Michael Munger on Free Markets
Aug 9 2021

Depositphotos_81499578_s-2019-300x300.jpg Author and economist Michael Munger of Duke University talks with EconTalk host Russ Roberts about the virtues--and the flaws--of free markets. Munger says the best argument for a free market approach is not that it's perfect but that it's better than anything else we've been able to come up with over the centuries. Better at bringing people out of poverty, better at promoting wealth creation, and better at pushing up the standard of living for most of the people, most of the time. Topics include what exactly is a free market, why specialization is so important, the case for case-by-case intervention, and the challenge of picking the prettiest pig.

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Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.

READER COMMENTS

rhhardin
Aug 9 2021 at 9:35am

Universal basic income – we see the effect already in paying people more in unemployment than they can earn if they go back to work, namely the cost of workers goes up.  That apparently leads to quick inflation.

Maybe the lesson is don’t inflation- index the universal basic income and its effect will eventually disappear instead of destroying the entire economy.

Michael Munger
Aug 9 2021 at 1:43pm

wait.

you’re equating a benefit that is LOST  if people return to work, which locks in unemployment, with a  UBI, the point of which is that it is not contingent. completely different policies.

Steve
Aug 13 2021 at 12:58pm

That all depends on how the UBI is structured, like how much the UBI is reduced for each dollar of additional income (think marginal tax rate). There idea is to preserve some incentive to work, but there’s no perfect solution.

Walter Boggs
Aug 15 2021 at 7:43pm

As I understand it, UBI is not reduced by the recipient having other income. I believe that is what Mike was saying above.

Joeri Sebrechts
Aug 9 2021 at 5:16pm

Isn’t there a wide range of rule-based systems that are based on more than price? It’s not just free markets vs case-by-case decision making. It’s more a case of unregulated markets vs regulated markets, with rules in place as constraints to prevent bad outcomes.

I did enjoy the dive into the process of figuring out those rules, and how that is a path fraught with peril because both the priesthood and the democratic process aren’t very good at choosing rules because of misaligned incentives and insufficient information. I had not looked at it that way before. Still, I’m not convinced unregulated markets do better than regulated markets with rules incrementally determined through the democratic process, messy as that process is. Although I think perhaps I’m mischaracterizing the argument there. I assume everyone agrees some rules are needed (like property rights), the debate is just on how many rules there should be.

Marc Alexander
Aug 10 2021 at 4:06pm

This is what I always think when I hear Russ talk about the benefits of free markets. I agree that too few people don’t understand that the alternatives are poor and that being a ‘comparatives’ is obviously the best way to go about judging different economic systems.

But by that same logic, should we also not compare amongst democratic capitalist countries and see which ones achieve better results on the other dimensions Russ discusses early on in the episode, like human flourishing, etc? To my eyes that is the obvious point. America has serious issues with unstable and low-wage work, its clearly detrimental to large groups of people who feel economically (and culturally) disaffected. So look to Northern European countries, Canada and New Zealand. The latter two have no succumbed to the populism that has taken root in many Western capitalist countries, perhaps their more gentle form of regulated markets is better?

Dave Chisholm
Aug 11 2021 at 12:50am

As a Canadian, I count my blessings every day for the anemic state of our endemic populists.

I would also like to second the sentiment that this is not a binary issue.  We do not need to choose between priesthood and  mass whimsy.  In fact, all the rich free stable countries in the world are pretty much a mixed-bag and end up somewhere in the middle.

A fact which makes the USA health care debate all the more frustrating to listen to.  For example, pretty much all rich and free nations have some form of universal health care, and somehow manage to remain rich and free.  A fact that you would consider impossible if you listened to the right wing, and even moderate, voices claiming that such a think it is an inevitable road to Marxist serfdom.  What total rubbish!

Russ, I have listened to pretty much every episode since 2007/8.  I would love to hear you once say that it is possible for a country to have universal health care and still be rich, free, and stable.

Jenny
Aug 9 2021 at 7:02pm

I agree that markets aren’t perfect, but they are the best we’ve got.  Back in my econ 101 class, perfect information was assumed.  What are your thoughts on making information far more freely available? As an employee, I’ve never known what my co-workers make. That gives my employer a huge information advantage. When negotiating with vendors, a few misdirected invoices have given me access to what competitors are paying and gave me access to better deals. What if all transactions and contracts were public record? Why should any of that data be secret?

Atanu Dey
Aug 18 2021 at 8:10am

I think there are privacy issues here. There’s a distinction between private and public information. What two people talked about is private information; a politician’s position regarding trade is public information.

If you wish to know your colleagues’ salaries, perhaps you should ask them. That way they’ll get to choose whether or not to share that private information with you. You could begin by publishing your salary and other private information for everyone to set the trend.

Walter Boggs
Aug 9 2021 at 8:00pm

Russ mentioned that US healthcare is far from being a free market. In the runup to Obamacare, I attended a local town hall about it. I remember that one lady went to the mic and announced that we don’t want a free market, since that means everyone is free to charge whatever they want!

Schepp
Aug 9 2021 at 11:23pm

The great learning that should come from the Israeli Day Care trail. Indeed markets are complicated and I likely would not have predicted that charging a fee would decrease timeliness of parents, but what should the real economics teach blackboard economists.

People value the ability to be late. This charge freed people from the guilt of being late and created much more value than whatever late fee parents had to pay. It stopped parents from possibly dangerously driving to get to the day care on time. Huge value for the parents with this change.

The daycare owner gains market knowledge that parents value the ability to pick up children later. The daycare operator has every incentive to determine the price that provides the profitable margin she desires. With real economics the day care owner can use price to meet much of this newly discovered market while satisfying herself in how much she choses to supply.

Lou
Aug 10 2021 at 4:18am

This was a great podcast.

Exactly what I expected from the Michael Munger and Russ Roberts duo.

Quick question, why are you against the Ricardian idea of Comparative advantage ?

If division of labor is all you care about doesn’t the Comparative advantage, unintentionally lead to higher increase in the division of labor ?

Lastly your comments on the US markets I think is partially true, yes US has about 60% tradable goods, so with protectionism 60% of all products and services can be sold internally in the US, but what about the other 40% and what about retaliatory from the other countries that are not happy with the protectionism. Protectionism of any sort is terrible (even infinitesimal amount), for large and small countries.

Russ Roberts
Aug 11 2021 at 12:31am

This episode from 2010–a rare monologue–goes into why comparative advantage is only one source of the division of labor and why Smith’s insights on the source of the division of labor are greatly underrated.

Ken Perepelkin
Aug 13 2021 at 12:16pm

Russ’s monologue on comparative advantage is well worth listening to: it starts with a basic premise then walks you through the division of labor and ends up explaining the connected concept of opportunity cost.

Here are some additional links to check out on the subject. The first is an article by Michael Munger on why he is opposed to its place in the current economics curriculum and the other is an Econtalk podcast with John Nye who exposes a funny quirk of Ricardo’s famous example of comparative advantage of British cloth being traded for Portuguese wine, namely that it is a very poor example of comparative advantage due to tariff distortions.

https://fee.org/articles/comparative-advantage-an-idea-whose-time-has-passed/

https://www.econtalk.org/nye-on-wine-war-and-trade/

 

Jason
Aug 10 2021 at 8:27am

This is not a challenge, but a question. I would love for you to comment next time you talk about different kinds of markets. “Mechanism design“ as they say. It feels that often the idea people have in mind is that it’s either markets or something else, but aren’t there a number of details that need to be determined even given that you’ve chosen a market system?

