Russ Roberts

Roberts on the Price of Everything

EconTalk Episode with Russ Roberts
Hosted by Russ Roberts
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Russ Roberts, host of EconTalk and author of the economics novel, The Price of Everything, talks with guest host Arnold Kling about the ideas in The Price of Everything: price gouging, the role of prices in the aftermath of natural disaster, spontaneous order, and the hidden harmony of the economic cosmos. Along the way, Roberts talks about novels vs. textbooks and other traditional treatments of economic reasoning.

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0:36Intro. Out of ordinary: Russ is guest, Arnold Kling is host. Prepublication copy of the book, works better as a novel, page-turner, gave to wife, eyes teared up at end; gave to youngest daughter, liked it. Book delves into spontaneous order, will try to avoid spoilers by talking about first chapter, which is online. Seems to anticipate the day's news. Florida, tropical storm Fay. Fictional frame, try to tell story to demonstrate the economic concepts. Main character, Ramon Fernandez, Cuban-American refugee, tennis prodigy, scholarship at Stanford. Lights go out over dinner with girlfriend over an earthquake. Go from store to store looking for batteries, flashlights, milk, etc. Everything twice as expensive. Campus protest, price gouging. State of In advance of tropical storm Fay, Florida warned retailers not to gouge. One book theme: role of prices in helping people cope with natural disaster, sudden increase in demand relative to supply. Munger podcast, North Carolina. We understand the advantage of low prices, but have harder time understanding the advantage of high prices, one of which is solving the problem: who should get goods when there isn't enough to go around? Second role: encouraging future supply and holding of inventory by retailers. Retailers don't want to raise prices if they can avoid it. High prices play a role in creating social order, harmony after a disaster.
7:35In Chapter 1, two stores: one politically correct, keeps prices steady and runs out; other, fictional big box company raises prices but has goods in stock. Teacher character, asks Ramon, which is the better store? Ramon doesn't like either choice, wants a better way. Yet, in Florida, there was a warning issued not to raise prices, ordering stores to be the one that doesn't raise prices. Hayek quote, urge to take the ethos of the family and spread it more widely, where when there isn't enough to go around, parents allocate using love, using knowledge of which kid had more; natural egalitarian and informed situation. From p. 18 of Hayek's The Fatal Conceit:
Part of our present difficulty is that we must constantly adjust our lives, our thoughts and our emotions, in order to live simultaneously within the different kinds of orders according to different rules. If we were to apply the unmodified, uncurbed, rules of the micro-cosmos (i.e. of the small band or troop, or of, say, our families) to the macro-cosmos (our wider civilisation), as our instincts and sentimental yearnings often make us wish to do, we would destroy it.  Yet if we were always to apply the rules of the extended order to our more intimate groupings, we would crush them. So we must learn to live in two sorts of world at once. [italics original]
We like the idea of a town making decisions similarly. But anywhere larger than a neighborhood there isn't enough information. Flood that hit St. Louis a decade or so ago, porch building prices had doubled. Carpenters were busy rebuilding after the flood. High price signaled unintentionally to let the carpenters and the wood go somewhere else. If asked to release a carpenter, would probably say yes. Harder with fourth gallon of milk. Sometimes high price may mean someone won't get the first gallon, and that the carpenter will get rich. Wife: Why don't more people believe this? Why do people hate price gouging so much that they want to punish price gougers? Willing to have inferior outcome if you get rid of the profits from distress. Also partly that people haven't really thought about it; and thinking about it as if it is within a family. Intuition, emotion from family life.
