Russ Roberts

Munger on Love, Money, Profits, and Non-profits

EconTalk Episode with Mike Munger
Hosted by Russ Roberts
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Mike Munger of Duke University talks with EconTalk host Russ Roberts about the world of profit, money, love, gifts, and incentives. What motivates people, self-interest or altruism? Both obviously. But how do these forces interact with each other? Does relying on one always provide a stronger incentive than the other? Do charities, for-profit businesses or government agencies do a better job providing a good or service? Munger and Roberts have a wide-ranging discussion across these issues including a section where they discuss whether Christmas gift-giving and gift-giving in general is inefficient.

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0:36Intro. [Recording date: April 13, 2010.] Duke, basketball. Smoking ruins of what used to be benches on campus. Student Michelle Macadoo [sp?], project related to profits, non-profits, and their performance. Start by ignoring the legal distinction between for-profit and non-profit firms. Want to talk about two different business models. First business model uses money to motivate people; for-profit tries to make money for its investors and owners, charges as much as it can subject to the competition, pays as little as it can for its resources, employees, raw materials subject to the competition. Described that way, doesn't sound very attractive: but "subject to competition" brings out the best in businesses, forces them to treat the customer and employees well. Doesn't rule out pride or other non-monetary benefits to either the owners for supplying a great service or the employees for working for a great company. Not saying money is the only thing that motivates people, but it is the organizing principle and is what most businesses in America look like. Second business model uses something else. The product or service is going to be given away without charge, so none of the business's costs are going to be paid for by the customer. The resource costs of providing the product are either covered by volunteers--who work for a variety of motivations but nothing to do with money--or it could be covered by donations--philanthropy, foundations, donors, individuals who care about the activity for its own sake. First, ridiculous question: which model works better? Ask another question: isn't that leaving something out by describing those as the two alternatives? That description of non-profits--accurate description, Section 501 of the IRS code--the main justification for having non-profits is to have a social service or to solve some of society's problems. So, is it really that non-profits are an alternative to for-profit corporations, or are non-profits an alternative to government? Do non-profits do things that government might actually do? Not only do non-profits not charge for their service, but actually have negative profits in the case of giving out charitable donations, giving money to the homeless. They are providing these services as an alternative to government. Are non-profits really an alternative business model to for-profits or an alternative business model to government, and for that, how are we going to divide up? Venn diagram: What activities would we want these three ways of organizing human activity to specialize in? Or do we just stand back and see what activities emerge naturally? At least three business models; will add a fourth in a little bit--three organizational models. For profit--McDonald's, Macy's. Not-for-profit: give products away. Coercion through taxation; overlap: some of the things government spends its money on are things that would be provided otherwise. Hybrid model: will argue there are a lot of opportunities for overlap.
7:08Basic motivational question: Walter Williams likes to say: If you want to get potatoes to NYC and you know somebody in Idaho has to get up really early, do you want them to be motivated out of love for the people of New York or for the profit the potato-maker can get. Out of love; besides the person who does it for profit is going to charge more because they are doing it for profit, right? Right. Two problems: wrong motivation. Love will get me better potatoes. Second, all these profits--we don't have to pay profits. Worse potatoes and more expensive. Doesn't work that way. Most economists and non-economists would understand that the profit motive has to pay a role to get people up in the morning. Essay example: on your way to the airport, 6 a.m. flight so you've got to get there at 4:30; say to sibling or colleague you've got to get there, who says "I can take you. That's kind of early, but you don't have to call a cab." They love you or like you. But a lot of people might say they like that cab driver showing up early because they don't want the cab driver to lose his job. Will forgive brother if he messes up and sleeps through the alarm clock, but maybe will just call a cab. We understand the power of monetary incentives. And yet we can think of lots of cases where love triumphs and maybe does a better job. Or at least a sufficiently good job. Hospitals--for profit and not-for profit. In a sense they compete with each other. They say they offer a different service. One says, you come in and we are going to charge you a price. The other, we're going to give this away because you are indigent. For-profit doctors often do charitable work. There are Idaho farmers who donate some of their potatoes to a food bank. Even attorneys do pro-bono work. Even economists do pro-bono work; often blog for free. In 19th century or early part of the 20th century, a hospital was a place people went to get medical care; often were indigent. No health insurance or it was minimal. For rich people, the doctor came to your house. The hospital was a degrading and unpleasant place, typically free or very inexpensive. Funded out of charitable donations, sometimes a religious organization, sometimes by ethnic groups or occupations--sailors, form of implicit or actual insurance. People would rather go to a doctor and money rather than go to the hospital where poor people go; the care there won't be as good. In today's world, weird hybrid system--puzzling--a university hospital where everybody says they want to go to, where in theory it's not for profit. Does generate revenue, but it need not. A hospital today--could be two kinds of hospitals: hospitals you go to where the doctors work out of love, volunteering; or their time is paid for by salary, not by the customer but by people who want to make sure they have health care. Two different products. May look a lot the same. In one case, being financed out of the selflessness of the donor, the doctor or the contributor. Isn't that different from fee for service arrangement where you are just comparing apples for oranges? Non-profit example is the EconTalk example--people out there who would presumably pay something, might be hard to collect--but Liberty Fund, the sponsor to me [Russ] pays me, the time of the engineer, the webmaster who helps put them up on the web, the webspace; the listeners pay nothing. As a result, there is a disconnect between the provider and the customer, which we ordinarily would say in economics is problematic. Want to talk about some of those issues in a minute. But if we think about a hospital, wouldn't it be better for the poor people served by the hospital to pay something, or for the donors to give the money to the poor people, and have the customers pay zero? Yet most people would say okay, that's what charities do; no charge, raise their money from people who care; and businesses raise their money. In the hospital if there were religious objections to some procedures, the hospital would not provide those because the donor would object. From the perspective of the indigent person who goes there, that's the procedure they'd want to have. Government example: different charities: handing out money with no questions asked--which is what governments do, handing out money through taxation--could imagine a private charity, uncle--charities earlier part of the 20th century, customized; donor has a lot of say, could be they wouldn't let the poor person use it for drink or alcohol or drugs.
16:47Economist would say you should give vouchers money to the consumer, not to the producer, because then the consumer will spend it on what he or she wants to spend it on. That model interestingly not going to generate nearly as many donations nearly in money or in kind, because the donor has a specific thing. "They need health care. They need water." Fascinating: the donor is at least as concerned about improving the welfare of indigent people in a specific way. This is what you lack. If we just give the money to the indigent person, they'll spend it, but they might very well not spend it on what the donor wants them to spend it on. Funny kind of paradox. Presumably does make the donor better off. Non-constrained, but we want to constrain them. What non-profits do: we give money to the producer and not the indigent person is we want to constrain it because the donor thinks this is what we really need. Force in that direction. Earlier podcast, can view the charity as a middle man. Part of the reason I might donate is I might want them to fulfill my goals for health or aid. But I might not be able to find poor people or might be ignorant, might not know how to fulfill their goals. Economist's kind of view: Invisible Heart, friend's brother always carries around a V-8 Juice to give around to homeless person so he can give it to a homeless person so he won't spend it on drugs or liquor. Then he won't get breakfast and will only spend the money he'd have spent on breakfast on drugs or liquor. Second thought: fooling yourself. His life's miserable--he wants liquor and you give him a V-8 Juice? A certain kind of disrespect. Can make a bloody mary. Certain compassion there.
19:30Hospitals in America today; universities in America today: state run, highly subsidized; private, somewhat subsidized by all kinds of things including donations, some of which are non-profit; also have for-profit universities, training schools. Which of those would you want to go to if you had a bad health problem: if the doctors were there out of their love and the donations of people who cared about you or the people like you, or where they just want to make a profit? As economists, don't have clear answer. Thought we did; but think about it some more. What's really different? Is there something lurking in the background? Is health care just different? Might very well choose a charitable or non-profit hospital as being better. Would depend on local path dependence, where a good hospital in my area for a very long time has had this tradition of being charitably funded. Are there other industries that are like that? Or is health care just unique? We actually see non-profit charitable farmers' co-ops. In North Carolina, the People's Republic of Carparo [sp.?}--really, really free market, bring stuff they have. Not a barter system. Can get free food there. Not sure health care is different. Food: for profit food has served the public really well by driving down the price of food. Could imagine a world where poor people got their food not the market place--putting aside food stamps, the government third alternative--but if worried about people going hungry at night, let's try to make food as cheap as possible. Works incredibly well. Obesity crisis in the United States because food is so cheap. Let's just raise money to give people free food. Pile up a bunch of food and let anyone take it who wants to. Let's videotape it so we can put it on some TV channel so if you saw your rich neighbor taking some it would be slightly embarrassing. Idea would be that people who have plenty of food probably aren't going to try to get free food; and for people who are truly hungry, no questions asked, minimal administration costs. But one of the things that make markets work so well is this Hayekian solution to the knowledge problem, which is the idea that we don't know what people really want. Pile up a bunch of Cheerios, turns out that's not what they really want; marketplace steers information, market sends signals, etc., etc. Yet a lot of people would assume that the free food would be the right way to help poor people. You motivate farmers to produce that free food by saying you are helping poor people not go hungry. Very concrete way of helping people. Why is it that so many people are willing to devote that effort, contributing their time instead of money? Many times, if you see a fund raiser. Cynical, an economist. Son, on crew team, asked if willing to come and spend four hours selling stuff. Would be one of four people selling stuff. People at the booth selling stuff might make $300; split that four ways in four hours, happy to give $100 not to do that. Not nearly as good as spending your time.
25:10Idea that spending for charity--walk 25 miles, shoot 25 baskets. Why not just do something productive? Take the 1000 hours of basketball shooting, take the money, and pay cash to the charity. Why have to do this stunt--which obviously has some social benefit or it wouldn't exist? You go around and you ask people to sponsor you to do something meaningless, yet people do it. Shoot the baskets and they give people money. Obviously important that it is meaningless. Signal of love and affection, commitment to the cause. The world is about costly signals. Look how much I care. Important that it be nonsensical. If you give your wife a gift certificate, that's not as good as flowers, because flowers are going to wilt and disappear. Gift certificate, she gets to choose what she wants, and maybe she doesn't want flowers today. Maybe she wants to smack you upside the head for giving you a gift certificate. Conversation has a certain chaotic nature to it; disconnect between textbook on giving and money versus the cultural trappings around all these things. Gift certificates: book out showing Christmas is inefficient. Give gifts, better to give money. Only an economist could write a book like that. Fundamentally wrong. People disagree; it makes them less happy. Could argue about they're wrong for giving that gift. Having a gift which might not be precisely what you would have purchased is not as good--is worse--better--than giving money. Here's $25 for a bottle of wine; choose the one you like. Did you like red, white? Maybe don't even want a bottle of wine. But that's not what people do. Given the opportunity, that's never what people do. There are gift certificates. In many cultural settings they would be inappropriate. Wife's birthday, dinner guests--or cash, generally not done. Reason for it. Common argument is they don't know what you've paid for the bottle of wine, so instead of giving them $20, you can only spend $10. Absurd. People shop for wine, they know what it costs. If you were able to match what you know they like it's a much more charming gift even if it's cheap. Not a financial transaction; takes us into a personal relationship. The way charities are able to raise money is they are able to say here's why it matters, here's the personal connection. It is self-interest to be able to portray yourself--Joel Waldfogel. You can make more money by not caring about money. The reason non-profits can make money from donors is that they are saying we don't care about money and all the money is going to go to the recipients. So all of the people you care about: we are going to spend it efficiently and we ourselves live like monks, take a monastic vow. Money doesn't matter to us at all. Our doctors are motivated only by the desire to help people. If they can cultivate that reputation, they'll get far more money themselves. Self-interested from a non-profit perspective.