Peter Silverman
Aug 11 2021 at 1:20pm

In the discussion, isn’t there concept confusion between liberalism of the no-intervention-absent-harm variety and free markets?  And isn’t there the same confusion going from utilitarian to deontology justifications?  Simple examples are societies that may prosper economically from free markets but not fully allow humans to flourish by restricting freedom of religion or speech or that has faux-democracy.  Or there are many liberal societies where the opportunity to flourish is open but markets are relatively more restricted.

Don’t these distinctions need to be sorted out to defend markets, and shouldn’t the defense be more humble than a grand defense of the liberal market economy?

 

Michael
Aug 11 2021 at 3:52pm

I just wanted to say thank you for this podcast. It was a mini-masterclass in the rationales for free markets, and is very welcome in a time when markets seem under attack from all sides.

John K.
Aug 11 2021 at 4:33pm

I agree that free markets are the best overall setup, but things like Roberts saying he’s “willing to tolerate some unattractive outcomes ” (around minute 27:30) that are very unlikely to personally happen to him and his family is fairly emblematic of why libertarianism gets a bad rap.

I wish Roberts (and the many tenured libertarian academics that he often brings on) would directly address this since it’s a widespread critique of free markets among Gen Z in particular. It simply seems “uncaring” and the product of out-of-touch boomers who already got cushy jobs and don’t have to face the reality of what the free market means anymore.

To be clear, I don’t think the critique undermines free marketism in general, but it’s a huge marketing/persuasion issue that Roberts and Munger here basically just seem to dodge rather than directly address. And I think seeking to understand this critique would also help libertarians better understand why their preferred policies don’t end up getting implemented more often.

Ethan
Aug 12 2021 at 8:08am

“That guy now works for the Food and Drug Administration.”
Loved that line, and always love Munger as a guest. Many topics, especially when there are many claiming the mantle of educated on the subject, deserve a deeper dive. I always appreciate Mike and Russ fleshing out the details of economic ideas and political economy.

“I’m not opposed to making the entire public school system better. I’m with you. Let’s do that.”

Mike’s point on the above quote is well taken. I side with Russ on this particular issue, but one has to concede that writing checks has a likelihood of actually coming to fruition. Creating universal backpack vouchers….not so much.

But the same argument could be said for Mike’s true idea; UBI with no other welfare programs. That is not what is actually on the table. It is a bit nihilistic, but until something happens that hurts elderly homeowner’s pocketbooks, the state will only continue to add entitlement programs. Therefore the best path is to forestall any addition to the entitlements and work on the margins of school choice, healthcare reform, zoning laws, and current entitlements.

Nathan
Aug 12 2021 at 1:44pm

This Episode was OK to blah I would rate it C-.

Mike Munger uses a ton of stale analogies and misrepresesents a bunch of arguments. It seems to be a string of Straw man arguments to prove that Markets are better then left leaning alternatives but those seem to just be straw mans that no leftist or left leaning person or politician has purposed or wants.

Things mention
1. deciding what frosted flakes you want. Show me a viable bill that purposes this?
2. deciding what coat size you wear. Nobody is asking to do this

Here is a quote

“Now, in the mind of my Leftist interlocutors, Donald Trump was such a person, so it’s no longer hypothetical. Now, I’m not taking a position on whether he was or not. But, for them, Donald Trump was a bad guy.

So, it’s no longer hypothetical. So, I assumed that they would say, ‘You know, you are right. We should have less concentrated power in the government because we cannot be sure.’ And, no: What they said instead was, ‘We’re going to double down and make sure that never again does a person that we disagree with get to take power.'”

I would challenge Munger to name names of elected officials or point to bills that passed that gave Joe Biden more Power than Donald Trump?? Munger uses derogatory terms and vague terms like They and Leftist interlocutors and puts force a complete straw man argument here of an invented person.

also the episode complete glosses over how the USA has incredibly big problems because markets do fail.
A. We have outsized Homelessness becuase markets do not provide housing for those without money
B. We have one of the largest shares of Uninsured (healthcare) in any developed country. WIth some states as high has 18% (https://balancingeverything.com/uninsured-rate-by-state/)
C. We are seeing the effects of externalizes through pollution as Car Companies have pushed to make large trucks and truck commercials as gigantic low mpg vehicles give them the highest revenue.

A better episode imo would not be a somewhat service level markets are great but dive into ways we can make markets better even if that means more government regulations

Ethan
Aug 13 2021 at 7:33am

The point about CornFlakes and Coat size is that consumers, making choices in a market, with limited information, and every incentive to get this correct, still make mistakes.  It is drawing the comparison of what consumers do in a market, and what voters do in a booth.  These being the same people, and these being the two ways that are generally proposed, or maybe even possible, for making decisions.

For the point about executive power, look at the Net Neutrality fight, look at the federal spending on education, look at the capital and regulatory requirements imposed on banks.  These executive bodies (FCC, DOE, FDIC) are all steered by the executive and the appointees of said executive. They power vested in the president (and therefore in said appointees) is vested via the voters booth.  When you ask someone if these decision for the price of internet, or the spending of education, or the price of banking should be decided by markets, many will say “this is too important.  Consumers are ill-informed.” Then they will turn around and decry the politician they oppose for making the wrong choice.  The point being that why do you assume that the people in the voting booth will make a better choice, when they don’t even have the incentive to actually consider the options in an informed way.

Lastly,  All the things you named are not free markets.  You give poor examples.  If one were to trash markets you should say “we cannot have people selling their bodies, whether organs or sex, in order to put food on the table for their kids.  This is an outcome of markets.” That would be a decent argument about the outcomes of markets.

Housing and constructions is very highly regulated and bottlenecked by having to get permission and onerous space requirements, but definitely varies by state and locality.  The healthcare market is so far from free that the litany of items would be too long to list.  And in case you have missed it, pollution in developed countries is plummeting, and I don’t see this as a result of regulation, it is wealth.  See Simon Kuznets.

Joe Born
Aug 12 2021 at 2:02pm

The virtue I see in Dr. Munger’s UBI idea–I assume it’s not unlike Charles Murray’s in In Our Hands–is that it eliminates the high marginal tax rate imposed on low-income people by, e.g., a negative income tax.

But I fear that unless the UBI is set at a level that’s too low to be politically palatable it would prevent too significant a fraction of the populace from seeking employment.

That said, a system that you might compare UBI with in a UBI-themed episode is the following: all current transfer payments (and, ideally, implied payments from means-tested programs) put under one unified Department of the Dole. To get your free money you just fill out as many pages of a single (presumably voluminous) Dole form as you think apply to you.

Anyway, in my view this was a stellar episode, and not just because it was refreshing to get back to economics.