14:53Why choose to use fiction? Why not a textbook? Can't seem to write a normal book. Appealing to write in fictional form. Spontaneous order is a hidden form of order in our daily lives, and revealing it through a story is effective, doesn't lend itself itself to equations and charts; untextbook oriented. Insights of Hayek and Adam Smith have been lost in the current classroom atmosphere. Not bite-sized chunk. Also, people like stories. Passing on of knowledge and a form of entertainment. EconTalk is not a standard interview, but conversational; similar in these books. Dialogue, easy to listen to, something about learning process, talk and listen at the same time. Robert Frank podcast, problem solving. Any influence from Ayn Rand? Dominate the niche of economics fiction, but it's a very small niche. Aren't many people who do it. Jonathan Wight; Marshall Jevons (pseudonym conflating Alfred Marshall and William Stanley Jevons), mystery novels; Ayn Rand. Michael Crighton, tell story and educate. Didactic fiction. Rand, cardboard characters but books are page-turners, telling a story that has an economic lesson; sometimes characters stand back and give a lecture. Disappointing: a lot of people find her appealing because she opens a door on the pursuit of happiness; economic lessons, public policy lessons less successful, perhaps because of her skepticism about altruism and fellow-feeling. Most people care about more than just themselves. Rand feels disdain for that. Left-wing, anti-economics narrative: capitalists are bad; politicians trying to rein them in are good; Rand comes up with the opposite story, politicians bad, capitalists heroes. Incentives. Good-guy, bad-guy story, more powerful as fiction but maybe not economics.
22:35Spontaneous order. Podcast theme, Hayek's "Use of Knowledge in Society," price system as a marvel. Prices do stuff, they send signals. Adam Ferguson, things that are the result of human action but not human design. Doing dishes, raking lawn: you want this done but you have to do it yourself. But also whole category of stuff that comes from order but not intended, yet comes from human action. Econlib essay: language. No one decided that "google" is a verb, but to google somebody is a verb. Who decided it? Prices: who decides what the price of the house is? Seller; but really the market. We fall back on saying "the market sets the price," but that's not terribly informative. Book: the prices in turn create an order that is quite extraordinary. Weaver of dreams. If life were static, people would get better and better at making the things people like. But world is not static. People decide to change careers, etc. Who is in charge? No one out there to weave the dreams together. Graphite, Leonard Read's "I, Pencil," coordination without a coordinator. Chinese, countryside, graphite for fishing reel. People really prefer to think there is a designer. Franklin Roosevelt let people know he was in charge. People don't walk out of freshman economics course with a sense of spontaneous order is that professors are anxious to get to the model where the government can fix things. Counterarguments: Markets fail, language problem; governments fail, better clerk should bumble than the boss who is far away from the floor; truth to that, but more to it. We are handicapped by our notion of what markets are and what they do and what governments are and what they do. Sometimes government intervention in markets makes the world better; but we have lack of appreciation of what the clerk is capable of and how that process unfolds. As a profession, economics has just scratched the surface of these decentralized processes, how markets work and what they actually do. Shirts, apples; health care, education. Natural response is that if it's complicated, there's got to be an expert. It's not that in markets no one is in charge, Kling healthcare podcast. Within the firm, each organization is striving to please the customer, but no one in charge of the whole process or of the process across processes. Not just Chinese pencil demand; but also graphite demand.
34:23Graduate school: MIT vs. Chicago. At MIT, Kling didn't hear about any of these ideas. Mostly math. Idea is that economist's job is to point out ways in which markets go awry so as to help designers and leaders fix them. At Chicago, articles on the reading list but not much time spent talking about them. George Mason U. But the ideas go back to Adam Smith, Ferguson, Darwin, biology; ideas seeped out of economics and haven't seeped back in yet. Spontaneous order, emergence--in biology literature sometimes don't even know that economists are familiar with the idea. As if in biology you had people trying to accommodate people thinking man is the product of God's design rather than as the product of evolution. Economics courses ultimately try to do that when they talk about need to try to design a better health system. Skepticism about Darwin. Emotional, spiritual; but also doesn't seem as easy to grasp. Easier to think about a designer based on our daily lives, organizing your desk. But if you want to have lots of pencils next year, better not to have anyone in charge. Afterword of book: market believers often deeply religious or deeply atheistic, aggressively believing or aggressively disbelieving. You can be a believer in God and still believe in undesigned economic system and vice versa.