30:48Mentioned as a non-profit phenomenon; put it back into the profit context, make it a little more confusing. Merck, used in book Invisible Heart, motto that Merck used to have, inspiration; drug company, pharmaceuticals. "We try to remember that medicine is for the patient. We try to never to forget that medicine is for the people. It is not for the profits. The profits follow.... The better we remember that, the larger they have been." Same idea. If you tell people in a for-profit organization that you are going to make as much money as possible, it generally doesn't do very well. If you tell people your goal is to help people, in a non-profit setting as well, make the most money. Difficult to make a credible commitment really to care more about consumers than about profits. Some of it is window-dressing, flim-flammery. Maybe the reason we see nonprofits is that it's a way of binding themselves to the mast. Give us your donations. In the modern setting, going back to the legal distinction: in the legal distinction, a non-profit can pay its employees a ton, can have lots of goodies for its employees that are non-monetary, influence prestige, etc. Unless you do not charge and do not collect any money that is a bit of romance rather than the real thing. There are rating agencies that give information about that and percentage cost. Information asymmetry. A few years ago, there were some non-profits flying around on Lear Jets; but that came out, and like in any asymmetry, lemons problem--you can't tell what quality you are getting--if just a few non-profits are wasting money they all of the contributions are going to dry up. Rating agencies saying you get 95%, only 5% administrative costs. May be some ways of trying to solve the problem. We see for-profits and non-profits in the same industry. Whether it's the same product is debatable, but serving some of the same group of customers. Hold that. Something about gifts: disagree that the best gift is the one you would have wanted anyway, wine I know you like or music you would have liked. Approximates money. The best gift is the one you didn't know you'd like. I find an author or band or movie you've never heard of, but I put enough time into the relationship. Sometimes that fails: color of the sweater is the color you don't like. Not that you never thought of the lime-green sweater. But I find you a movie or vase you never thought of yourself; what we strive for. That or maybe I do know about it but never bought it for myself because it seemed frivolous or self-indulgent, but when I get it I say I just love this. The other paradox: according to the Waldfogel analysis--textbook. St. Louis Cardinals. Mike likes the Cardinals, Albert Pujols, and one you won't like: Enos Slaughter. Suppose I'm such a good friend to you that I'm going to get you a piece of Enos Slaughter memorabilia that you would not buy for yourself. $300 and no way I would buy that. Don't think anyone who gets that gift says "I wish I'd gotten the money." Don't say it, and don't think it. Not even an economist thinks it. Waldfogel says you would pay on average 16% less, and that's why Christmas is no good. And from your Grandma, you would pay at least 40% less than what she paid for it. But I am so happy to have that Enos Slaughter photograph. You like it, but you don't like it $300 worth. Could be a lot of reasons--your wife could be upset you bought it; but that's not the case I'm talking about. Looking at the picture every day. If I bought it for myself, it would be self-indulgent. But as a gift, it's a sign of your esteem. Catalog number: I'll send you a check and you can buy it for itself--would offend you. But if it showed up on your doorstep, you'd be ecstatic.
38:35Hospitals: the different ways of providing the service co-exist. It seems pretty stable. Both are expanding at about the same rate. There seem to be some advantages of non-profits: a way of inducing people to give more contributions but also genuinely out of the fact that people like the idea of providing this service at reduced cost to people who need it. A little bit of a red herring. Most hospitals charge for the service. The hospital thing confuses what is going on; should think about a model that is only a real non-profit: no fee for service, and the people who donate do so because they care about the mission of the hospital. We don't see that. The reason we don't see it: government provision of these things is crowded out. The truly non-profit way these would be provided--expansion of government in the 1930s at the federal level basically eliminated private charity to help the indigent, to help the hungry, to help the sick or poor. What most private charity goes to today--very little goes to the indigent--you will see a food kitchen for homeless people because they don't have food stamps, don't have an address, don't want to fill out a form, not integrated into formal bureaucracy--you can still collect money to fund a food bank or soup kitchen for homeless people, but very hard to compete with food stamps for poor people via private charity. Where do we see non-profits? We mostly see non-profits to supply subsidized services to rich people: museums, the opera. They are taking advantage of the tax system to provide services to themselves and claim credit at their big gala that they are being a contributor to their social class: Look at us, we are contributing to the opera. Window dressing around it, programs for city schools, bring the opera in to sing The Marriage of Figaro, but overwhelmingly the tax status of those institutions is helping rich people, which is bizarre. Different from the original rationale. True of education as well.
42:33Guest last week, two weeks ago, Art De Vany. He has a website: used to be free but now it's not. If you want to get to the good stuff, you now have to pay a subscription fee; charges for the service. Some of the commenters were offended by that. Here he is, promoting his website on his podcast. Couple of thoughts. One is: that's what we all do. Reputation, brand name--not uncommon. We have lots of authors on here. No one complains: he's just trying to sell copies. True you don't make a lot of money selling books generally. We're all selling books, doing other things. Call it capitalism. If you don't like it, don't go to the site. But there is some hostility to this, partly because--don't want to overdo this--we have a sense of entitlement. We have free blogs--Cafe Hayek, Kids Prefer Cheese--we don't charge. Like it that way; don't have to post every day; busy, feel a little bit of guilt but take a break and it seems okay. Don't do that at George Mason. George Mason pays salary. Could have a different model: how dare somebody try to make money teaching, trying to help people understand economics? Could have some donations. We have something between a profit and a non-profit legally. Big disconnect between how much the students pay. But you keep writing stuff, trying to get a higher salary! You are a pig! You are interested in having your salary increase: valuable guy. Doing things publicly where you can say look at this thing that I've done.
45:37Segue to the media. Right now, obvious problem newspapers have: not making much money. Old source of revenue was advertising. Now stripped away by Craig's List and other forms of information. Newspapers, Art De Vany's website, EconTalk, etc. all have something in common, which is that it's very inexpensive to expand the audience by one member. Really attractive thing about the fact that they're really cheap; costs are covered by people other than the customers. In the case of newspapers, it used to be advertisers, willing to pay to get their ads in front of those eyeballs. Now that they are having trouble doing that, they are going to have trouble collecting the money. But of course they could become charities. The New York Times could create a foundation, not charge for the NYTimes, give it away for free--which it does now and which almost all do, Wall Street Journal is the only prominent one that doesn't. Couldn't they just create a great newspaper using the model of National Public Radio [NPR], though it collects tax money--small amount. Could be funded by donations. Would that be an okay world? Not a paradox. But could finance themselves better by stopping charging for subscriptions and asking for donations. That's the opposite of the way we think about Samuelson's story about public goods. Excludable public good; all they need to have is a password. Newspapers that are going to survive are not going to say here's a password--you've got to sign in in order to look at our content. They are going to make the content free and then ask for donations. Presumably the reason is some relatively smaller number of people are going to donate proportionally more than a few of us paying a dollar a week. Seems like a paradox; opposite of usual story about public goods. Interesting, viable model. Viable besides the fact that people have nostalgia for a brand name like the NYTimes--others have negative nostalgia--want to curl up with the Sunday NYTimes puzzle or on iPad or holding it in the magazine, will fund these out of love. The fact that it's being distributed at zero marginal cost--no subscription, no fee--will allow people to collect more donations. Will say we can't charge for it, will just ask for money, but will reach a lot of people for that money because the out-of-pocket costs to the consumer are zero. That business model--is that a better model, maybe the only viable one, disconnect of who pays for it and who consumes it? Normally in economics, medical care, education Ravitch podcast--we give it away, don't treat it as value--but here we are talking about a situation like EconTalk because we'll get lots of listeners. Not to get more money from Liberty Fund but because that's what we're in the business for--encourage economic education. Want huge audience of interested listeners. Health care: is there something different about the internet? Get the WSJ, don't mind paying it; infuriated me to have to pay to get access to the NYTimes. Is there something about the Internet where we think it should be free? Are we going to get over that. Don't mind paying for software. It's just what's on the Internet. Why is it that we want stuff to be free on the Internet to the point it may harm ourselves? The NYTimes was about a dollar a week when they were charging. Made myself worse off by having a bizarre principle that they should be free. Why should they be free? Fell into that trap. Feeling of entitlement. Famous story: a lot of people over the age of 70 who hate the Red Cross. First encountered this in business school at Washington University; talking to charities, individuals--sometimes they would say that would be okay so long as we don't have the Red Cross involved. Usually you'd think of the Red Cross as some kind of positive. Turns out there is a significant group of people who have a visceral angry reaction. In WWII the Red Cross and some other groups used to give away donuts--not a joke, not an urban legend--to soldiers and whoever it was. At some point during the war they started charging for donuts. It was a nickel. Even heard people in the Red Cross today, when they encounter this--usually from veterans or veterans' families--sometimes come to a meeting and bring a box of donuts: "Here's a bunch of free donuts: let's not talk about the donut thing." This makes up for the 17 donuts we made you pay a nickel for. Sounds like a fake story but think it's a true story. They took something they were giving away--as you lower your price, your costs go up; each donut has a cost. In that case people were so angry--it wasn't even like they were profiting off the soldiers. Just looked this up on snopes.com. U.S. Army asked the Red Cross to charge for donuts, coffee, and lodging. Not to make a profit, but to make even. People valued this service. Quotes from Eisenhower. Not just the Internet--turns out it's the internet and donuts. You got it for free and then they start charging; what's wrong? No contract at all. If I have a new product and want you to try it and give you a free sample--sense of entitlement. Hard to put that genie back in the bottle. Steve Meyer podcast--for people who have stolen their music for many years, hard to go back. Forego transactions the value of which is less than the money you have to pay. Irrational but will persist out of this sense that it is wrong.
56:41If it disappears--if news organizations disappeared and didn't exist without a subscription fee? Would have to be generational. 99 cents is not enough to worry about, but could forego it on the principle that it should be free. Or steal it. If I spent two hours stealing it, I should have paid the 99 cents. Evolution of information will take some twists and turns over the next few years. Would it be okay: posed a conjecture: The reason I don't want to pay the NYTimes is it's a for-profit company. If it became a non-profit, would it make it easier for me mentally to pay a subscription fee? Maybe that is the business model that will work. Fee for service non-profit, not a donation non-profit. Might that be more viable? Would be perverse. Full circle, medical issue. Back in the 1950s it was considered grotesque that people would get paid for giving blood. Economists weighed in on this: book The Gift Relationship, Richard Titmuss; piece in NYTimes with Michael Wolkoff, incentives of this. Alex Tabarrok podcast, kidneys: if you want people do donate out of love, you don't get very many. Our cultural attitudes have ebbed and flowed. Suppose you have two companies: for-profit that sells blood and a non-profit that gives away blood to people who need it. Which is more likely to make you go in and roll up your sleeve? Non-profit has an advantage. But the argument at the time--and still is--if you pay people for the blood you get people who are desperate for the money, more likely to be drug addicts, health problems, may give too often, can lie, hepatitis, AIDS. The two could co-exist. Plasma had a commercial market.
1:01:37Fundamental question: as economists we tend to argue for the power of profit and market incentives. More complicated. The role money and culture and expectations and non-monetary forces play are also a large part of the story. Hayek: markets provide information: 1945 article. But later Hayek argued for nontraditional markets. If they survive and attract enough money; hard for governments to do this. Wide variety of different organizations that may be able to do this. Might be some kind of voluntary organization instead of strictly for-profit institutions. What form they would take. Let a thousand flowers bloom. Software: Wikipedia, people contributing their time, reputational advantage; contributing time out of love.