Gary D Lynne
Aug 12 2021 at 4:06pm

Munger on Free Markets
Good conversation, overall, pointing to how freer markets can do good things. Problem is: The conversation had a clear bias toward doing things only in the self-interest, and, focusing on the commodities that can be monetized without ethical concerns. The conversation could have been improved by recogniziing that real Humans have dual interest(s), not only self-interest. As Behavioral Economics (Empirical) science makes clear, real Humans also seek shared (with others, yet still internalized) – interest(s). So, it is also the case that real Humans see the efficacy of Other Forums for deciding value V beyond just price P in the Market Forum. Other Forums for evolving value V are just as legitimate as is the Market Forum, latter being good a evolving price P but not value V. In fact, value V might need to override price P, like in the use of Other Forums to allocate Human organs like kidneys, and dealing with environmental pollution. It is about finding balance in self&other-interest, priceP&valueV, private&public, market&government, as dual interest theory makes clear.

Gary Lynne
Aug 12 2021 at 4:36pm

Munger on Free Markets: Adam Smith’s Theory of Moral Sentiments is about libertarian framing?  Not.  The Sentiments is all about (in modern terms) Empathy based ethics which serve to give content to the shared (with others, yet internalized) -interest. And, it is that ethics based other-interest which represents that which others can go along with, which is to temper the more primal tendency to a kind of libertarian based pursuit of self-interest. It is far more accurate to claim that the Sentiments is about making a libertarian responsible for the primal tendency to do as one pleases.  The Sentiments are to temper the (primal) excesses of the libertarian.

Steve
Aug 13 2021 at 1:07pm

I was surprised that both Munger and Roberts don’t like the Israeli pre-school example. It’s one of my favorite examples of “real world” economics, as it underscores the importance of the psychology that underlies all human action, and for which Nobel prizes have been awarded. It also raises the issue of whether the pre-school should include a baby sitting service as part of its business. Makes me wonder if Roberts and Munger have any appreciation for the nuances of economic logic.

David Q
Aug 14 2021 at 2:35pm

“Makes me wonder if Roberts and Munger have any appreciation for the nuances of economic logic.”

Listen to a few more Roberts and or Munger episodes.  You’ll stop wondering.  You will know that they do have an appreciation, and then you can narrow your statement down to the particular nuance that might still be bothering you that you feel they may have missed in this particular case.

That said, I am wondering (after all these years) how much is true about the Israeli Daycare Center story.  Maybe all of it.  Maybe most of it is true.  Maybe none of it.  Was it originally just a hypothetical, meant to illustrate nuance?

Skip Franklin
Aug 14 2021 at 1:27pm

I enjoyed this episode with Munger, which has not always been the case with his past appearances, so well done this time. Now I want a return appearance! Specifically, two topics that came up near the end of this podcast: negative income tax and anti-trust policy. Many others have already commented on the first, so I’ll say only that I’d like to hear a reasoned conversation about how best to implement it, whether UBI or some other method. On the anti-trust policy topic, I think there’s a large area to cover. It was brought up in the context of controlling the influence of technology and social media companies on public discourse, and that’s an important part of the discussion. But I’d also like to hear thoughts on combating issues like the use of contractors to avoid providing employee benefits, and the vertical integration that allows platform owners to also be service providers. To my mind, all this comes under anti-trust since only the rise of very large employers/providers with hefty political and economic clout allows the practices to continue.

Chris D.
Aug 22 2021 at 12:29pm

One thing that troubled me about this episode was a question about the “starting point” for what we consider free markets today, especially about the line between “structure” (the rules of the market, how they’re enforced) and “participation” (who is trading what with whom and how). For example, if we take a snapshot of August 9, 2021, how much is the current market influenced by government intervention, esp. if we interpret “government” to be individuals and organizations that make and enforce rules about who gets to do what? Or if we look at previously unmeasurable influences like biology, including recent scientific consensus about the impact of epigenetics, trauma,  the way the brain “maps” conceptss (beyond Kahneman-style “fast” and “slow” thinking), then how “free” is a market where so many people’s ability to participate is influenced by physical or mental health health that is the result of outside actors or limited personal control?

Brandon Hull
Aug 26 2021 at 3:27pm

My nominee for podcast of the year.  This discussion could stand alone for decades as the quintessential defense of personal liberties and the power of markets.

I’m also very much moved by Mike’s capitulation to UBI as the least-bad concession to the political reality of the wide and widening gap between societies most and least productive members.   Everyone seems rattled about impending inflation; what stuns me is why inflation isn’t everywhere already.

Are there invisible forces suppressing the operation of labor markets in mysterious ways?

At Buck’s, the legendary deal-making VC diner in Woodside near Palo Alto, the customers at the tables each morning are among the wealthiest and potentially wealthy people on the planet.  Betcha the average customer income/net worth is 50X the national average on a typical morning.  Yet the menu prices at Buck’s are not much more than upscale breakfast anywhere else.   And the waiters, while well paid I’m sure, don’t have wages representative of the lowliest software developers at a silicon valley startup.  What’s going on with that?

Comments are closed.


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AUDIO TRANSCRIPT
TimePodcast Episode Highlights
0:37

Intro. [Recording date: July 26, 2021.]

Russ Roberts: Today is July 26, 2021, and my guest is economist and author, Michael Munger. He was last here in March talking about desires, morality, and self-interest. This is Mike's 39th appearance on EconTalk and what will be, I think, our 801st episode, more or less. So, that's almost 5%, roughly 5%. We could put a decimal point or two in there for listeners and entertainment.

It's a little scary, Mike, but I've enjoyed every one of them. I know our listeners have, too.

I want to thank Plantronics for providing today's guest with the Plantronics 5220 Headset.

Mike, welcome back to EconTalk.

Michael Munger: It is great to be back.

1:21

Russ Roberts: Our topic for today is unease with free markets, a topic suggested by a listener who likes free markets, but doesn't like, sometimes, what comes with them, some of the outcomes and results, and is uneasy being a free marketer. So, I thought we'd start off by talking about: what do you mean if you describe yourself as free market? Or what is a free market in your view?

Michael Munger: If I describe myself as a free market person, then I am a believer that increases in wealth, and prosperity, and reductions in poverty come about as a result of elaborating division of labor. So, when students take my class, I get them by the end to be able to respond very quickly to the question, 'What's the argument for markets? Is it the perfection of markets?' 'No.' It is that division of labor is a way of fostering specialization.

Now, there are many institutions that can foster specialization. There was division of labor in Pharaonic Egypt. So, very substantial. In fact, we see the legacy of that. My name is Munger. That is someone who sells stuff. There are people called Baker, and Shoemaker, and Cooper.

So, the division of labor was accomplished through guilds. And, you were the King's person. You were the ruler's person who was in charge of making shoes. You learned how to do this, and this was handed down. And that actually resulted in an enormous increase in wealth.

The argument for free markets is that you can break out of the small command economy into a system where I don't need to know the person that I'm buying things from.

So, I'm a student of Douglas North and his claim was that markets are institutions for reducing the transactions cost of impersonal exchange.

Now, that all sounds sort of cumbersome. The answer is, the argument for markets is, there is no alternative system that increases the wealth of most people, most of the time, by more. It's not that markets are perfect. The argument for markets is not the perfection of the price mechanism. It's the imperfection of the world. We don't have enough information to be able to use any other system. There is literally no other system that can elaborate division of labor in the same way.