39:56Influence future leaders or the public? First book, The Choice, Dick Gephardt, blue-collar St. Louis district, ran for President, protectionism. Readers suggested getting him to read the book but he pursues his own self-interest and his constituents have an interest in minimizing imports. Not a good idea to try to influence politicians per se. Fantasize bottom up; people might influence their leaders then. Teaching. Part of it is beautiful and fun to share it; helps us understand the world a little bit better. Catharsis. Hope that some people will like the knowledge for whatever purpose. Pessimism about political process, lose-lose for libertarian end of things. Overwhelming narrative that things work better when a good guy's in charge. Solace in the fact that the system works well. Intense electoral campaign coming up. Maybe not as important as it appears. Go about our lives anyway, even with plenty of bad legislation and bad laws. Huge portions of our lives are relatively unaffected. Huge element of theater in an election, designed process or emergent process? Designed to convince people that they are participating and these things really matter. Perhaps the are degrees of freedom after they are elected are pretty small.
46:12Would you ever write a book where there are villains? are they just misguided? Neither. Teachers' union or their opposition to educational reform. "My Mom's a teacher and she's a good person," is typical gut response. Lots of congressional staffers met through Mercatus Center, etc. All decent human beings. Constraints have been set up, emerged not designed, that are complicated and are not always conducive to a first-rate education. Interesting book to write is that of a decent human being or idealistically struggling with a world that is not always just. "The Wire," HBO series, brutal show, drug dealers and drug war in Baltimore, violence, language; utterly fascinating as an economist is the incentives the police face. Many of the people are just trying to do their job, but the constraints they face often are at odds with getting rid of drugs. Public choice. Politics and government as an emergent order. Government order is viewed as unconstrained: we can do whatever we want to do as a government. But in fact it's emergent. "We've decided in the United States to have a mixed system or to have a system of low tariffs." But Kling's pointed out that we should lose the "we." Political decisions are not like where we are going to dinner. They are a soup, stew, cacaphony that is not what any one composer wrote. Politicians are individuals; political decisions are the results of individual decisions. The Welfare State Nobody Knows, U.S. vs. European welfare states. You'd never design the mortgage interest discussion, same with Social Security. Would world be better or worse with more constraints? Earmarking seems like a good thing: add a little thing here or there, don't want to have a whole vote for every little thing. If Congress could do one thing a year, everyone would pay attention to it. Virtue of hodgepodge.
56:54Another novel in the works? Might not be a novel. Why do people get afraid of certain things economically. Writing about income, how standard of living has evolved over the last century, technology and growth. Shortcoming of economics textbooks and courses. Kling: "Economics 2.0". Misunderstanding of well-being. Movie or TV version? "Talk to my agent and I don't have one." Visual for economic education. Important as economists to find ways to communicate, more novels, movies, folk songs. Lending library, no one there. Desk for donations; books were catalogued and orderly. On wall there was a note: "We really appreciate your donations but we don't want any of this: No outdated books, No periodicals; first thing listed was No textbooks--they are never checked out." Heyne's The Economic Way of Thinking, now co-written--no one these days curls up with a textbook. Movies, cartoons, YouTube.