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COMMENTS (71 to date)
Mads Lindstrøm writes:

About why people want Internet websites to be free. One contributing reason could be that the WWW do not only derive its value from the content, but also from the interconnectedness of websites. If you setup a paywall you hurt this interconnectedness.

Some may argue that charging per article will allow us to keep the interconnectedness and still let news organizations profit, but no dead easy micro payment scheme exist yet. At least not micro enough that it can be used for peeking at a single article.

John S. writes:

I'm surprised you didn't mention schools. Here is a market where you have all three models operating: for-profit, non-profit, and government. Up to a few decades ago, I would argue that the non-profits did a better job. Consider Catholic schools: they provided education on par with private academies, at a much lower cost. The teachers (nuns) were paid very little, and basically provided their services out of the goodness of their hearts.

The model has broken down now as fewer and fewer women want to become nuns, but back in the 1950s and 60s, given the choice between schools that were operating for profit, and those that were doing it out of the goodness or their heart, many parents chose the latter.

Russ Roberts writes:

John S.,

I meant to mention the school system example. It was in the back of my mind because your point had come up in the Ravitch podcast and was part of the reason I was thinking about these issues. The nuns aren't volunteers but they do make less because of their willingness to work at lower wages, a willingness that comes from their devotion.

Hard to know what to make of that, assuming it's true--assuming the nuns do an excellent job. Is that a plus for the profit model the way I defined it? Doesn't the willingness of nuns to work at a low wage signal to a profit-focused business that they should be hired? But what if people were willing to work for low wages simply because they have poor alternatives? These questions are what I am struggling to understand.

David writes:

RE: Taking something that was free on the internet and charging for it, specifically news.

Customers perceive that they already pay for the distribution in the form of internet subscriptions. We pay again in the form of advertisements. In some instances we also pay for a different form of the same content such as a newspaper subscription. As a person of a younger generation I am always amazed and confused that cable TV can get away with charging a monthly fee as well as using advertisements. The danger of making a paywall for general news is that people just move to other non-paywall news sites that will provide the service. There are more and more places to get news today than 10 years ago. Why should the consumer be fearful of some of them vanishing.

RE: "Stealing" music / movies / restricted content.

First off the content that people download or infringe the copyright of is not the same content as is being sold by the content creators. It may appear the same to someone who doesn't understand technology but they are really different. Unlocked content that people get from the internet is vastly superior in terms of value to the consumer. What the media companies provide in the form of drm is actually a value minus. The ability to port content between devices is huge and one the music/movie industry would love to charge you for. People are tired of paying multiple times for the same thing. I actually believe that if the music industry actually added value to the product people would have no problem paying for that value. As it stands I will just send my donations directly to the artists I enjoy bypassing the relic that is the recording industry. Customers that are treated like criminals tend to start to act like criminals given enough time.

Mike Munger writes:

Wow. Great comments. EconTalk has some pretty impressive customers for its free service. Perhaps EconTalk should pay YOU; free isn't cheap enough!

Ken Ndirangu writes:

Do we feel entitled to the Internet ?
Yes we do but we do so for alot of other things.
I live in a country with over 20 free TV and over 100 free radio channels. I get to watch the news or get entertained without paying this companies any cash. But I do pay by having the inconvenience of watching advertising, suffering through their choice of programming, paying for an electricity bill and arguably the opportunity cost of my time.

It is no different with the New York Times especially considering that it's market had become much more competitive due to alternative news sources on the Internet.

I love the podcasts, they are a great source of
education.

Oakeshott writes:

It's been pretty conclusively shown that our valuation of things is dependent (to some degree) on whether or not we possess them. This is probably due to the fact that we dislike giving things up more than we like getting them.

1) Current equilibrium: Mike has $300 but no photo. He values the $300 in his pocket more than the photo on the collectibles website.

2) Hypothetical equilibrium: Mike has the photo but not the $300. He values the photo more than $300 he could sell it for.

In both scenarios Mike believes he is in the optimal position and has no incentive to change either by purchasing the photo in 1) or by selling the photo in 2).

Receiving the photo as a gift automatically puts Mike in situation 2) and where he again feels he is the optimal position and content to remain there.

So even if Mike would only pay $100 maximum for the photo in scenario 1), there is no loss of efficiency as long as he values the photo in hand more than the $300 he could sell it for.

Clearly social factors greatly reinforce this phenomena.

Sebastian Iorga writes:

Very, very interesting talk.

On why people get offended when previously free services start asking for money: I think it's the assumption that you are being gouged. I don't think it's rational, but if you get service/good X for a period of time and no one mentions this as being somehow exceptional(a promotion, a sample whatever) then it sort of makes sense for you to assume that the producer somehow covers their cost otherwise. The Red Cross might cover it from other donations, websites might cover it from ads and so on. The assumption is that if you could give it away for a long time then why would you charge for it now? Your just looking to pad your profits, as opposed to struggling to break even. That at least is my instinct on the matter, even if I disagree with it after a bit of consideration.


Regarding blood donations: I think the situation is similar to the gift problem. There are some things that you just don't monetarize, because money is to a degree perceived as dirty or simply an inappropriate incentive in that circumstance. Blood, organs and life are deeply interconnected in our psyche: we don't sell people, we don't sell organs and we shouldn't sell blood. The criteria for who lives and dies should not be that person's net worth. I know there was a big struggle in Romania, where I am from, to boost blood donations these past few years. What got people to donate was a very clever ad campaign(advertisers and televisions do pro bono work as well, go figure). One of the controversial things about donating blood in Romania that came up was the fact that you get a food coupon, worth $2-3. Basically the cost of a meal, which doctors at the center say is just enough for your body to recover the blood you just lost. A lot of people refused it or felt insulted. It's almost like prostitution in a sense, you don't want to be selling (parts of) your body. I don't agree with this stance necessarily but I can see where people are coming from.


Music and software piracy: I think price is underestimated as a problem. I listened to 3-4000 individual songs last year, according to my music software. Imagine buying all that music at a cheap cheap price of $.80/song. Where would a college kid, or hell, the average person in the world(and lots of people in America) get $3-4000 to spend on music every year. I am without a doubt a more voracious music listener than most but I am also considerably wealthier than most people I know. I also fly a lot US-Europe and because customs has the right to check your laptop/mp3 player content for pirated materials(or perhaps I just believe that particular urban myth) it's stressful for me to carry around pirated music when traveling. I might get sued so I don't like downloading in the US. I have a strong incentive to buy music, I have virtually no money and I REALLY want to listen to lots of music.

The solution for me was the Zune Pass which is a subscription service, works sort of like Napster, let's you download DRMed music that you can keep listening to as long as you pay the subscription. In the case of the Zune, it's slightly worse than Napster(which is running its subscription service again as well) since the content is bound to Microsoft's mp3 players(which are quite good, so I don't mind that). The service provides the same quality as iTunes(or more since iTunes kinda sucks to use in a Windows OS), with most of the same tools and comparable album selections. It costs me ~$170 per year. I would probably pay more, thinking about it I would go into the $3-400 range for a service like this. Still 1/10th of what it would cost me to buy the music. I could go on this topic for a long time since I've thought about it very much(in the bad old days of sweating through customs). My point however is simple: price really matters. There's all kinds of other issues, like the fact that most songs suck and you want to try them out first, or that record labels are, wrongly imo, perceived as exploiting the artists and people would be willing to pay if only the middle man wasn't there. But fundamentally I think the problem is one of cost. If you sold songs for $.01 people would buy them in droves(but of course that might not cover your bandwidth let alone production costs). I am truly curious to see if the subscription model works and how it is going to evolve. I have no idea if it is even viable.

To expand this see Hulu(I'd subscribe to it and probably will once I am back in the US, hell I'd subscribe to an online streaming database of BBC/PBS documentaries) or Steam(excellent service, lots of value added over piracy, which in itself is value added over buying DVDs/CDs, I'll never buy a game not on Steam or a similar service again(unless it's some amazing indy title) because it's really wonderful for it to always be available to you regardless of lost or scratched disks).

And truly finally this is why people don't like for profits: http://hothardware.com/News/Activision-Blizzard-CEO-Bobby-Kotick-Talks-Gaming-Hates-Happy-People/

It's an extreme and absurd example, but the fact that even one of these guys exists makes it easy for any for-profit venture to be watched with suspicion.

marcus writes:

Can it be argued that when taxes are higher; luxuries like the opera programs and museum quality goes up due to more donations?

David writes:

The following interview with Chris Anderson from Wired hits on a number of points discussed in this podcast. A different view on this interesting subject.

http://fora.tv/2009/09/23/Free-Conomics_with_Chris_Anderson#fullprogram

[We've also added a link to Chris Anderson's EconTalk podcast in the links above. Thanks for the reminder!--Econlib Ed.]

Julien Couvreur writes:

"What motivates people, self-interest or altruism? Both obviously."

That seems far from obvious. Maybe this should be elaborated. Or maybe our definition of terms differs.