Now, there are a bunch of drawbacks, and we'll talk about some of those. But, that's the argument for markets: is that, it is the best, most of the time, for most of the people. And, in particular, as Deirdre McCloskey and other have argued about the Great Enrichment, there is no system that reduces poverty by more. In fact, it's not even close.

Russ Roberts: Boy, that isn't the answer I was expecting, so my script is shot now. Really, it isn't, but I'm going to react to that.

Michael Munger: Well, you asked me. It's like, 'How do you spell Iowa?' If I say, 'M-I-S-S-I-S-S-I-P-P-I,' that very well may be how I spell Iowa. What's the argument--listeners want to know-- What is your argument for free markets? I speak on behalf of millions around the world.

4:36

Russ Roberts: Uh, I'm actually going to challenge what you just said, up to a point.

Michael Munger: Okay.

Russ Roberts: I love what you just said. The first thing I want to add--I want to elaborate on it just a titch.

I did a monologue episode--I've maybe done five of them, I think, in the history of the program--where I talked about Adam Smith, David Ricardo, exchange, trade, specialization. David Ricardo's great contribution to economics was this understanding that, because we are different, we can exchange, even if I'm better at everything than you are--or more likely, you're better at everything than I am.

So, let's take that example. Let's say Mike's better at everything than I am. That still allows for the possibility of for me to make something useful for you and exchange it. Because you would specialize, then, in the thing that you do relatively well.

And that insight--which is great for exams and has something to do even with the real world--I think overshadows Smith's insight, Adam Smith's insight, which is that the division of labor's limited by the extent of the market.

Which means that when there are a lot of us to exchange among ourselves, the potential for specialization that you talk about, the liberation of our talents to serve those around us is amplified to the point that we get the incredible state of living that we currently have.

I like to point out--I think I did in that episode--that if you took 49 of your most talented friends, so 50 people, you and 49. You get to choose them. You can pick the smartest, the most handy, whatever you think is best. Put them on an island that's lush, and green, and fertile, with incredible natural resources, you will never be very wealthy. 50 people just cannot specialize enough. There are not enough brains to interact in that setting to create great wealth.

I think that's a profoundly interesting thing that I think most people have never--I'd never thought of it until I really learned--you know, I learned from James Buchanan's interpretation of Smith.

So, I think that's part of what you're saying, obviously.

The part I would disagree with is that, even though I think wealth is important, well being, standard of living, and hunger is awful, and destitution is worse, and subsistence to the point of starvation is even still worse. Maybe they're the same thing. But they're all bad.

I don't really think deep down that money is what makes our hearts sing. That it gives joy to life. It's better to live to 70, or 80, or 90 with an artificial hip, and get to still play tennis, or golf, or whatever floats your boat. So, I don't think standard of living is irrelevant. There are a lot of wonderful, glorious things that come from growth and general material well-being. But it's not the only thing we care about.

The other thing we would care about is what we, I think, would both call human flourishing--the opportunity to find your own path in life, the opportunity to use your gifts to their highest potential. And, I think economic freedom--markets--allow that to happen in ways that other systems do not.

So, those are my two footnotes. One is really an extension and the other is a bit of a caveat. Do you want to respond to either of those? And then I'll give you my definition of free markets.

Michael Munger: All right. I'm a political scientist, and I always resent the notion that economists want to talk about economic freedom as if it were freedom. I think that a presumption in favor of liberty, across the board, accomplishes people's ability to establish communities of meaning around things that matter to them.

And so, the argument for free markets is that it elaborates division of labor in a way that allows me to be prosperous enough to take all the other dimensions of my life and create human flourishing. And, economic liberty is only a tiny part of that.

So, Adam Smith, when he was writing Theory of Moral Sentiments was trying to create, that's--I agree with Dan Klein--that's his most libertarian book. He wants a presumption in favor of liberty across the board.

And then he realized, you know: we need to explain why it is that the elaboration of division of labor creates enough prosperity to give us a space in which that can be accomplished.

So, we will have a kingdom of propriety. Propriety is a self-correcting set of norms that, over time, we develop and learn more about. And, economic freedom, the argument for markets, is a small part of that. I would say that--I bridled when you said that Ricardo's insight is perhaps more important than Smith's.

Russ Roberts: No, no, no. Other way around. No. I think Smith's much more important.

Michael Munger: Then I'll--then I'll stop right there.

Russ Roberts: And, Ricardo has overshadowed Smith because people, I think, like it because of its cleverness; but I think Smith is actually much more important.

Michael Munger: I misunderstood, and some listeners may have, also. So, let me go back then and agree with you.

Comparative advantage is an idea whose time has passed. We shouldn't even teach comparative advantage. Comparative advantage is a minor footnote on division of labor--because, there are certain things--yes, it's hard to grow oranges in Alaska. So, the usual examples that I get, we can do it. We can have hothouses and we can use solar panels for half an hour a day, but it would be very expensive.

So, you should engage in that thing where you have the lowest marginal cost.

But, a lot of that is endogenous to the process of the development of division of labor. So, Smith's example of the street porter and the philosopher would say--he's such an egalitarian: We're largely capable. Given good institutions, we're largely capable of developing our own human flourishing. We will find something where we can contribute. And notice the way to prosperity is to contribute something to society. We're going to leave that up to individuals and they're going to use their own devices, provided they have access to education and enough infrastructure.

So, what's really important is division of labor. So, the 49 people who start out, they're all very talented and they all go to an island. They're not doing very well at first, but before long, each of them specializes in something. And then before long, maybe they can trade with the mainland. They could become wealthy.

Now, you're right that it's very bad at the outset. But, the dynamic part of Smith's view was that we can, even if we're all clones and not every good at anything at the outset, we can all develop a comparative advantages. And, those comparative advantage should be guided by prices.

Russ Roberts: We'll get to that next. When I said, by the way, it's 50, not 49, because you're in there.

Michael Munger: Ah, yeah, okay--

Russ Roberts: With that 50th person. What I meant by that is, without exchanging with the mainland, they can never be wealthy.

Michael Munger: Yes.

Russ Roberts: By our standards. By our standards. They could, maybe at the end of a year, build a few cars. They would die from starvation. They can't do the range of things that you and I have easy access to, that millions, hundreds of millions, a few billion people have access to, fortunately in today's modern world--not everybody, but many, many.

Michael Munger: May I say one more thing about that? James Buchanan would always give that example of why access to open markets is really important to developing nations, paradoxically.

So, the United States has a big internal market. We probably can get by with quite a bit of protectionism. Sri Lanka cannot. Relatively small countries, they need to open up precisely so that they get access to a larger market, for just the reason that you say. Those 50 people, those relatively small number of people in a developing nation, they really have no hope of becoming wealthy.

Russ Roberts: Yup, exactly.

12:38

Russ Roberts: So, when you say 'freedom across the board,' you mean in economic and commercial life, but also in non-commercial life: Freedom to read what you want, freedom to associate with whom you want to associate. Is that what you mean 'by across the board?'

Michael Munger: A presumption in favor of liberty. So, any restriction on my liberty that doesn't involve the harm to someone else, means that the burden of proof must be on the state. The state has to demonstrate. This is really important. Not: I have to demonstrate why I need that freedom.