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COMMENTS (26 to date)
Arvind Srinivasan writes:

An interesting podcast as usual, and Russ sounds more passionate then usual:)

The presentation and discussion of ideas on econtalk works very well because of its narrative style. Two guys discussing interesting ideas with real life and made up examples is fun and more importantly easy to listen to.

Unfortunately the same principles apply to political campaigning as well. The idea of a “designer”, a sympathetic government who will look after the interest of the country, compounded with relentless marketing forms a very compelling story that’s easy to buy into.

I was thinking about this for a while and I feel a bit ambivalent. The ‘story’ is important and people in general are optimistic and look forward to maybe better times and improvements in their lives with a change in government. At the same time all governments (and most politicians) have the incentive to stay in power and people are left with more of the same every time.

Benj Giffone writes:

Drs. Kling and Roberts,

Excellent podcast, as usual…

I’ve found Russ’ comment about the religious commitments of “free-market believers” to be remarkably true. Some writers whom I’d consider my ideological soulmates are my exact religious opposites.

As Russ said, there are those who see evidence of design in nature and are led to believe in a Creator, but who also acknowledge the wonderful emergent orders produced by a free market. I would place myself in this category, and I see no inherent logical contradiction between these ideas.

The two key differences between the two ideas are the rules of the systems in which “agents” live (institutional constraints, I suppose), and the participants in the systems themselves.

The constraints in which a “free market” produces order are principles like private property, protection from involuntary imposition of cost, individual liberty, etc. The participants are human beings with rational and creative capacity.

I find it more difficult to believe that the constraints (laws of chemistry and physics) and the participants (matter itself, with no rational capacity) in the natural process could produce such biological order as Darwinian evolution would predict.

I don’t want to debate the scientific merits of different evolutionary theories. I do assert that the aforementioned principles and institutions that make the free market work come from a broadly Christian-theistic worldview. When human beings behave rationally and creatively, they reflect the nature of the God in whose image they were created.

At the very least, one must acknowledge the significant difference between random movement of atoms producing macroevolution across species, and the free, rational choices of human beings producing desirable social outcomes.

P.S.: This is partially a response to some statements made in the podcast with Bryan Caplan as well.

Brad Hutchings writes:

I've just ordered TPOE. But having read the first chapter online, I think it could make a good musical. The kids these days really love the alternative rock, hip musicals. The sophisticated kids anyway...

Floccina writes:

Request:

Since universal pre-k is a part of Obama's platform, is there any chance that you could interview Eric Hanushek about universal pre-k. I am presuming that Eric Hanushek has researched this topic, if he has not maybe there is someone else. (Bryan Caplan maybe)

Jacquelyn writes:

Hi Russ,

I have two comments about this podcast:

1) One thing you didn't bring up in relation to the issue of price gouging is the idea of stores limiting the number of items purchased. If stores limited purchases to one ream of water per customer per day, for example, wouldn't this maintain the supply without raising prices?

2) Also, I'm not sure I agree about your assessment of people's general dislike of price gouging. While nobody loves the idea of people profiting from the bad fortune of others, for me the bigger concern is the human rights issue. If goods are very expensive, than there's the possibility that richer people, who probably don't need the items as much, will hoard them, while poorer people won't be able to get enough of what they need.

I'd love to hear your thoughts on either of these topics. I can't wait to read your book, by the way. Thanks!

Unit writes:

"If stores limited purchases to one ream of water per customer per day, for example, wouldn't this maintain the supply without raising prices?"

Not necessarily. Higher prices induce suppliers to supply "more" water (and still cover the costs of inventory, for instance). You can't be sure that stores routinely factor in one ream per costumer per day. The way people trickle to the store might make it so that it's enough to factor less than that.

Also, the higher prices could discourage some people to get their ration altogether (maybe because they have other alternatives), this would free up reams for people who want them more. In your scenario, when some people don't come pick their water up, the left-overs don't get redistributed in a timely manner.

Ultimately, nobody has the knowledge necessary to determine what the best ration would have to be: 1,2,3, 1/2,...etc reams per costumer per day?

ObamaRossi writes:

Russ,

Season 2 is regarded by most followers of "The Wire" as so-so for the series (making it merely better than most TV).

I'd say soldier through it... Season 3 is a libertarian's dream.

Geech writes:

After reading Hazlitt's Time Will Run Back, I'm really hesitant about economic novels. Time might have been a good criticism of a Soviet-style economic system, but it was a terrible novel. I worry that other economic novels will suffer from a similar problem.

SteveO writes:

Can someone tell me what a ream of water is?