If I choose to give to charity, rather than spending the money on a vacation, it is because the former seems more important to me.
Altruism is about following our own values and preferences, and with the ultimate goal of being happy.

dario writes:

But you are seeing only from the economic point of view. There are motivational factors such as feeling that helping another. Additional to meet a need you help others. If this succeeds reusing things get additional value, to keep usable products out of landfills, therefore less pollution. All this together achieves a cycle where everyone wins a little, the giver, the requester, nature and society.
http://www.givingetting.com allow people to give and get stuff they no longer need or to get what they need and don´t have, donating or getting it for reuse, achieving longer product cycle and also keeping useful stuff out of landfills.

LowcountryJoe writes:

I liked the issues that were brought up on this podcast. Lots of psychology and discussion about what causes people to act/not act. I have some statist-minded friends who could benefit from listening to this specific podcast because it really strikes at the deepest roots of ideology.

Nick writes:

Dr. Roberts,

With regards to open source software I would argue with your characterization. For some maybe it is done out of "love" but generally software is created to solve some sort of business problem. Developing a robust software solution is expensive, so by releasing the software "free" they are in fact receiving a service which is worth quite a bit of money if they had to pay for it privately. Often the businesses which develop open source solutions also sell paid enterprise versions or charge for support services and these are done for profit. In fact it can be quite a lucrative business model by lowering the barriers to entry it encourages business to adopted their solution, once they are hooked you can up sell them to an enterprise ver or a lucrative support contract.

Nick writes:

Err..I mean to say, in trade for releasing the source free, the business which developed the software receives a valuable service as the "community" of programmers/users finds and patches bugs, augments with new features and so on. Its mutually beneficial, where as in most non-profit exchanges, the person who is donating their time receives no benefit which has monetary value.

Jake Russ writes:

I have to second David's points.

Especially with websites, I would pay more if getting behind the pay wall meant no ads. But largely, the banners and the pop-ups are still there. So I paid to get the content but I'm still hit with all the annoying bells and whistles. Maybe I'm wrong but that feels like double dipping.

If memory serves me right, the satellite radio firms used to advertise on FM/AM radio that they had no ads. They do now and I'm sure users aren't happy about it. Maybe they did that to survive. I don't know.

I use Google Reader to read blogs, I love it because all I get is the text in a simple easy to read format, which is all I really want. I'd pay for that. Maybe that makes me a bad blog follower because I rarely click through to the actual site.

I'd be more receptive to a pay structure that eliminated the extra stuff.

Pietro Poggi-Corradini writes:

On gifts I have 3 hypothesis:

1. Transaction costs: if I get money, instead of an approximately good gift, I still have to go out and spend time choosing something. The transaction costs I would encounter might be higher than the costs of not getting exactly what I wanted.

2. Permanent Income Hypothesis: if I get 40 dollars, I might just save it.

3. Old age: we are terrified by old age, or generally become so incapacitated that we won't be able to express what we really want, we won't have the independence of getting what we want ourselves, etc...(i.e. we're afraid that our transaction costs will shoot up to infinity). Therefore, every opportunity to get a gift is an experiment to see if people really understand what we want deep down. If we don't get what we want exactly, that's just part of the training period. Hopefully the more we repeat this experiment the better people will get at anticipating our wishes.

Pietro Poggi-Corradini writes:

One more thought regarding the taxi-cab example. If one just looks at knowledge, your brother knows you a lot better and would be able to anticipate many of your wishes (your preferred route, preferred music etc...) and yet knowledge doesn't automatically translate into action. This example also raises another puzzle: is local government necessarily better than distant govt? Just because local authorities might have better localized knowledge it does not follow that their actions will necessarily be better. I don't have an answer to this question, I've always assumed local govt would be better.

Eric Vanhove writes:

Only about half way through the podcast... great talk, as usual.

I was struck by how the discussion of why people donate to non-profits is so much like foreign aid. When the US pledges so much money to aid a certain country, the unspoken (but very clearly delineated) requirement is that the aid will come from US companies in those certain areas. So the US generally decides what the recipient country will get, although the US company that will provides the service will actually decide what is provided. And why? It isn't only that the US thinks it knows better than the recipient what the recipient needs, but the US likes the provider of the service and wants to help them out. I think that this is also the case for non-profits. The donor likes the area that the non-profit targets, and likes the producer (i.e., the non-profit) better than anyone else and wants them to benefit. Considerations of the target of the donor's largesse are mainly neglected.

Russell writes:

Another enjoyable podcast.

I was hoping, though, that Russ and Mike would delve a bit deeper into the fundamental question of whether a "non-profit" (ignoring the arbitrary tax code def.) can/does truly exist in the first place?

If profit is defined broadly: money, status, good-feelings, etc. is there really any organization that is truly non-profit? I would argue that there are almost zero, true non-profits, which is a very cynical view, but is it wrong? Is anyone truly altruistic? I think probably so, but only in an ad hoc, almost accidental way (maybe the V-8 story is true altruism, but Russ seemed to question his own example).

Having said that, there may be perfectly good policy or social reasons for continuing the fiction of the profit/non-profit dichotomy, but as a starting point I think it important to determine if the analysis isn't starting from a false dichotomy. And organizations can't really be altruistic only people (animals) can - right?

Even if there is no such thing as perfect/"true" altruism, I do think there are behaviours worth labeling altruistic even if they aren't 100% so. Don't let the perfect be the enemy of the good...

Justin P writes:

Re: Why is it that we want stuff to be free on the Internet to the point it may harm ourselves?

I think it comes down to subjective valuation and opportunity costs. Subjective valuation because I don't use the NYT often because I feel they have a very strong left-wing bias. It's my opinion and anyone can disagree but thankfully I'm not forced to read only the NYT, I can read the Wall Street Journal. (which is also biased)
This brings me to the second point, Opp Costs. Now I do get mad at the WSJ for gating their article online, because I know they are there somewhere, just waiting for me to read them. I can simply consult the Oracle of Google the article title, and the Oracle of Google will provide me with an ungated copy of the article, completely free of charge. The reason I'm mad is because of the extra hassle I have to go through. To me, the idea of gating new is a waste of time, since the Oracle will give me anything I want for free anyway.
The opp costs of going through the motions of Googling is what makes me mad, not that WSJ has the audacity to charge for their service. I think people get mad at WSJ for the wrong reason, they are in it for profit, which I don't mind at all. They are obviously doing something right though, since they charge and are getting subscribers, and the NYT is free and losing subscribers...Market signals anyone?
If the WSJ were to gate their material is such a way that I absolutely could not get to it unless I paid the WSJ, I'd pay, maybe even the $10 a month for online access. But since they do it in such a poor way, I don't pay, and will harm myself by going to extraordinary lengths to get it for free.
I think the same things hold true for music. We only go to length to download (pirate) music that we have a high valuation of. I think David has a great point about adding and subtracting value as well. I don't think most people mind paying, if the service adds value to the product. We do mind paying when the company subtracts value from the product, like DRM. I personally hate buy from Itunes for that reason. I hate Itunes because of the extra hassle it takes to port it to other devices.
The Internets are a truly wondrous thing!

Justin P writes:

@Russel:
I agree that there isn't any real or true "altruism." Everyone is out to get something, if not money, then status, good-feelings (like you said). Even the Nuns, do what they do (at least partially) by the explicit promise of "eternal paradise." There is always a reward of some kind, at it is almost always high subjective. The reward of eternal paradise, isn't high on my list, but for a lot of people, that's the best reward ever, but since it's non-monetary, there isn't anyway to measure it.
Which of course leads to the $60,000 question, why can people seem to be "altruistic" yet groups of people (organizations, corporations etc) deemed bad or "evil?"
As for non-profits, I work for a "Non-Profit." It's a NP in only the 501 sense of the word. My company charges a lot of money for their services, it's only their service is research. (which is somehow deemed to be "good") I also used to do braille for a NP, the NP status was only for tax purposes so the owner could get gov contracts, again since NP are deemed "good." Is there really any distinction between NP and For Profit firms in the real world?
It's only a signal, nothing more. I think of the United Way. They are a NP, yet their administration extract huge rents. The last financial statement I saw, had Admin expenses at ~40% of total revenue (donations). That just doesn't jive with the popular notion that NP are all "volunteers."
I personally think the whole notion of Non-Profits are extremely romanticized in our society. Almost all of the NP I know of, are not "not-for-Profit", they are for extreme profit, since they can get huge gov contracts as well as get huge tax breaks, which I think are wrong. Of course, I'm all for a flat tax on everything, absolutely no exceptions (especially not religious or charitable groups).

Overall great podcast, keep the Mungercasts coming.

I love Munger's idea of paying Econtalk listeners...I'll take an autographed copy Russ's Invisible Heart as payment.

Sebastian writes:

@Eric: I like your take on US foreign aid. Personally my far more cynical view is that aid is often directed through US companies or in the form of US goods merely as a subsidy or pay off to those particular interests. Aid is a complicated topic and a million things can be said about it though(for instance you probably don't want to let the country's government manage aid money, since on average it'll probably be horribly corrupt).

A further comment on the social perceptions of giving stuff away versus selling it. I think what we're fundamentally talking about there is the idea of the person selling content, as opposed to giving it away, as having a horse in the race. Suddenly he's more interested in selling something, than the thing that he's selling. Even if this is as mild as "Saying provocative thing X" and then offering to expand on it if you subscribe to his website. I think often this type of thing makes our instinct scream SNAKE OIL, which often may be justified and often it may not. You have to agree that most things that ask your for money on the internet are con jobs though(but why readers wouldn't differentiate between some site selling weight loss tips and a clearly thoughtful economist's blog I do not know).

Magnus writes:

Wow. What a fascinating topic. I felt like a fly on the wall listening to two economists chat about ideas... both of you were not pushing ideas but were just chatting about ideas that we can all agree with. Refreshingly non-political.

This topic is interesting because in the wonderful world of webcomics, that's what happens. We offer comics for free, hoping that that will translate in the future to money for books and other merchandise. The guys at http://www.webcomics.com are the ones who told me about this business model.

The other idea that you mentioned was that Christmas was a bad holiday because you buy gifts that people might not want... but giving cash would be too impersonal and bad culturally. In China where I lived and where my wife is from, at Chinese New Year everyone gives cash as gifts. Same thing in a Chinese wedding. CASH. As a matter of fact, according to my wife, it would be a bit rude to tell your friends and family what THEY should spend their money on in order to give you a wedding gift (gift registery) they just give cash at a Chinese wedding in China.