Russ Roberts: So, I'm going to give my definition now. It's not my definition: it's what I would have said. Obviously, it's a large area. You can inhabit different parts of it.

But, I would have said: The key to free markets--I think people often assume two things that I find uninteresting. They either assume that when I say I'm a free marketer, they mean I'm against government. That I want no government. That I'm an anarchist, effectively. And I'm not. I'm not an anarchist. I think the state should enforce property rights. It should enforce laws against fraud. I'm not an anarchist. So, it doesn't mean zero government.

The main part of it, for me, is that prices are free to adjust without legal restriction. So, no minimum wage, ideally.

But, for most of the labor market, the minimum wage is not binding for most people in the labor market. So, the labor market in the United States, many other countries, is effectively free, except at the very bottom--ironically or not. Maybe we'll talk about that.

But, that's the level of intervention that I am--want to focus on, at least the first part of our conversation.

There's more to say, but what I want to emphasize is this idea that I don't want the government steering outcomes via price. Which is very tempting. As we'll talk about, there are many outcomes of market transactions where people voluntarily exchange that someone on the outside might look at it and go, 'I don't like that. That makes me uncomfortable. I think that's bad. I think that hurts people, certain kinds of people, and we want to do something about that.'

What I want to start with as my definition of free market is that the government does not tamper with prices. They allow prices to adjust.

That means that healthcare in the United States is not a free market. It has market elements, which I think confuses people. It encourages people to blame markets for some of the outcomes they don't like in the healthcare world, in the healthcare field, healthcare market.

But, it's not a free market. It's not remotely a free market. There are many, many things that would be different if there was a free market in healthcare. Some of them you wouldn't like, some of them you would like perhaps, as a listener.

But, I want to just start with that as my default definition. A free market is one where the government lets prices adjust. You want to comment on that?

Michael Munger: That would be one element, to me, of a free market. There are also other regulations that are tantamount to price.

That is, I have to get permission before I innovate something. I have to get a license, that is the presumption is in favor of not doing anything. In order to do anything, we lard up the process with a bunch of permits.

But, yes, by and large, a free market requires freely adjusting prices.

And, the reason for that is that prices give us signals about the opportunity costs of resources. And, knowing the opportunity cost of resources actually gives us a chance to act morally out of private incentives.

So, if something has a high price, that tells me other people want it, also. If it has a low price, it means if I use it, I won't be using up many resources.

Now, who are these other people? Why do they want it? I don't know, and I don't need to know. And that's the genius of prices.

So, prices give--freely floating prices, freely adjusting prices--give us an opportunity to take the needs of other people into account. And if you try to keep prices artificially low, you make people act selfishly when they don't want to: 'It looks to me like nobody else wants this toilet paper. I'll take the whole shelf.'

So, the reason for prices is that it gives us an accurate measure of the opportunity cost of the resource. And what opportunity cost means--we often don't make that clear--other people need this, too. Think about other people.

17:26

Russ Roberts: Now, you used an example on here before when, in the aftermath of a natural disaster--and you and I have had a few conversations about this general topic; we'll link to those. But, this example bears repeating, given what you just said. In the aftermath of a natural disaster, I may not know about the natural disaster. It may not have hit my neighborhood, my area, my state.

So, I'm thinking of building a porch. I get an estimate for the cost and it turns out, all the lumber in the region, and the carpenters, and the skills that are necessary to create a porch are working in the area where there was flooding, and they're not building a porch. They're replacing people's houses. They're allowing them to live comfortably again, under a roof. And I'd like a porch. It's pleasant. If you said to me, 'My house just got destroyed by a flood. Could you let me have the carpenter for the next six months and the lumber that's available now? At the end of the six months, you can have your porch.'

I would say, 'Maybe.' Maybe I would say yes. Maybe I would say, 'Yeah, I understand that. I sympathize with you. I'll let you have the resources.'

But, under a market system, you don't have to find me. I just see that they're expensive and I defray the--I wait and build my porch later when the price is cheaper.

And I think that piece of market process is so misunderstood and underappreciated that it's worth talking about a little bit more. We've probably also, you and I have probably also talking about surge[?] pricing. And, I've given the example in an essay that, when there's a threat of a terrorist attack, if there's been a bomb somewhere, as there has been a couple times in the last few years, and people think it might be a terrorist attack, and sometimes it is--they want to get out of the area where the place is. We want people to go there to help them, if they have the ability to do so.

And that's what a high price for an Uber does [i.e., surge pricing--Econlib Ed.]. It says to people, 'Hey, a bunch of people want this,' what you just said. You can provide it. It might be dangerous. In this case, you might want to know what the reason is before you went down there. But, the price alone says, 'Hey, come on in. We need your help.'

If you don't let the price rise, you need to suggest what mechanism you would use to encourage people to do it. You could make an announcement: There are a bunch of people stranded in this neighborhood. They want to get out. 'Would you please go over there?' That might work. It can work, in certain communities, certain ethnic connections that people have--they might be willing to do that.

But, what prices do in that case is, they get people to head toward danger. It's really quite miraculous when you think about it.

So, it sends signals, as you say, about information that are not--you can't-- they're not hanging around, that information. It's not just posted everywhere. In fact, it's posted nowhere. And, it allows you to act as if it were posted. And that's extraordinary.

Michael Munger: It is extraordinary. The nice thing about your example is that it does suggest an alternative, that I often hear: Well, why not, since we're pricing this. It's like the famous, maybe slightly apocryphal Israel day care center where, once you start to price--

Russ Roberts: It could be apocryphal, yeah.

Michael Munger: One of my least favorite examples--

Russ Roberts: Me, too, strangely enough--

Michael Munger: It drives me crazy. It's, like, 30 years old. It had a bunch of features. Then it's as if I've quoted from sacred text.

Russ Roberts: Yeah, that gets quoted all the time. It's been quoted on this program, unknowingly, by more than one guest. They didn't realize how much I dislike it. Since you've mentioned it, you should probably give a little of the detail.

Michael Munger: The bones of it were that people were picking up their children. They would pick up their children at the end of the day from the daycare center. And they were supposed to be there by, let's say, 5:00pm. Sometimes they were a little bit late. The daycare center was getting tired of this and so they said, 'We're going to start charging if they're late;' and people became more late, not less, because this meant that it was a fee-for-service arrangement where I could pay you to take care of my kids for a few more minutes.

So, we changed it from something that was done out of love and mutual respect, into something that was--worse--commodified. And, commodification is always the great sin of markets, according to many people.

Now, here's the thing. Moral communities can operate at small scale out of love and personal interactions. And moral communities are really great. Smith thought moral communities were really terrific. And so, if you look at the diamond merchants, the Orthodox Jewish diamond merchants in New York, that's a moral community. And in Antwerp. Being excluded from that community would be really expensive. So, millions of dollars are exchanged on a handshake. Don't even write it down. We understand that we can all trust each other.

That's great, but it doesn't operate at the scale that would allow us to achieve division of labor. Division of labor is limited by the extent of the market and it needs to happen over a larger group.