Brad Hutchings writes:

Jacquelyn,

I think you need to observe buying and selling in sneaker culture if you think voluntary rationing is a solution to price gouging. What happens there is Nike will do what's called a limited shoe drop at a few unpredictable stores. These shoes are in very short supply and quickly become the object of many enthusiast's desires. The people that are fortunate enough to buy them retail may wait in line for hours, then turn around and sell them on ebay or one of the shoe broker sites (like Flight Clun NY). The shoes eventually end up in the secondary reseller market (e.g. shows like DunkXchange), where a $110 retail shoe might sell for upward of $500.

I guarantee that the same will happen with plywood if its supply is constrained after a hurricane. In fact, there is plenty of evidence available from people on the scene that it happens every time with all sorts of critical commodities, from ice to batteries to gasoline. From a social order and even social justice perspective, we would be far better off encouraging retailers to get the maximum price for these items than to warn against gouging or crack down on it. The problem with cracking down is that you immediately involve shady characters into the mix who don't have a problem with the threshold of breaking the law. It's kinda like in sneakers. Many of the people who get the shoes at retail price end up being people who just want to make a buck, not the sneakerheads who love the shoes. In the case of the sneaker market, companies like Nike derive tremendous future value from the mystique, so the supply games work for them. I have no idea what government gets out of forcing the market to work out provisioning supplies in an emergency completely underground. They certainly don't get the sales tax receipts.

Philipp writes:

Great program! Allways learn a lot from it.

Do you by any chance know the book "The Mind of the Market" by Michael Shermer evolutionary economics?

A lot of interesting ideas there, why people intuitively are more egalitarian oriented than free market. Or why we not only pursue our self-interest but also are hardwired for altruism by our evolutionary history.

KL writes:

I haven't watched TV series for a long time and know little much about them. Aside from The Wire, are there other good series you'd recommend that give good insights on economics or human psychology?

Jerry Finn writes:

In passing you mused that Darwin was influenced by the ideas of Adam Smith. I think you mean the other classic economist Thomas Malthus, which is very clear. It would be much harder prove Smith had that much influence.

Would you consider a podcast comparing Joseph Schumpeter's Creative Destruction with Spontaneous Order? Two evolutionary theories: one dynamic, stressing change and the other stressing order and equilibrium. Can this be reconciled?

C writes:

Hey professor Roberts:
I love the show and have been listening every week for a little more than a year. As a political science/psychology double major, the insights I get here do wonders (political economy for the first major, behaviorism for the latter).

Anyhow, keep up the great work. And give your sound engineer a raise--there's a million wonderful podcasts out there I will never listen to consistently because the sound quality is so poor, but Econtalk is consistently the best sounding audio in podcasts.

I was held on the runway for 10 hours on tuesday flying home, after paying 50 bucks to bring my suitcase with me. How about a podcast on the economics of the airline industry--macro or micro as you wish--in the vein of the magnificent show on the economics of car buying?

You're a rockstar.
-C

Bob writes:

Russ,
Are any of your books in audiobook form? My search of Amazon.com and Audible.com was not successful.
Great podcast. Thanks.

Bob

Thomas writes:

I am sorry that I bought this book. The podcast was much better than the book. Talk about stilted and hooky. This book was hard to take serious no matter how much I agreed with the basic economics. Please stick to the podcasts.

Bill O'Byrne writes:

Professor Roberts,
My only quibble with your example of using prices to limit consumption after a natural disaster, is that a more socially useful method is rationing. As an emergency step a quick lift in prices seems hard-hearted, and is indeed hard hearted to those without much money.
I don't believe stifling demand for the two to three days it usually takes to get emergency supplies flowing would upset the market, which I agree from then on is the best way of sorting out what gets used where.
Thanks for Econtalk, always an interesting listen. Some are downright inspirational!
Cheers
Bill O'Byrne

Jeff Cuvilier writes:

Russ,

interesting podcast. Raised a couple of questions... perhaps you deal with them in your book, perhaps not.

First, in an emergency situation where there is a severe shortage of some necessary good/service and insufficient time for market mechanisms to generate additional supplies -- suppose a remote village cutoff from the outside by earthquake -- what is the market-oriented response to demands for rationing?