Finally, you guys mentioned the idea of giving a V8 to a beggar because that is better than giving cash since he'll just spend it on booze. Your different take on that idea was fascinating and I had never thought of it that way. Living in Shanghai, I saw beggars all the time. I became jaded to their plight since students would always tell me that some worked for someone and if you give them money they have to give it to their boss. One American friend of mine started bringing food with her to give to the beggars. I thought that was nice, but your idea is that the beggar might not really want that food... and my friend was being very selfish? because she gave what she wanted the beggar to have, not what the beggar really wanted or needed. Fascinating.

Mikeikon writes:

I've been thinking about this a lot as well. I consider myself pretty competent in economic understanding, yet (or maybe as a result) the concept of "profit" is foreign and meaningless to me. I think we should erase it from economic discourse.

Correct me if I'm wrong, but isn't profit simply the value of your contribution to the creation or delivery of a product or service? In other words, the price of your labor/time/risk?

If I am a retailer and I buy a product from a supplier in order to resell it at a "profit," my "profit margin" is just the price I (along with my customer) assign to the part of this service that I perform myself. In other words, my time, brainpower, and physical effort in getting the product from the supplier to him.

The money I spent on the original product was to me an expense, but it was to the supplier a profit. Of course, the supplier had expenses of his own which cut into his own profits, but these expenses were just the next guy down the line's profits. In fact, EVERY expense is someone else's profit.

Therefor, it is ridiculous to say that profits are unnecessary or wasteful, because profits are the prices assigned to the labor of the various actors in the creation and delivery of a product. If you cut out everyone's profits, you'd cut out the price system altogether. Without profits, there would be no prices, since profits are prices and prices are profits.

So the very notion of a "non-profit" seems absurd to me. I see the donor as a customer and the purpose of the "non-profit" as the product he or she is purchasing. The price of this service is what the owners and employees of the organization earn monetarily or gain otherwise from the experience, which--even if it is not much--is still profit. These profits are driven down by competition among "non-profits" supplying this service to donors, since donors do not want to see their money going to the organization rather than to the people they are trying to help.

I think to truly understand economics we have to get rid of these colloquial distinctions.

Tanya writes:

Great podcast. Made me think a lot, while chuckling at the jabs you kept exchanging. I love how you didn't reach a final conclusion (like: "this is the way you should be thinking about it" preaching sort of style), but brought up thought points that made me go deeper in my thinking about the value we assign to things. I don't have any comments, just that your arguments have been circling in my head for hours now... Keep Mike Munger coming back, please!

Amos Wright writes:

One of the reasons you are asked to participate in fundraisers that are far less efficient than straight donations (you were talking about manning a booth) is that fundraisers reinforce and create participation with the charity. For those who are directly connected, it's simply a familiarity/community thing. It's not just signaling - though there's that. It's tying you in closer so that you'll donate over the long run.

For those a little more disconnected from the charity, the familiarity thing plays less of a role, but the event helps inform people that there is a cause and that there are real people they (might) know who are part of the event.

J. Anomaly writes:

Mike Munger says (18 minutes in) that it is paradoxical that we want to constrain the recipient of our donation by earmarking it for a particular purpose, when giving them cash would allow them to spend it in ways that would make them better off.

Earmarked gifts are only paradoxical, however, if we assume either that actions always reveal preferences, or that a person is always better off acting on their preferences. Of course, the person might prefer Miller over medicine, but the donor believes if he thought about it, he would prefer medicine over Miller. Alternatively, the recipient might prefer Miller over medicine no matter what, but the donor would prefer that he have medicine or nothing at all.

Either way, there's nothing paradoxical about an earmarked gift: it's paternalistic, to be sure, but not paradoxical.

Thanks for another great podcast!

Jonathan C writes:

Great podcast on a very provocative topic.

The difference between a for-profit and a non-profit corporation is that the latter is not allowed to distribute profits to outside shareholders. Non-profits commit themselves to instead reinvesting 'profits' into the corporation, which means they pass them onto clients and other stakeholders. In my view there are many 'hybrid' types of firms between these two polar terms, for instance for-profit firms that find ways to commit themselves to a particular 'mission' (i.e. a pledge to deliver a particular service or particularly quality to particular types of groups at particular types of prices) by publicly dedicating a portion of all profits to a particular cause, by hiring agents 'motivated' to pursue certain types of mission, by becoming majority owned by shareholders committed to mission, etc.

Yes, of course, non-profits at times pad their employees and directors' salaries and to earn rents that otherwise might have been profits, but you'd be wrong to conclude that these firms are no different from for-profits. This would erroneously conflate the motivations of agents with the ownership/governance forms of their corporations. This creates a major blindspot. The whole point is that the stakeholders that come together to form a firm chose a particular governance form to try to bind themselves to a particular mission. Whether that mission is to maximize shareholder value or to maximize something else, there will always be problems of implementation.

We should be expanding economics to try to understand how in a world of individuals who are driven by BOTH the private pursuit of income optimally choose the organizational forms that help them to best achieve those goals.

Adam Smith opened our eyes to the possibility of "an invisible hand world" where pursuit of profit could lead to the public good. But you don't need to read too many pages further in the wealth of nations to find him worrying deeply about whether incentive/governance problems in corporations could ever be overcome to help make sure such an outcome might happen (e.g. read his discussion of joint stock corporations).

Smith was comfortable with a world where many types of firms (the butcher and the baker say) chose governance structures that led them to pursue profit but he also seemed concerned to make sure that morals/love/sense of duty and other aims and constraints "governed" the pursuits of men. Why not use the ownership/governance/capital structure of the firm to shape the incentives of agents and therefore to be bound by those aims and constraints?

The pursuit of income/profit is always a means toward an end (axiomatically so in most of Economics).

One last thought. This topic tiptoes around the important work of Henry Hansmann and his discussion of how hospitals and other types of corporation might, paradoxically, choose to strategically adopt non-profit status as a way to more credibly commit to delivering difficult to observe quality and also (relatedly) to not 'hold-up'. Check out his classic book, the Ownership of Enterprise. Also worth perhaps listing in the bibliography is Milton Friedman's essay on corporate social responsibility (and why he thought it was a bad thing).

Steve writes:

it is more time consuming getting $0.99 songs to continue working on new systems and other devices than stealing it would be to begin with. eventually it is easier to illegally download the song you already bought than to try to get the purchased copy working again.

the "free/pirated" version is a different product that actually works better.

Nic writes:

The issues talked about here are all over the journals and the books of the humanities, psychology, sociology, philosophy, political science, even public administration (think Elinor Ostrom)... it is just a pity economists have been so worried about econometric modeling. I think, fortunately, the trend is turning and the mainstream (mostly macro) economists are getting a handle on the actual behavioral and motivation forces of men, and what actually means to have a functional society.

By the way: I would NEVER go to a hospital where the doctor wants to, first, maximize his profit. I would RUN FAR AWAY!!! (As a matter of fact, I avoid to the most of my ability any such people)

Jake writes:

Re. Mike’s aversion to paying for things on the internet (only because I couldn’t identify with the analyses in the prior comments)

I have the same aversion, and as a 22 year-old Econ grad who routinely spends $100 of time to ‘steal’ $5 worth of online goods, I have thought about this issue a fair amount. Here's my argument:

People make purchasing decisions in part by evaluating the likelihood of finding a better deal elsewhere: “This awesome blue sweater is worth $200 to me, but I’m not going to spend $100 on it because I think I can find it somewhere else for $50.”

For those who have been socialized amidst competitive markets, I think we have evolved an intuition that if P!=MC, then there is a high probability of easily finding a better deal elsewhere. In other words, when price does not seem to reflect marginal cost, someone is probably trying to profit off your ignorance. Consequently, when we come across situations where price obviously doesn’t reflect marginal cost, we get (rightly) suspicious. Someone must be ripping us off! Think bottled water at Disney Land (P definitely !=MC).

I think online services are an extreme case – everyone knows that the marginal cost of a web service is ~zero. “How dare NYT charge me for this, it wouldn’t cost them anything to let me in!” Our intuition hasn’t yet adjusted for making purchasing decisions in a world where startup costs are really high and marginal costs are low…we feel like we’re getting ripped off when we’re not.

Granted, the pharma industry might contradict this argument. Do most people dislike paying for drugs (MC=0) in the same way they dislike paying for web services? I do get a similar feeling...

Don Garrett writes:

Russ,

I was surprised you did not mention the Freemium business model, where basic content is offered free while charging a fee for premium content.

http://en.wikipedia.org/wiki/Freemium

Schepp writes:

Roberts and Munger, always outstanding. Here are a few comments.

I don't think of these as non-profits, but as indirected profits. Many churches focus on returns to the member donors (not external benificiaries) where the church members assess whether inefficiency of spending their money as a group is better than spending it individually and paying taxes.

Other groups like the American Medical Association turn out to be a tax exempt lobbying groups that allows the tax shelter in the marketing campaign. One only needs to look at the National Journal Website and their expert responses to question to show the self interests of the group.

As for free internet, currently I am finding most of my information for the cost of advertising to my eyes, and the understanding that the sponsors of the content are selling something. I think of myself as a reasonable consumer when I compare the quality of my current information to the opportunity cost of paying, still being advertised to me, and still with content producers trying to sell ideas.

I don't begrudge the sponsors selling of ideas, but the folks that pay for Econtalk would be paying someone else if Dr. Roberts ideas and message did not line up in general with sponsors' views and message.

Ray Gardner writes:

Russ / John S. RE: Schools
Low wages made possible by devoted teachers would result in a higher quality product than low wages because of a lack of alternatives, for reasons I think or self-explanatory. Government schools hold such flowers back from blooming however so we’re stuck with the current crop of choices.

Free internet Info
People get upset at being charged for the same reason that the famous dictator games turn out the way they do in psych studies.
Beyond the irrationality of that however, it will be tough to charge for internet content for the sole reason that there is so much out there for free. With such a low barrier to setting up an internet presence, there’s always going to be lots of options for content. The NY Times, et al are finding out that their content isn’t so special after all.
And I would pay for Café Hayek and EconTalk, but I can say that having enjoyed them both for some time now. It’s much more difficult to get someone to subscribe when starting from scratch.

iPhone apps are probably a good model here. Your average app is maybe a buck, and the more expensive ones typically have free versions to try first. So instead of a newspaper charging a monthly fee, maybe they can work out a per issue rate? Or maybe just subscribe to certain writers, or maybe just the sports section? Get the whole paper for free in a very limited manner, and set up an account where with only one or two clicks a given article can be purchased for a quarter.

When’s Café Hayek going to have an iPhone app?

Greg McNerney writes:

About how consumers have outrage towards a price change from fee to a nominal charge (i.e. the internet newspapers and donuts), I think 2 things are going on. First, and more obvious, is an underserved sense of entitlement. That the person deserves it. It maybe a primal power/status issue, I am not sure. The second thing is a mild addiction that can onset at the continual and uninhibited access to the service/good (even if it is not regularly exercised).