And so, the second concept is a moral order. Friedrich Hayek, James Buchanan both developed this part of Adam Smith's insight. A moral order is one where we trust each other because of a commitment to the rules, not personal commitment to each other.

So, famously, the George Mason economist that you often cite as an example. If you have people growing potatoes in Idaho, and steak in Texas, some of them might send steak and potatoes to their good friends that they know personally, as part of a moral community in New York. But, New York is a big ol' place. It's too big for moral community to work. It's good that it is, because it helps us take advantage of division of labor.

So, Walter Williams said, 'You need something other than a moral community. You need, in effect, a moral order that's based on accepting of a price mechanism.' And as a result, we get great cities like New York where people don't know each other, but they can trust the fact that when they go to the grocery store, there's going to be steak, and potatoes, and myriad other things that were provided because of the price mechanism.

Why? It's because the opportunity cost of steak and potatoes in Idaho and Texas, because they have developed a comparative advantage, is much less; and it's more valuable in New York. So, they send it to New York.

And so, the basis of this is a moral order. Markets are a moral order. It is not a moral anarchy. The moral anarchy is the breakdown of this belief that we all have in each other.

So, a hierarchy is: Moral community: those are great. They're small. They are fragile. A moral order is when we're committed to a sort of Humean [David Hume--Econlib Ed.] set of conventions--property, price mechanism. Moral anarchy is when things break down.

And what people don't realize, I think, is that if you get rid of the market system, you don't get an alternative system called socialism, at least not at first; and maybe never. What you get is a moral anarchy where people don't trust each other.

So, saying, 'I want some alternative to the moral order of markets,' well, you have to tell me what it is and how it's going to work, because I'm skeptical.

Russ Roberts: So, why did you bring up the daycare center?

Michael Munger: Because commodification is supposed to change the way that we act. It destroys a moral community. The daycare center was a moral community. We all did the right thing because we knew each other.

Russ Roberts: Okay.

Michael Munger: But, the price mechanism becomes a moral order. Commodification can give us an alternative. That actually means that we can all operate within a system where prices give us information.

25:22

Russ Roberts: Yeah. I think I've--you know, I've talked about commodification with some guests before on the program. I don't like the daycare center example because people conclude it means that prices don't work. You know, 'Shocking. You raise the price a little bit.' What you've done is, as you've pointed out very eloquently, you've changed the product, in this case. You changed the expectations. I bet I could find a price increase that would get people to be on time at 5:00. I might not have a business because people might be so nervous that they couldn't get there reliably by 5:00 that they would not want to use the service. So, there's going to be trade-offs there.

But, I think people have made the wrong conclusion from that one-time example that--I had Ariel Rubenstein on the program saying, 'This obviously couldn't have taken place in Israel because there's no way somebody who shows up at 5:02 is going to pay a $20 fine, or even a 20 shekel fine.'

26:12

Russ Roberts: So, anyway, put that to the side, the reliability of that one example. But, I think the point is interesting about when do we use financial incentives, material incentives versus norms and other ways of organizing our interactions. There was an implicit contract at that daycare center, that you should come by 5:00. People were evidently violating it, coming at 5:05, 5:10, 5:03, 5:15, imposing costs on others to avoid having costs of their own, of getting there in the right time of 4:59.

So, I understand how that could be: that can deteriorate that situation. And there are different ways you can solve it. You can pick a high-enough price that it discourages it. You could do shame. There are many, many ways to improve that situation.

But, the moral order that you're talking about, I think a lot of people would say--and I hear it all the time, actually, 'Well, this all sounds good. There's a lot of romance about the division of labor, and blah, blah, blah, Munger. But, what about the fact that there's people who are hungry and don't have much? What's this great idea about the division of labor? If you don't bring enough skills to the marketplace, you make, if you're lucky, the minimum wage. If you're unlucky, you can't find work.' How do you defend that attack on the moral order?

And, I actually want to make it a little more general.

So, I think what separates you and me--there are a few things--but what separates you and me from people who feel otherwise about the market is the idea that I am willing to tolerate some unattractive outcomes. That could be somebody not getting ice in the aftermath of a natural disaster because they've chosen not to afford it; or they literally can't afford it--another example that we've talked about before. It could be there are going to be some poor people who don't have any skills that they bring to that market, that division of labor.

Are we just going to say, 'That's life. Markets are the answer.' I think for you and me, we don't pretend that markets work perfectly. We say, 'The alternative to that is something that will have features you may not like, either.' Is that a fair summary of how you feel? That's a fair summary of how I feel about it.

Michael Munger: As my good friend Pete Boettke always says, 'We need to be comparativists.' So, a comparativist is going to say, 'Tell me what other system would systematically perform better.'

Russ Roberts: Here's my system--I'm going to give you my system. I want markets everywhere, except in that corner in the aftermath of a natural disaster. And then I'm going to pick a few other places. This person, his or her skill is only worth $4 an hour and I think that's inhuman, so I want $10. And I'm not going to let you sell your kidney, because even though it's yours in many senses, I don't think that's good for our moral order elsewhere.

Many, many people would pick particular examples of where they would intervene. 'I don't like that trade is destroying the way of life of a group of people.' I might not like driverless cars, if they actually come, because they're going to put millions of cab drivers out of work, and those people will struggle to find something else. Are you going to let those changes happen or are you going to stop them?

Michael Munger: Notice that those who would argue for that position are imagining--and I literally mean imagining because it's an imaginary alternative--that they can have all the features of a system that they pretty much like, except they'll change only those things that they don't like about it.

And so, that's a very difficult problem. In fact, the most that we can probably hope for is general sets of rules.

And so, I try to teach my students that they should think in terms of rule utilitarianism. Rule utilitarianism means there's relatively small number of focal points, sort of Schelling points.

There's a way that we can organize--

Russ Roberts: Explain.

Michael Munger: A Schelling point is a particularly salient feature. Two more weeks, I'm going to go to Prague, in the Czech Republic. And, in the Czech Republic, the tail of King Wenceslas--and Wenceslas Square--is known as the place where everyone goes to meet if you're lost. So, it was a particularly salient place to go meet. If I don't--Schelling's example was, you have to meet someone in the United States; you're not sure when or where. You would meet at midnight on New Year's Eve in Times Square, or someone that everyone can think of.

Well, institutions are the same way, but we all have conflicting plans and purposes. There's many different things that we all want to accomplish.

There's a relatively small number of rules--and a market system is one--that constitute a way of organizing society that allows kind of self-correcting, adjudication, or reconciliation of conflicting plans and purposes: 'I want to do this. You want to use it also. We both want to use a piece of property.' It turns out that using it for a restaurant is more valuable than using it for a parking lot, so it becomes a restaurant.

So, I wanted to build a parking lot. You wanted to build a restaurant. What happens? We decide that using a price mechanism. That's not ideal, but there's no other mechanism that will allow us, if we just have rules.

Now, if what you want is discretion--that is, I'm going to look, and I literally don't know what people mean. I think they mean they want to look because they want to be the dictator, and they say, 'Yes, no, yes, no. This outcome, good. This outcome we will change in particular ways.'

