixing is not real. It's actually just something that
people who have caused inflation by government policies are trying
to shift the blame to someone else. The reason prices
have gone up is the monetary and fiscal policies of
the administration.
Speaker 1 (03:49):
All right, I'm going to play devil's advocate for a bit,
just for the record. My gut instinct is that price
gouging in the absence of price fixing is not even
a real thing. But I'm going to play devil's advocate
for a minute. If you were to ask me to
name an example of price gouging or or a situation
where maybe there isn't price fixing but there isn't competition.
(04:12):
I think of Martin Schakrelly, who bought a company that
owns some that makes some drug. I forget what the
drug is. It's not a drug that millions and millions
of people use, but I think at least.
Speaker 2 (04:24):
Thousands and thousands of people use it.
Speaker 1 (04:26):
And he bought the company and multiplied the price of
the drug by like fifty overnight to a price that
maybe some people legitimately couldn't afford.
Speaker 2 (04:36):
Is that price gouging?
Speaker 3 (04:37):
Yeah, sure it is. And the reason is was that
Martin Screlly had a monopoly on the ability to produce this.
Now where would that monopoly come from. Why wouldn't someone
else say, well, look at that really high price. Because
remember I said two things, three things. One is consumers
will buy less. But your example is a good one.
(04:57):
I need this drug. I can't buy less. I can't
economize on buying this drug. Why not the second thing?
Then why don't Why don't producers make more? So the
answer is that go ahead, the Obama administration at that
time at a restriction on generic drugs. They wanted to
(05:18):
increase the regulation of generic drugs, and in effect, in
order to produce this drug, you had to get the
permission of the existing producers, and of course Martin Screlly
sued to prevent that, so he had this artificial monopoly
that prevented the second of my three part response mechanism
from working. So it is absolutely true that you can
(05:39):
have price gouging if the government prevents producers from making more,
But that's not market's fault.
Speaker 1 (05:46):
Right, Okay, So I guess we're adding that even that
price fixing is in a way a form of price gouging.
But even in the absense of price fixing, you can
have the effective equivalent of price fixing if somebody has
(06:06):
monopoly power for any reason, whether it's due to monopoly,
whether it's due to nobody else wanting to it could
be for any reason. So in so price fixing, as
you said, is already illegal. In the Martin Skrelly example,
do you think it is the proper role of government
to say that Martin Skrelly should not be able to
(06:28):
raise the price by fifty x overnight.
Speaker 3 (06:32):
Yes, given that they caused the problem in the first
place by creating an artificial monopoly, they have to regulate
the price. It's just like the electric company. So if
the government has taken in action that creates an artificial,
in this case, unjustified monopoly. It's not even a patent.
This was a generic drug. They just raised entry barriers.
(06:54):
Usually price gouging comes when there is an emergency, So
thirty four states have anti price gouging laws, and in
my state, North Carolina, the law is that in an emergency,
if a governor has declared a state of emergency, then
you cannot raise the price. And I just looked this up.
The limit is it cannot be unreasonably excessive under the circumstances.
(07:18):
So it can be unreasonable or it can be excessive,
but it can't be unreasonably excessive. What does that even mean? Well,
the answer is it's something like five percent. So after hurricane,
we need ice, milk, we're short of things, there's no
stores that are open. You can't raise your price more
than five percent because there's this temporary emergency and we
(07:39):
want people to be able to get stuff right.
Speaker 2 (07:42):
Or going into a hurricane.
Speaker 1 (07:44):
What if you want to raise the price of lumber
and generators and water, And let's talk about these for
a second, because the Martin Skreley thing is is an
extreme example, and I actually don't like to make connor.
Speaker 3 (07:56):
I was price gouging, though you're right, that was price gouging, okay, So.
Speaker 1 (08:00):
But I also the extreme cases can be interesting, but
they're not common.
Speaker 2 (08:05):
So let's talk about the common cases.
Speaker 1 (08:07):
So what about when you know such and such lumber store,
I don't want to put a name on anything, is
going to double the price of the big boards that
you would use to board up windows, going into the hurricane.
Speaker 2 (08:19):
Why is that not wrong?
Speaker 3 (08:22):
Well, they want to double the price, now, why don't they?
And the answer is that there's competition. There is more
than enough lumber given the number of people that want
to buy it at the existing price. Now there's a
hurricane coming. All of us want lumber to be able
to put four y eight sheets of plywood over our
windows so that they don't get broken. Because that's really expensive.
(08:44):
We all go to the store at the same time.
There's not enough four by eight sheets of plywood. How
should we decide who gets it. One way we can
do it is to have prices be kept artificially low
by government policy, and the first person in line says, wow,
this price is really low. I'm going to buy all
(09:05):
of it because I have a big house. Or we
could say we don't have enough of this stuff. Let's less.