When the price tag appears, the more obvious outrage from the sense of entitlement appears. But also, there is a sense of being swindled coming from the addiction. A classical model to relate to here is drug dealers. They may give the first taste for free in order to setup and addiction/habit, then start charging once the person is hooked. The consumer maybe subconsciously recognizes this ploy and gets rightfully upset. The times in which this economic model works is when the barrier for abstaining or finding a replacement is larger that the new price tag. For the drug dealer, it is easy since they may act like a near monopoly on the combined supply, trust & minimal effort that the new addict needs and the person physically cannot function without it. In the case of the donuts or internet newspapers, the consumer can find alternates or do without easily.

Therefore, I do not believe that online newspapers will readily start charging and get away with it unless either they are recognized as 'the place' to go (except for a small, dedicated niche) or everyone does it at once. Other models maybe successful though, like the non-profit idea you mentioned, which I like.

Mike Munger writes:

Jake: Good point! The marginal cost thing is right, I think, because each of us thinks of ourselves as G*d's special snowflake. Of course, in the aggregate, it costs something to supply the service. But it costs essentially nothing to "let me in." And there is nothing physical (like an almost empty movie theater, where I might feel like being let in costs nothing, but there is a physical building I am entering) that I am using. It's just data.

Schepp: Again, it makes me wonder if free is cheap enough, from the sponsor's perspective. On commercial television, you watch the content and suffer through the commercials, but pay nothing. On Learn Out Loud (http://www.learnoutloud.com/Podcast-Directory/Politics/Liberal-Politics)
you can download podcasts of liberal commentators, and pay nothing, and listen to NO commercials, because the sponsor wants to make the ideas free. But, is free cheap enough to do the work the sponsor wants? For time-shares and real estate deals, at least in the middle part of the aughties, the sponsor would PAY YOU (free dinner, free hotel, free drinks) to listen to their dog and pony show about how this swamp land was soon going to be a vacation paradise.

So, my question is, will providers at some point find a way to start paying eyeballs directly, instead of just tying their message to otherwise desirable content?

Nathan writes:

About Universities and Restaurants,

The hospital example came very close to an interest of mine--universities. There are for profit universities, but the discerning consumer pays MORE to attend a not for profit one. Such a situation is unimaginable with restaurants.

Both universities and the opera are instances of the rich paying for things they consume, but there is still an interesting question. Why do we not see not for profit five star restaurants. Cuisine is a form of art and valued by rich people. Alternatively why don't we see for profit operas, like we do see for profit schools. (Maybe we do see for profit opera in the form of broad way shows?)

karl writes:

I think people expect things for free on the net because:

1) it was a model established in the early days when commercial use of the net was actually forbidden.

2) there's always someone willing to provide for free what others want to charge for.

re point 1: I'm reminded of the episode of The Office where Michael starts his own paper company and gets a lot of customers because his prices are so cheap. Then he realizes he can't make a profit and starts calling customers asking them for more money. It's easy to lower prices on consumers, but it's next to impossible to make them happy by raising a price. If they got it for free, it will leave a bad taste in their mouths to pay for it.

re point 2: For example, news. Even if all the major news wires and papers stopped putting their news online for free, people like HuffPo or Oh My News would provide it for free. It won't be as good, or not as good for a long time (think wiki 5 years ago) but many won't care.

Matt writes:

Thanks for this podcast. It was good to hear economists recognizing the money isn't the only motivator in this world. :)

I had a couple of comments.

First, I want to second Nick's comment about open source software. On the surface, it looks like people doing work out of love. And for some, it works that way. Many of the primary maintainers of open-source software spend a significant amount of time on something that is "free". But many of them work on the software as a part of their paid job, and the company they work for derives some benefit in either being able to use the software or in being able to tout that they're the home of the software. Also, many of the contributors are people who use the software. For instance, I have contributed a few bug fixes to a couple of open source software projects because I found the problems while trying to write other software. It would be like if builders could freely exchange not just plans but actual physical structures at a very low cost -- it costs me very little to contribute, but I gain a huge benefit. Another example is an open-source project that I created. I wrote it so I could use it, and it seemed general purpose enough that others might want to use it too. I considered trying to sell it, because it would be useful in a professional space where there is lots of other non-free software. But, if I sold it, I would feel the need to make it much closer to perfect, and I doubt that I'd get as many people to use it and give feedback and fixes as if I release it for free as open source.

My other comment was about the contrast between for-profit and non-profit organizations, or, rather it's a comment about the way that money changes social dynamics. My first encounter with this was when my mom decided to stop helping at an after-school program at my elementary school. She had volunteered, teaching an after-school class. I don't remember what she taught, but I remember taking a magic class in the same program. She decided to stop teaching when the teachers were going to be paid. I don't remember the entire explanation, but she wasn't doing it for money, and really didn't want the experience to be muddied with financial stuff. And she's an accountant, so it's not like she's afraid of finances! More recently, I was listening to a podcast (from TED, I think), where the speaker described an experiment in Switzerland, where two groups of people were approached about having nuclear waste stored near their communities. One group was offered compensation. The other wasn't. The group that was not offered compensation was more willing to have the waste stored near their community.

Tom Vest writes:

Another great podcast -- great enough to make me glad that I postponed listening to it.

Re "Is there something about the Internet that makes it different?"

I think that here, perhaps, the Hayekian, Subjective Theoretical roots of the discussants' views on value, exchange, and money as a means of payment (and also the excessive attention devoted to media piracy as opposed the arguably vastly more significant and widespread phenomenon of tens of millions of people regularly investing their scarce time in the production of online content *in the complete absence of any direct monetary inducements*) may have eclipsed several huge differences.

Goods and services that can be exchanged over the Internet are, simply by virtue of the physics of packet switching, intrinsically nonrival. As was noted, with some additional/otherwise completely unnecessary effort, many Internet-based goods may be packaged in such a way as to make them excludable. However that additional effort is not and cannot ever be justified even in part as it was in the conventional economy, because no quantity of aggregate consumption over any length of time will ever be sufficient to even marginally deplete the supply of (literally) any thing that can be traded over the Internet. From what I understand, one possible Subjective Value Theory-inspired reaction to this fact would be to counter that input and production costs either don't really matter much (e.g., when they're high) or are completely irrelevant (as they asymptotically approach zero). If that's not too far off base, then the Internet present does present some interesting conundrums, the as the speakers rightly noted.


IMO they are worthy of careful consideration. In a world where the marginal cost of production is also falling in many "conventional" product and service markets, the scarce time and attention that individuals can allocate to just a few among the ever-increasing alternatives confronting them is itself a kind of payment-in-kind, and if current technological trends persist, in the future it may eventually come to be the last truly scarce/finite signal of value capable of driving virtuous market-like dynamics (e.g., competition that inspires and rewards innovative problem solving). Today we count on advertisers (who understand that attention > opinions > behavior), and they rely on Google, to convert those unconventional payments into $$$, but in the future that too may become less necessary, as other ways of measuring and realizing the "weight" and direction of attention-value exchanges are developed.

Anyone who's managed to suppress the natural/ customary response to this point might be interested in having a look at the link below for more thoughts on this subject:

http://www.eyeconomics.com/eyecononomics.com/MoEDdefined.html

Brian Cosgrove writes:

Amazing, you never seem to have an off day.
Regarding your free educational podcast (which I never miss) - it has provided me the incentive/motivation to purchase some of your books to better understand your ideas and insights.
In the process I've noticed the used hardback copies can be acquired at Amazon.com at an all-in price (shipping included) less than the Kindle versions.
As one who runs an internet service company, this seems odd to me.
I wonder - which market signal is correct?

Tom Vest writes:

re: karl's observations about Internet history and the psychology of pricing

On the historical point, the earliest "products" that were shared over the packet-switched networks that subsequently gave birth to the Internet were not free because commercial activities activities were banned by network operators. Granted, that restriction was implied or explicit in many of the early research grants that funded those networks, and an explicit commercial prohibition was imposed much later, at which point it did cause some fleeting inconvenience to the the few commercial data networks that were then just emerging (remember that an internet predated the break-up of AT&T by a decade-plus, and also predated the previously discussed FCC "resale rule" by a few years; before that rule, AT&T commercial practices alone effectively precluded the possibility of many kinds of independent commercial networking services). Back in the earliest days, Internet-based "content" was free because the only transacting parties were university science departments and government-sponsored research labs, and the only "content" exchanged was the kind of stuff that never trades in markets -- academic research, large scientific datasets, etc. (followed soon after by email exchanges between the same parties)

Your point about the psychology of pricing is an important one, but to fully appreciate it you should consider how that perspective might affect the incentives and behavior of producers. In general, technological breakthroughs tend not to arrive, or to generate productivity gains and product breakthroughs in tiny but highly regular incremental steps, like clockwork, on a year over year basis. And yet that is how such developments often appear, when (if) they hit the marketplace. Given that the shape and impact of major technological breakthroughs can be so utterly transformed between those two critical moments of discovery and commercialization, it raises (for me at least) some troubling questions about the drivers and limits (or alternately, the absence thereof) that shape that transformative process.

Trent Whitney writes:

Another great podcast, as all the ones featuring Prof. Munger are. You always raise several questions that seem simple, yet have no easy answers, and always leave me thinking. So then I have to go back and re-listen to the podcast later in the week.

My reaction was more at an overarching level in that I was left wondering not only why today's economics cannot answer these questions, but also why they're not even working in those areas.

It seems to me that it's because that today's dominant economic thought, at least in the USA, is organized behind the view of economics that it's the study of how scarce resources are (or should be) allocated. From that flows myriad mathematical models that try to examine those allocations, and determine what those allocations actually are, what they should be, and what needs to be "fixed" (or changed) to make that happen. It's always been my belief that you cannot accurately model human behavior (much less the human mind), so there are an infinite number of questions that will never be able to be answered accurately.

I've always viewed economics as the study of how people value things (goods, resources, etc.), and likewise how they respond to myriad external factors, especially including incentives. I think that leads us to be able to predict the direction of outcomes, but neither the magnitude nor the end result.

So in summary, I enjoyed your questions, appreciated the logic behind your answers/arguments, but am neither worried nor concerned about the inability to model it.

David writes:

Hi Russ,

Yours is my favorite podcast, and Mike is my favorite guest on your show! Thanks so much for doing this for free!

I think the core reason why people do not want to pay for things on the internet is because they don't want to pay for anything that is digital. And the reason they don't want to pay for anything that is digital is because people realize that once you have something in digital form, no matter how valuable it may have been to begin with it has no value any more. This is because it is essentially zero cost to make a copy of anything digital, which means that the marginal cost is zero.