That means that there's a really long line of people waiting to have their outcomes adjudicated by this monarch. And, they're rent-seeking in the sense that each of them is trying to think up the best argument that they can, so that the discretion of the monarch will be invoked on their side rather than on their opponent.

The cost of making decisions that way means that you're months and months backed up. We saw this happening in Revolutionary France. We've seen it in every socialist nation. If you want to use discretion, it means people don't know what the law is because the discretion of the state is going to be used to put a thumb on the scale of the side that whoever the state wants.

Even if you think that's going to be used in a way that's fair--although it would surprise me if the powerful would intervene on behalf of the weak. Probably, the powerful are going to intervene on behalf of the powerful.

But, let's suppose that they're actually going to intervene on behalf of the weak. The cost of using that mechanism are going to dwarf the gains.

And we talked about this a little bit last time in David Schmidtz's example about Desert Town with the traffic stop. You may want to put a link to that, also.

Russ Roberts: Explain that.

Michael Munger: Briefly. I drive into town, and cop pulls me over and says, 'You know what you did wrong?' And I say, 'No, not really. There were no, like, traffic markers or anything and the other car stopped, so I went on.' And he said, 'Well, here in Desert Town, at every intersection, we all pull over and we talk to each other about who has the most legitimate reason to be in a hurry. And then whoever gets priority gets to go through the intersection first.' And then he stares at me and I say, 'You're obviously joking. I don't know what the joke is, but you're kidding.' And the cop says, 'Look, I was going to let you off with a warning until you said that.'

So: Is that a good system? That's a social justice system. Because, sometimes I'm at a stoplight and I'm in a hurry; and Russ, I know you're going the other way and you're not in a hurry. You're 10 minutes early because you're that damn kind of guy. And so, you should stop and let me go over.

It's unjust. Except that if we had a system where we all had to stop at every intersection, it would take even the most in-a-hurry person 10 more minutes than it would to wait for two minutes in an unjust way at the stoplight.

So, rule utilitarianism would say that even the least well-off are going to be better off in a system that's predictable--even though it's unjust. It is absolutely unjust. Of course it is. But, the cost of achieving case-by-case justice through discretion and rent-seeking argument will dwarf the benefits that you imagine that you can provide.

Russ Roberts: You're such a Doug North student.

Michael Munger: I'm a transaction-cost guy. There's no doubt about that.

Russ Roberts: Yeah. That's a great example, though. I don't remember you talking about that because probably because my mind was drifting. It happens. Don't tell anybody.

Michael Munger: It is interesting because it means that, if you were to ask, you could get unanimous consent for stoplights, even though people would say there are going to be times when they're unjust.

Russ Roberts: Absolutely. And, of course, there are times when people run a red light on the way to the hospital with a pregnant person.

Michael Munger: And we might want to make provision for that. So I broke the rules. But, still, by and large, we're going to have the rules.

And so, that's the relatively absolute absolutes. That's Hume's convention. That's Smith's propriety.

So, we have a bunch of different names. But, by and large, we should stick to these rules. The Humean convention of property. Smith's notion of propriety. The judgment of society. The approval that we get from other people from acting in the right way.

35:53

Russ Roberts: So, let's bring this down into a more practical realm. We're in the middle of the coronavirus pandemic, still. It's unbelievable. A number of companies developed a vaccine. They sold it. They didn't give it away. They took a large amount of money to develop it--for the research, in the United States. I'm not sure how it worked in other countries, but a large--basically a pre-order--was guaranteed by the American companies that worked on it.

We could have held them at gunpoint--meaning coerced them, forced them to develop the vaccine. Most of us would think it's probably not going to be that effective. But, the more interesting case is, after they developed it, should we expropriate it? I think a lot of people--I know a lot of people think that's a good idea. 'People are dying. Are you serious? You're going to allow pharmaceutical companies to make profit?'

Listeners will know I've said many negative things about pharmaceutical subsidies. This is not a defense of pharmaceutical profit per se, never should be. I don't confuse pro-competition with pro-business, pro-free market with pro-business: important addendum to this whole conversation. That's not what we're talking about. We're talking about a process.

So, would there ever be a case where you would abrogate the property rights of an innovator, like a pharmaceutical firm, and say either, 'Well, a lot of your money came from the government anyway. A lot of your education of your workers came from subsidized universities. So, in some sense, this isn't your property; and therefore, we have a moral, not just a moral right, a moral obligation to require you to provide this at a low price or a zero price to the people in the world who can't afford it. That free market thing is murder. Literally: you're murdering people if you believe in free markets.'

That's a case--the case I just gave--is a case where discretion is seen as just. It's the traffic light case, but with a set of consequences that bite--in, I think, a little harsher way. So, how would you respond to that?

Michael Munger: Usual answer is some version of eminent domain. So, it is long-established that the King or the State has the power to take private property. The Founders of the American Constitution were worried enough about that, that they said that you had to give compensation.

So, if you wanted to seize the license, if you wanted to seize the formula to make the drugs in an emergency, okay.

But, why would it be that you have the right to say, 'And we're not going to compensate you?' You would have to compensate. So: I cannot force you to be a slave. I cannot force you to provide this for free to other nations. If I want to buy it and give it to other nations for free, all right.

Now, people say, 'Oh, but that's too expensive.' Well, wait. It's as expensive as it is. The question is, if you think it's a public good, should it be borne by the public, or should it be borne by the private innovator who, next times this happens, is going to think twice about innovating?

One of the difficulties is that if I come up with an innovation, and I look back at the past and I see that if anyone who was successful had it nationalized, my incentives to come up with an innovation next time are much less.

39:23

Russ Roberts: Yeah. I used to like to say that in the United States, people are allowed to come--in the venture capital industry; they're allowed to get incredibly wealthy and they're allowed to lose all their money. They bear, mostly, the risks and rewards of their own choices. That encourages prudence, foresight, as best is possible.

And, even with those incredible incentives, three out of 10 fail. Three out of 10 are okay. Three out of 10 do pretty well. And one is a home run.

That's a tremendous track record. It's just hard to predict what's going to be valuable and useful. And, if you're not careful with the incentives, you won't even get those raw numbers--

Michael Munger: It is impossible to predict--

Russ Roberts: You'll squander your capital, your savings, and will be the poorer for it.

So, I think one way of thinking about the difference between people like us, who are sympathetic to market forces, is that: on a case by case basis--certainly there are outcomes you don't like that you'd like to intervene in--but, you'd have to answer the question, the Thomas-Sowell/George-Stigler question, 'And, then what?'

And that outcome, that discouragement of future innovation might draw you up short. And I think that's quite, that's quite--

Michael Munger: So, we have two, now. One is the transactions cost of using discretion which will dwarf the benefit you imagine. The second is the loss of future innovation and work on research because it was nationalized. Those are two different, very powerful arguments.

Russ Roberts: And there's a third, and I just want to also say that I am going to get to make a stronger case against markets. I will do my best in a minute.

But, the third case is the one I think that segues nicely into what we wanted to make sure we got to today, which is: you're assuming that the regulator, the king actually has some vague moral sense about what's good for the people rather than helping his friends. That piece of it is another reason that rules rather than discretion should not just be the default, but enshrined as an ideal, even though they are imperfect. Because, the alternative is relatively appalling, in history at least, and I think often in recent times as well. So, how do you think about that?