Let price signal to people that other people need this too,
because that's literally what prices due a high price tells you.
You know, the person behind you and the person who's
going to come here tomorrow, they really need this. Think
(09:25):
twice about whether you need it, and so only the
people who really need this lumber are going to buy it.
They will leave some for the people behind them. So
high prices surprisingly are a signal for people to do
the moral thing, which is to take account of the
needs of others. But if you keep price artificially low,
in no time, there's no lumber. So I come in.
(09:46):
I really need lumber to board up my windows. I
have a hard time of getting there the first day,
but the second day I get there, I'm going to
buy it. I've got my truck. There's no lumber left.
What is the price of lumber? To me, it's infinity.
It would be better if there were a high price
and I could buy some than a posted price that's low.
(10:09):
But empty shelves. I don't care what the posted price
on empty shelves is. I need this stuff, and high
prices help achieve that. Also, your example is a good
one because suppose that I can raise price in the
onset of a hurricane. Well, this lumber store, they have
a warehouse full of four x eight sheets of plywood,
(10:31):
which they're paying the additional storage costs for because they
know in the event of a hurricane they'll be able
to sell this at a high price.
Speaker 1 (10:39):
Right, And if they can't sell it at a high price.
Then they won't stock the extra because there's costs to
stock the extra, and therefore it won't be available at all.
We're talking with Mike Munger, who is a guy who
makes me wish I was back in college so I
could take a.
Speaker 2 (10:53):
Class from him.
Speaker 1 (10:54):
He teaches at Duke University and as an occasional Libertarian
candidate for office. Tell you a very quick story, Mike
and my listeners have heard this before. I'm gonna just
tell the shortest possible version of it. I with some
friends I went scuba diving in Russia north of the
Arctic Circle, many hours train ride north of Saint Petersburg,
out of a town called Condolacsha. This was I guess
(11:16):
it was still the Soviet Union. I don't think it
had broken. I think it was before the wall came
down and we needed more gasoline for the compressors that
were filling our scuba tanks. Actually the compressors were East
German and didn't work very well. They were new East
German compressors and they didn't work. The motors that were
driving them were a US Army Signal Corps motors from
(11:39):
World War Two, and they worked perfectly. But because the
compressors didn't work. We needed more gasoline. Now. We had
come out of a town called Condolacca, and there were
a bunch of cars driving around, and I said to
my Soviet minders, why don't we just take a boat
and a couple of gas cans over there to Condolacia
and we'll just give someone a dollar or two and
(12:00):
we'll just siphon a couple of gallons out of their
car and we'll just bring the gas back and we'll
be fine. And the Soviet answer to me, and you
will appreciate this more than most, Mike, the Soviets answer
to me was, no, gasoline is very cheap in condo Loacha.
There just isn't any. Yeah, that was a quote. That dude,
(12:21):
that's a quote.
Speaker 3 (12:22):
They were serious.
Speaker 2 (12:23):
They were serious.
Speaker 3 (12:24):
They were serious. It would be wrong for us to
pay a lot for this because it's really cheap here,
isn't There.
Speaker 2 (12:31):
Just isn't any Isn't that amazing?
Speaker 3 (12:33):
Uh?
Speaker 1 (12:33):
Okay, So let me do one more Devil's advocate thing.
I have a listener who texts at me all the time,
and I assume this listener is somewhat left of center
and is convinced that corporate greed explains almost all of
the inflation that we've seen, and his latest thing for her,
I don't know if it's a man or woman. Latest
example is Target and Walmart and a few other companies
(12:57):
saying they're cutting prices on thousands and thousands of items,
and my listener says, this just shows that our inflation
was due to corporations raising profit margins, and now that
you know things are settled down a little, they're cutting
them back. So it was all corporate profits all the time.
I have two responses.
Speaker 3 (13:17):
First, I believe that it is a novel psychological theory
to learn that corporations become greedy in twenty twenty one.
So apparently they had not been greedy and then they
became greedy and that's why we had inflation. In fact,
corporations always try to charge the highest price they can.
That's literally their finutionary duty to their stockholders is to
(13:40):
try to make profits, so I don't think there was
any change in the level of greed. The other point
is they say they're cutting price. I think that confuses
cause and effect. It could be that the reason prices
went up was the corporations were greedy, or it could
be that the prices went up because of inflation and
(14:02):
now that inflation is coming down. It is true that
the corporations are rather cynically advertising, oh, look at us,
we're cutting price because inflation's coming down. But that's not
evidence that they weren't greedy in the first place. So
it always surprises me when people on the left want
to invoke a greed storm somehow there's been a recent
(14:23):
increase in greed. There's a heavy greed front over the
mountains near Denver, and it's going to come in and boy,
there's going to be greed over the weekend. That's always true.