Since the marginal cost is zero, who wants to be that patsy who pays full price for the first copy? Well actually, that's what's really valuable -- getting it first, or getting the content in a more convenient way. That's why people will pay $10/month to Netflix for unlimited streaming -- sure you could get the same movies for free, but by paying this very low cost, you get a professionally designed user interface, technical support, and consistently high quality. They're not paying for the content, they're paying for the delivery mechanism.

It is the same with other digital media: nobody wants to pay for content of any kind because the marginal cost is zero, but they will pay for someone to deliver the content to them in a way that makes it easier to use, or faster, or early access or any of a number of other features, but they are not paying for the content itself. So they'll pay with the release of personal information to get an account, or they'll pay a nominal fee to become an 'insider'. Doing so saves them time, hassle, and ensures they won't run afoul of the law.

Software is a little different from other digital media because it is often complicated and so it requires technical support, and there are frequent upgrades. But as with other digital content, people are not paying for the software itself, but for the right to yell at someone if it doesn't work, the ability to get it fixed right away, and for all of the support structure that comes with paying for it.

The Linux operating system is a case in point. It is produced by thousands of volunteers who are not paid for their work. There are dozens of free distributions you can download for free, and yet people will pay hundreds of dollars for a copy of Red Hat Linux. Why? Because Red Hat provides support if you pay for it. All the free ones don't, or the support is not as good.

In summary, digital content is worthless by itself, that's why nobody pays for content.

Charlie writes:

I don't think the Christmas paper can be dismissed so easily. To say there can be gifts that have value added does not mean that the dominant model isn't costly signaling. A quick example, my Dad is a much beloved teacher and coach at a middle school and gets all manner of gifts. Many of the gifts are sweets, often handmade, requiring time and effort, but delivered at a time when we're unundated with sweets. Many go uneaten. [you can try to give some away to guests, but it wouldn't be right to take them down to the local food bank would it]. At the end, he writes each person thank you notes. The cost in materials and effort expended in total is quite large.

So the question is what is the benefit of the signaling, and how is that affected by Christmas.

So if you think the students are showing respect and admiration and the teacher showing respect and gratitude, how does that compare to a counterfactual without Christmas or in a society without that holiday. Is there more or less optimum amount of positive feelings shown? Does Christmas make signals more or less costly? It's conceivable in a society without Christmas that teachers still get gifts, but more randomly, and the gifts can use less resources because the signal value is higher. On the otherhand it's possible that a holiday is needed up to the optimal amount of signal producing, people aren't thoughtful enough without the holiday--the holiday arises to fix a "market failure" reminding everyone to give gifts.

I'll end by noting that, the example Russ and Mike talked about, when a gift adds value to the economy as a whole--the value to the recipient plus the value to the giver exheeds the resources used--the question still becomes why we need Christmas to facilitate this exchange. There's no reason Russ and Mike can't exchange gifts all the time without a holiday. On the other hand, if we have a good reason to have a holiday, why not have many more gift giving holidays.

Matt H. writes:

Hi Russ,
You and Mr. Munger discussed the phenomenon where people inherently expect things on the internet to be free (mostly in reference to the news). The main explanation offered was that there was the initial condition of information being free and that when the condition is changed people react negatively toward the source out of principle. I also think this negative reaction has to do with the nature of the medium. The internet is structured so that you can jump from one site to the next using hyperlinks, which sparks this feeling of momentum behind researching a subject or topic. When this momentum is interrrupted by someone asking for money, there's immediate frustration that the natural flow of information seeking has been disrupted. Individuals will also feel that similar information will be available elsewhere if they spend extra time looking for it. Thus, they are paying with their time to avoid paying for a more direct way of reaching the information, but their stream of consciousness isn't being interrupted by a pay wall.

I don't know how many other people feel this way, but there does seem to be a notion that anything causing a disconnect between this very fast, intuitive, user-friendly medium is an unwanted hassle that will spark negative emotions.

Thanks for another great podcast!

John Berg writes:

These podcasts offer the best of teaching: making the reader/listener work and solve the proposed problem with the teacher, other students, and posterity.

First you erred in not recognizing that people have acted in order to please God. Remember the difference between perfect and imperfect contrition. Compassion is different than love and more likely to explain philanthrophy. The great era of Philanthrophy (love of man) was the late 1890's and Philadelphia is an excellent example. Free Library, Free Art Museum, Franklin Institute, Academy of Music, Natural History Museum, and the gift to itself of Benjamin Franklin Parkway. Replicated in New York and Vienna.

I kept waiting from you to bring up Obamacare and remembered the Davey Crockett story with it's emphasis on the fact that "Compassion" is not one of the enumerated rights in the Constitution.

Still lots of thinking to do over this podcast.

John Berg

Allen B writes:

Hi Russ,

Toward the end of your podcast you mentioned the market for plasma donations... I have to say that these do exist, or at least they did a few years ago when I was in college. In fact, there was a plasma center in our college town that often aired commercials directly aimed at college students (a group of people who are in need of money but less likely to be drug addicts or have the other problems you mentioned for people overing their blood only for payment). One I remember well was about a guy who makes a date with a girl, but then he opens up his wallet and realizes he has no cash, so he goes down to the center and donates some plasma and walks out with a wad of cash, the next thing we see is him appearing at the girl's front door with a bouquet of flowers ready for a night out on the town. I don't know how effect they were in receiving plasma donations, but I do know that in some of my more cash-strapped moments in my college years I considered donating it myself, although I never made the fatal step and actually made an attempt.

Jason Pratt writes:

Please go look at my site, Givv.org. I built it for many of the same reasons Munger and Roberts were discussing.

If you want a more "economical" way to give money to nonprofits, rather than funding government through taxation, you can implement something like it at givv.org.

Seth writes:

Loved the podcast. Where can I get my Roberts/Munger t-shirt?

I was a hold-out for paying for the WSJ not b/c I felt entitled or b/c it's digital, but because I didn't find a lot of value in it.

And I was also hoping the pay model wouldn't prove profitable, their advertising would take a hit and the content would become free again.

I decided to subscribe after about the 10th time I tried to reference an article I wanted to read and couldn't. I went through the similar mental math to justify the expense (e.g. "it costs less than a brewed coffee at McDonalds per day").

I've also discovered that I am much more likely to read it in places where I have my iPod touch or Blackberry (boring meetings, airport, chillin at Starbucks) where I wouldn't have had these devices before.

Sara writes:

Hi Russ,

This discussion reminded me of some people I've been meaning to recommend to you for an Econtalk interview. Holden Karnofsky and Elie Hassenfeld left their jobs at a hedge fund and started a project/website called givewell.net. They are attempting to do an honest evaluation of charities based on the number of life-years saved, etc. per dollar donated. They have found that most charities have not and are not all that interested in investigating themselves to see if they are actually doing any good. They've got a blog where they explore lots of these issues and have some great ideas about how most charities are oriented more toward satisfying donors than recipients, etc. I think they'd have some great insights into what you were discussing with Mike Munger. And they've been doing some sophisticated analyses of non-profits 'business models' too. Sounds like a great Econtalk!

Bliss writes:

I found the discussion about how free things become irrational entitlements very interesting. Just a couple thoughts:

Economic theory would suggest that public roadways would become much more efficient if a pay-for-use system was implemented. Practically however, I can't imagine this happening. Almost no one would be in favor, and it would be an extraordinarily hard sell politically. Perhaps public roads are another example of the irrational entitlement?

I suspect the same psychological tendency exists with healthcare. We have had a third-party payer system now for so long, we hardly make a full marginal cost medical decision - and we don't want to. I think the important question is whether or not this phenomenon is strictly rational (i.e. Bastiat's insight that the state is the fiction by which everyone tries to live at the expense of everyone else), or if it is truly irrational (something behavioral economics might study).

Mike said "we will forgo transactions, the value of which would be less than the money we would have to pay - it’s irrational." This comment reminds me of the cooperation studies that used various dictator games to determine cultural cooperation. Participants in the study would regularly forgo essentially 'free' dispensations, presumably because they thought the division was unfair. Though admittedly different than what was discussed in the podcast, I think there is a possible connection. Any thoughts?

rhhardin writes:

What you're seeing is correlation.

With most stuff, a person has a craving for one thing one time, and a craving for another thing another time.

It's different for different people at the same time, and so averages out. The market clearing prices are unaffected.

Economics is happy with this, even though individuals are acting irrationally individually.

With the NYT charging for what was free, everybody acts the same way at the same time, and the market clearing price irrationally goes to zero.

Economics isn't unhappy with individual irrationality, but with correlated irrationality.

Mike Munger writes:

Bliss: Great point! I would say that the dictator games result is NOT irrational, but that refusing to pay $1 for something you value at $3 IS irrational. Yet, when I think about it, I'm not sure the cases are really different. You may be right, and I may be wrong. But the difference to me is that in one case I am actually punishing the other player in a dictator game, and so my sacrifice has some impact. For refusing to buy the WSJ, my sacrifice has NO discernible impact, individually. Which leads me to....

RHHardin: Yep, I think you have the essential point there. If we take Bliss's point, then my refusal to pay for the WSJ hurts only me, and no one notices. BUT: If lots of people do it, and the WSJ goes out of business, then the consequences of that correlated irrationality have consequences for the mix of services and info in the world.

John Berg writes:

More to my 22April comments.
Government is incapable of compassion, a human characteristic, and is driven by the need for control. Government is pre-planned repeatable actions and its intent is to direct the use of your assets. Thus control is the ultimate goal.

A hole in the overall idea of the excellent and stimulating podcast AND OBAMACARE is what motivates entry into the market and who/why trains the practitioners to the correct level of skill.

A MN state senator visited a local teacher college and the president complained to him about the quality of the students its college had to accept. Senator T~ replied, "Whose product taught your entrants?"

John Berg

Schepp writes:

Mike Munger writes:

So, my question is, will providers at some point find a way to start paying eyeballs directly, instead of just tying their message to otherwise desirable content?

Response:

Seems to me that the pricing is related to your early Econtalk podcast "Munger on Subsidies and Externalities"
(http://www.econtalk.org/archives/2008/03/munger_on_subsi.html).

The fact that the bee keeper gains from having access to an orchard provides a form of payment to the bee keeper that is considered in monetary compensation for pollinating an orchard. I, personally, would likely pay 0.99 cents per podcast to listen to econtalk and likely more when Russ has a guest that I want to hear her ideas. But I realize that the exchange is as follows: Russ will share information and the guest will likely be selling more detail product that I may want to purchase.

Russ is also selling skillful classically liberal critique of the ideas being presented by his guests. The liberty fund sponsors through econtalk are promoting ideas that could give their ideological perspective more strength.