Second, should not patents be considered a form of sanctioned hording encouraging price gouging? Implemented to serve a reasonable end, no doubt, but a market-distorting measure nonetheless. Where strong patent laws apply, should there not also be price ceilings to prevent abuse? For example, the re-branding and repackaging of identical drugs at inflated prices and simultaneous curtailing of off-schedule prescriptions seems abusive.

Thanks.

Ruppert writes:

Hi Russ,

I'd like to propose Stefan Molyneux, an anarcho-capitalist who host the popular www.FreedomainRadio.com podcast (in Top 10 Education Podcasts).

His two books Everyday Anarchy) and Practical Anarchy (both free in pdf and audiobook) detail how a society and economy could work without a government. The first book covers why governments produce the wrong incentives. The second book proposes a new model and dwelves more into the economics of things.

I would very much like to hear you both discuss these ideas.

Thanks,

Emmanuel.

PS: Russ, there's a section in Everyday Anarchy where Stefan addresses the case of economics professors, which I'd love to hear your counter-argument to.

Paul writes:

Hey Russ,
I just listened to this podcast and thoroughly enjoyed it as usual and felt like making a comment. I just finished watching the last season of The Wire and I really want to recommend that you continue watching the show because it continues to deal with issues and topics that you like to discuss on the show, especially the force of incentives and how certain incentive structures lead to predictable outcomes. The Wire broadens it's scope to include local Baltimore Politicians and incentives in the Baltimore School system. One of the drug dealers (Stringer Bell) even takes economic classes at a local community college, in one scene he asks his econ prof about maximizing profits when selling an inferior product. The show evens deals with ideas of game theory and collusion when drug dealers band together to monopolize the market. You should do an entire Econtalk on economic lessons and the power of incentives taken from The Wire!!! Anyways thanks so much for doing econtalk!!!

alan writes:

This is the third or fourth of your podcasts that i have listened to and i very much enjoy them. One question, could you post a link to the school on Capitol Hill that you mentioned in this show. You briefly talked about a series of seminars run there, and I might be interested to learn more about those.
alan

Chris writes:

Hi Russ, any plans for a Kindle version of the book?

Russ Roberts writes:

alan,

The seminar program is called Capitol Hill Campus and it's part of the Mercatus Center. Recent events are here:
http://www.mercatus.org/ContentListing.aspx?Section=Events&typeID=234

Chris,

I am told that a Kindle version of The Price of Everything is on its way but I'm not sure when.

Sascha writes:

Russ,
Here's a guy that's been writing economic journalism for many a year ,
david warsh. You can find him at
www.economicprincipals.com

His recent book "Knowledge and the Wealth of Nations" and newsletter are both engaging and challenging.

This is an unsual combo that you frequently achieve.

Thanks for the podcast,
Sascha

Wayne writes:

Listening to this podcast reminded me of an old joke.

Mrs. Jones goes into Schultz's Butcher shop.

JONES: How much is your chicken?
SCHULTZ: It's 89 cents a pound.
JONES: 89 cents?! At Myer's Butcher Shop down the street, it's only 69 cents!
SCHULTZ; So go to Myer and buy the chicken for 69 cents.
JONES: Well, Myer is out of chicken.
SCHULTZ: Aha! When I'M out of chicken I only charge 49 cents!

Matt Wavrp writes:

Professor Roberts,
Excellent podcast. I look forward to reading your novel, it is in my book pile. This podcast moved it up to the top.

I finished watching The Wire on DVD a couple of weeks ago. Thanks for you for your comments on the show. The libertarian, free-market, and spontaneous order concepts in The Wire appear simply by accident. The creator of the show designed the story as a tool to reveal the unsustainability of free-market economics and the need for social solutions to economic problems.
In David Simon's (the creator of the show) attempts make this case he very clearly makes as series of free-market and Randian cases for understanding modern society.

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