You can't use changes in greed to explain something you
don't like. So it is at corporate greed, and the
fact that they're advertising that prices are coming down is
(14:45):
just the fact. And this is true, measured inflation is
coming down. Finally, the huge increase in spending and money
supply increases we saw in twenty and twenty one, some
of that we're backing off on, but that doesn't mean
that it was caused by greed in the first place.
Speaker 1 (15:02):
Right, and I'll add to the listeners, we've seen a
modest decline in the price of oil lately, and we've
seen a more significant decline in the price of certain
grains commodities.
Speaker 2 (15:10):
So inputs into some things.
Speaker 1 (15:13):
That grocery stores sell are coming down, and they're passing
some of that along not out of the goodness of
their heart, but because the other guys is cutting prices
to gain market share, and.
Speaker 2 (15:22):
So this guy has to cut prices too.
Speaker 1 (15:24):
A listener, I give me like a one word answer
on this, Mike, and I just I don't know why
the word therefore is in here. I'm not sure what
the listener is exactly referring to what do both of
you think farm subsidies are therefore bad? I don't know
exactly what therefore means there, but my answer is yes.
Speaker 3 (15:42):
It could be that the farm subsidies are a way
to try to pay off voters. It could be that
we're worried about having sufficient food supply. I think farm
subsidies generally are a mistake. Therefore is a little bit confusing.
Prices are going down because farms are becoming more efficient
(16:06):
and good for them. All right.
Speaker 1 (16:09):
You know, I was going to do a bunch of
topics with you today, but I think we're going to
be stuck pretty much on price gouging, and we're about
out of time, so we're going to ask you one
more question from this might be the same liberal listener
I was mentioning to you before. I'm not sure, but
this person's concern seems to be in a world where
we allow the lumber to go up, and the water
to go up, and the generators to go up in price.
Speaker 2 (16:30):
Doesn't that mean only rich people will be.
Speaker 1 (16:33):
Able to buy the stuff and poorer people will be
just left without in a situation where they really need something.
Speaker 3 (16:41):
Isn't that surprising because if only the first of my
three responses were true, it would mean that only wealthy
people could buy stuff. But remember, high prices signal producers
to make more so in the event of an emergency.
Want is for people inland, let's say North Carolina, we
(17:04):
need generators. People in Kansas say, well, I have a generator.
Oh but wait, there's a price gouging law. I can't
sell it for more there than I can here. What
happens if you don't have price gouging laws is that
a huge river of people try to find ways to
bring a lot more of this stuff to the beleaguered city,
(17:24):
to the place that needs it, and the result is
that the price quickly comes down. So a lack of
understanding of economics means you don't understand the following thing,
which seems paradoxical. The only way to have low prices
is to allow high prices. High prices are a signal
we need more of this stuff, and people respond quickly
(17:45):
to that. So the only way to get low prices
in an emergency is to allow the high prices that
signal other people to bring it in. So actually the
people who benefit most are poor people who otherwise would
have no way of acquiring this This is by far
the cheapest, fastest way, So it is poor people who
(18:05):
should be arguing against price gouging laws precisely become because
high prices cause low prices.
Speaker 2 (18:14):
Love it.
Speaker 1 (18:15):
I mean, look, guys, this is why you wish you
went to Duke and had a class with Mike Munger.
Not very many overtly libertarian professors at top flight universities
like Duke, and they're very lucky to have you.
Speaker 2 (18:30):
And I don't know if you feel like.
Speaker 1 (18:31):
You're banging your head against the wall sometimes, but you've
told me you don't actually feel too abused by others
because of your correct politics.
Speaker 2 (18:38):
So that's pretty good.
Speaker 3 (18:40):
I'm I feel rewarded. I get to teach my classes,
I get to talk to students, they get to talk
to students, and may the better argument win.
Speaker 1 (18:50):
Mike Munger's brilliant podcast, which will be coming out slightly
less frequently now during the school year and then we'll
go back to more frequently after the school year, is
called The Answer is Transaction Costs. It is a fantastic
economic podcast. The Answer is Transaction Costs. You can find
all of this on my blog at Roscomminsky dot com
if you forget any of it. Mike, that was fabulous
(19:11):
as always, Thanks for wearing the sport code even if
you're not wearing pants, and we'll talk again soon.
Speaker 3 (19:19):
It was a pleasure. I gotta go get those pants.
Speaker 2 (19:21):
See you all right. By Mike
The Ross Kaminsky Show News
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