One other interesting perspective is to consider the increased transaction cost moving off of the free. Costs will be incurred to separate advertising podcast from the podcast itself. The fact that I could find it on Itunes and try it for without directly paying money enticed me to listen and to give econtalk a shot.

This is equally true if you were to pay for my eyeballs. The transaction cost would be huge and while you may be willing to pay me a few pennies for my eyeballs, how would you deal with the professional viewers or viewerbots who now have interest only because of the financial transaction.

Transaction costs are like the energy required to change the phase of a liquid to gas or solid to a liquid. Energy is added to change the phase but the temperature does not rise.

So the bottom line, I would be very doubtful of a podcast that paid me, it would tell me that I am not going to gain anything worth my time unless I take into account monetary compensation. It would be telling me that you likely are selling swamp land.

And you do pay. When a guest interests me on Econtalk, other podcasts or other internet sites, I can use my email to contact them. Not surprisingly if you can share quality information and questions to information providers, they reciprocate with questions and information as well.

Bliss writes:

Mike Munger: I think you nailed it with the word sacrifice. Perhaps that's what's going on?? (And I would hardly presume you to be wrong Mike!)

Rationality seems to be such a nebulous concept when value is so subjective. The more I think about it, the more it becomes a tautology. But, identifying and questioning 'irrational' behavior often leads to important economic insights (Coase - Nature of the Firm comes to mind).

I think you are right though. It IS irrational. Why would someone do something that harms them? With the dictator game there is a direct marginal impact (punishment), that doesn't exist in your example. Maybe the connection is still there though. Perhaps what is going on is still similar to the "irrational" acts of voting, or many of the popular 'green' activities - the common feature being an essentially zero marginal effect. It reminds me of your podcast about cultural norms, where you discuss how societies seem to breed occasional 'irrational' norm enforcement mechanisms. There is a visceral, irrational reaction that occurs when something deviates from convention - or even when something simply deviates from what we think it 'should' be. Maybe that's what's going on?? Anyway, interesting to think about. Maybe it’s the start of a Theory of Principled, Irrational Sacrifice...or something like that...

Bob Strickland writes:

The Merck motto seems to me to be saying, let's focus on the work we're doing, and the money will follow. If we focus on the profits, well, that's just too abstract. If I work at a construction company and I'm told to go make some money, I will be lost and clueless. (Unless, of course, the construction company is a front for a counterfeiting operation, or the Federal Reserve, and then I'd know what to do.) If you tell me, "Go build a house with these basic specs", well, that I can do.

Because the point isn't really the money. Money is a communication medium for matching wants with resources. It's like if I'm cutting a sheet of plywood with a circular saw, if I focus on where the blade is (like a business solely focused on profits) I will get a really bad wavy cut, if I focus on where the blade is going, then I will get a nice straight cut.

Christian Pugaczewski writes:

Russ and Mike,

Kudos for reading all these comments and responding.

Focusing on the characteristics of an entity (non-profit vs. for profit vs. government) is unilluminating because many entities labeled as one type will engage in transactions that are usually thought of as belonging to the other. Instead, distinctions should be made at the transaction level and the circumstances/incentives that best motivate people to engage in such a transaction at a particular moment in time.

For instance, the Afrobats (NYC street performers who engage in daring acrobatics in Central Park on concrete!) give their services away every weekend. Instead of controlling who can view their performance, they simply make several allusions to donations (both directly and indirectly, often humorously) during the show. They perform in front of 200+ crowds and leave with bags of cash.

This example shows a for profit entity giving away their service for free and soliciting donations from the customer/end-user of the service, which appears (I don't do their accounting) to be very lucrative.

Why don't I pay for the WSJ on-line? Because I can get just as good financial reporting at Yahoo! Finance or Bloomberg.com for free. WSJ needs to innovate or die.

Thanks for the shows, really enjoy them,

John Berg writes:

Our Founding Fathers had it right by defining a constitutional republic form of government which rasps off the dangerous and non self-sustaining aspects of a democracy. They used the then existing states to provide "local" voters and then provided for voting rules which permitted each local area to form a faction that could defend its minority status against any majority formed by combinations of other states (State Rights).

Note that a democracy soon finds it can vote itself benefits from the national funds and soon takes away any power by the states to limit the power of the federal government. The Enumerated Powers clause has become flacid in 75 years and apparently can not be used to limit the federal power.

Our current administration uses the promise of compassion offered by the central government to win ever diminishing control from the electorate and States.

John Berg

James McCammon writes:

I think an important idea that wasn't mentioned in your podcast is the societal respect that people tend to have for "sacrifice" be it in time, money (just another name for time in most cases), or effort (sweat, hunger, discomfort, etc).

Imagine the situation where your significant other tells you that he bought you a wedding ring with the lottery money he happened to win last month, as oppose to him telling you that he had to work 10 hours a week extra for the past 6 months to save up the money to make the purchase. Surely both occasions would be a happy day, but I think most would agree the latter would add a little something extra.

We can think of many more similar examples, but I think the commonality in all people is some innate sense of what is being given up either in time or effort. This is what makes religious "feats of strength" so impressive and important and why people from different religions can view these rituals with such respect. We all view Gandhi's fasting as an amazing feat and it is specifically the discomfort involved that makes such an act more powerful than simple words. Anyone can talk, but not anyone can fast for weeks at a time. Even when it comes to speech we respect those who speak out the most when they have something to lose by doing so.

It is this interplay that is at work with those who attempt to get sponsored by donors when doing walk-a-thons (or as Russ might say shoot-baskets-a-thons). Usually this type of fund-raising involves walking or running for a prolonged distance or time and so I think Mike is wrong that the act must necessarily be illogical. Rather the acts are usually very simplistic, conjure up some idea of empathy, and must therefore necessarily be something that the average person is familiar with doing on a smaller scale. ("Oh you are walking 60 miles in 2 days to raise money for cancer? Well I walk to lunch everyday and can't imagine walking such a distance. Sure I'll donate $100.")

As for your news website business model where people donate as they see fit, Wikipedia currently has such a system that seems to be working quite well. I use the site several times a day so I must admit I was suckered in to giving a few bucks.

RNC writes:

Russ,

Was kind of surprised to hear you say that the free market is what has driven food prices down to the extent that we have a supposed obesity problem. What about our massive government subsidies of agriculture?

Also, concerning the discussion that centered around the Merck quote: It seems that there is an economic explanation for this: Profits follow value. If a producer takes his eye off of value to focus on profits, he will tend to emphasize the latter at the expense of the former. A simple observation but I was surprised to not hear the value proposition mentioned as an underlying mechanism to this way of thinking.

Cheers,

RNC

Wally writes:

I believe quite a few of these questions can only be understood in the context of evolution. Humans were around for 1000's of years prior to the market system. It is not surprising that we value certain things based on sociological relationships that are most important in small groups. It is not surprising that we are unwilling to give up these values even though many of our needs can be provided much more efficiently through markets rather than group ties. Perhaps the single biggest omission in the discussion of nonprofits versus profits and hybrids was religion!

Mike Munger writes:

Wally, absolutely right, on both counts.

The values may in some sense be anachronistic, but they are real.

And, Russ and I are both pretty devout religiously, and we are also pretty conscious of not imposing that on the listeners. I'm glad YOU brought it up!

Mike writes:

Have we seen the commercials for KFC's buckets for the cure? http://www.bucketsforthecure.com/
They promise to donate 50cents of every bucket to the Susan G Komen foundation and make possibly "the largest single donation to end breast cancer forever"
Like it was alluded to in the podcast, why do people do meaningless things to raise money for charities? Fifty cents is hardly a large sum and for each customer buying a box of chicken can't they afford to double the donation to one dollar? Further couldn't KFC offer a match where they will donate up to what the pink bucket switch has cost?

Sebastian Hagen writes:

"Or steal it. If I spent two hours stealing it, I should have paid the 99 cents."

Do we have data on how much time people actually spend on getting a copy of a typical piece of data in a copyright infringing manner?

If you have the hard- and software set up to do it and a little experience, two hours is *way* too much time investment to get a copy of virtually anything reasonably popular.
The actual download might take that long (or much longer, for larger data sets), but there's no good reason to pay attention to it the whole way through; if you use a 'fire and forget' approach for such downloads per piece of data, your actual time investment can be a low number of minutes - likely no more than the time you would have to invest to organize for a paid, legal download.

Piracy being individually irrational because of overly large time investments by the pirates sounds very wrong to me - do you have specific evidence that people routinely engaging in this behaviour spend anywhere near as much time on it as you presume?

Mike Munger writes:

Sebastian H: That's a fair point. It was intended as an example.

But, for myself, my time is worth upwards of $100 per hour. Yet I sometimes spend ten minutes or more looking for an ungated version of something that I could buy for a few dollars.

Is that common? Readers, is it?

James writes:

Thanks for another great podcast.

If you are interested in pursuing this line of inquiry further (and I hope you are!), consider having Dan Pink back on the show to discuss his latest book, "Drive." The book covers a lot of familiar ground, but it does a good job of synthesizing different ideas on human motivation in the workplace, and it provides a framework to answer some of the puzzles you and Mike discussed. His theory would explain, for example, why you want to motivate the potato farmer primarily by money, but the nonprofit manager or the Linux contributor by other things.

Keep up the great work! I have gained a great deal of knowledge, wisdom and enjoyment from your podcasts.

Richard Taylor writes:

This was an engaging discussion on a number of topics, but it did not go into great depth. Here are a set of comments that float over some of the subjects.

The discussion of not for profit hospitals was "theoretical". I have used both for profit and not for profit hospitals. As a user there is really no difference between them, except that maybe I feel slightly less ripped-off by the non profit hospital.

On universities, you both work for not for profit universities, the Hoover Institute and the Liberty Fund are not for profit institutions, yet the fact that you, like many others, make your living at not for profit institutions did not really surface. I am sure you attended not for profit universities and you will/have send your children to the same, for obvious reasons.

You did touch on the notion of why most charities exist, but it would be good to hear more about "gift economies". I recall my father expressing the same idea as "Noblesse Oblige".

Others in these comments have mentioned Chris Anderson and His book "Free", which immediately came to mind during the internet discussion.

I did see a remark somewhere that the New York Times is effectively run through family foundations as an institution where the profit motive is less important than being the leading source for news and opinion. Similarly, the Guardian newspaper in the UK is run through a foundation, and that the future of quality newspapers may be these institutions that are protected from the crass profit motive.

John C writes:

Dr. Roberts,

Being a poor college student I have been to a plasma center or two and I can tell you that it is legal to sell plasma. However, the plasma cannot be used, by law, in the medical field. What it is used for is ingredients in high end hair products.

It seems silly that by requiring only donated plasma be used in the medical field, the government is subsidizing the hair industry.

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