Michael Munger: There are two things that, when I press them on just the question you just raised, there's usually two systems that people have in mind. And one is an unaccountable, unelected priesthood of experts.

And, that's really interesting. How are you going to choose them? And, why would you think, once you create this power, why would you think that a system based on power will protect the weak? Because probably what priesthoods do is--particularly if they're completely unaccountable--is protect the rights and privileges of that priesthood.

Now, maybe they'll try to do what they think is best. But, they probably don't really have enough information.

So, the problem of experts is that we don't have--is the Hayek problem about the socialist calculation debate.

Now the other thing that they sometimes say is: 'Well, we'll use democracy.' Gosh. So, consumers are too stupid to know how big a size coat to buy in New York, but they can solve the problems of foreign policy that escape statesmen.

So, the problem is, and this is the answer that actually--I have converted a couple of people with just this sentence. I've talked about this before on the program, but let me say it again: Every flaw in consumers is worse in voters.

Every flaw in consumer is worse in voters.

Do consumers lack the information that they would need to know what kind of corn flakes to buy? Maybe. There's misrepresentations. There's fraud. Do voters know which politician they want to vote for?

Every problem that faces consumers is much worse for voters. Which, with the additional problem that if I'm a consumer and I buy bad corn flakes, I say, 'Dang. Those are bad corn flakes. I'm not buying those again.' If I vote for a bad politician, there are no consequences, because my vote has nothing to do with the outcome. It's just an expressive act.

So, the problems that our friend Bryan Caplan has raised about voting are on top of all the ignorance, the rational ignorance problems that you have with consumers.

So, if you think democracy is better than markets, you need to ask yourself about the incentives and information-- the discovery process that is markets. All we have is the very crude instrument of votes. So, I always thought that I would say, 'What if a really bad person were to take office?'

Now, in the mind of my Leftist interlocutors, Donald Trump was such a person, so it's no longer hypothetical. Now, I'm not taking a position on whether he was or not. But, for them, Donald Trump was a bad guy.

So, it's no longer hypothetical. So, I assumed that they would say, 'You know, you are right. We should have less concentrated power in the government because we cannot be sure.' And, no: What they said instead was, 'We're going to double down and make sure that never again does a person that we disagree with get to take power.'

That's not the way democracy works. But it's a remarkable claim.

So, there's two possibilities: An unaccountable priesthood of experts, in which case, how are you going to choose them? And if you use democracy, you've just moved it back to democracy. Or, democracy from the get-go. In which case, every flaw in consumers is worse in voters. 


And so, if you think that you can do better than the market allocation, you have to tell me an institution that doesn't involve unelected experts or rationally ignorant voters.

45:41

Russ Roberts: So, that was lovely. I'm very sympathetic to those arguments. But, don't you believe in the EPA, the Environmental Protection Agency? Don't you believe in certain government agencies that restrict free markets and free trade?

I do. I think it's good the government has regulations against pollution. I think they're poorly designed. They're often designed to help the friends of the politically powerful. But, I generally suspect or hope--maybe it's a dream, maybe it's a fantasy--that the inefficiencies or immorality of some of those outcomes, relative to the gains from the overall restrictions, say, in pollution, are probably worth it.

Elsewhere, not so much. This would be a case, classic example of a market failure, that there's externalities: 'I have a natural incentive to want to dump my garbage in your lake rather than in my own, in your air space rather than my own. And so, we need laws against that.' You would agree with me, right?

Michael Munger: Notice what you did, and I realize you're doing this partly tongue-in-cheek. But, someone who makes that argument apparently got stuck at the sophomore level in high school debate. Because, what they hear from their opponent is, 'I think the government should not do everything,' and then attribute to their opponent the claim, 'Therefore the government should do nothing.'

I never said that. You never said that.

Russ Roberts: You got perilously close in the middle of that peroration. I know you don't believe that, but go ahead.

Michael Munger: Sure. I'm telling you, you need to give me a better system. And so, the EPA [Environmental Protection Agency] is--and in fact, we recently have seen some examples of bureaucracies that, because of democratic pressures, are not performing the way many of their fans thought that they would--

Russ Roberts: CDC [Centers for Disease Control], anyone?

Michael Munger: Yes. So, it makes it very difficult when you have the priesthood that is responsive to democratic pressures.

So, the market failure paradigm calculates the existence of an equilibrium which is different from the actual outcome of markets.

Now, there's a couple of problems. One is this equilibrium doesn't exist. Because remember, from the outset, the argument for markets is increasing returns to scale. Everybody's afraid of the IRS--but, I don't mean the Internal Revenue Service. I mean Increasing Returns to Scale. Increasing returns to scale mean that there is no equilibrium. The argument for markets is division of labor. Division of labor is sharply increasing returns to scale. No equilibrium exists.

Your justification, and the market-failure paradigm, is that a non-existent equilibrium is better than the one that markets provide us. That's a remarkable idea. It actually doesn't exist.

Now, if it did exist, would you be able to calculate it without prices? You would not.

So, there's some hypothetical alternative that you want to talk about.

Now, I'm a fan of the EPA. I'm a fan of the Food and Drug Administration. So, those are two different market failures. So, Environmental Protection Agency is externalities. The Food and Drug Administration is asymmetric information.

And to be fair, many of our colleagues who are pro-market people will go through some elaborate story about, 'You know markets could do this. Particularly for the Food and Drug Administration, the problem of reputation. There is a problem of asymmetric information, but we solve that all the time using reputation and brand name.'

And so, drugs would have a brand name. Yes. But, the transactions cost argument cuts both ways. It may very well be that having some process, like the Food and Drug Administration--and notice I said, 'like the Food and Drug Administration,' not, 'our Food and Drug Administration,' which actually has still not approved a vaccine--that is, the three vaccines that have been given to tens of millions of people. 'No, we've got to check.' Well, we actually have had a pretty big experiment.

So, Food and Drug Administration may not be a perfect example, but I could imagine a Food and Drug Administration whose job it is to test whether drugs are safe and efficacious. I could imagine Consumer Reports, a private agency, doing that. I could imagine both of these two simultaneous operating in different parts of the market.

But, sure, if you want to have regulatory agencies that are actually staffed by experts, that's great. That's different from having the state try to manage prices on a discretionary level. Food and Drug Administration has a process that we go through to get drugs licensed.

50:22

Russ Roberts: I'm going to, it's going to be hard for me, but I'm going to try to defend the Food and Drug Administration and the expertise model.

I think a lot of our friends are critical of them. It's interesting, actually. Just like some people might suggest that the pharmaceutical companies are murderers because they don't give away their product for free to desperately ill people who can't afford it, our friends in the market-oriented community have suggested that the FDA are murderers because they have failed--

Michael Munger: Well, actually, during the AIDS [Acquired Immunodeficiency Syndrome] epidemic, a lot of people on the Left said that the FDA--

Russ Roberts: That, too. That's true. Fair enough.

But, it's mostly people on the free market side who say that the FDA is insufficiently slow in approving drugs.

But, I want to suggest-- it's kind of ironic. It's weird. I've never really thought about this. Their corruption is not the standard sort of public choice corruption of: 'Well, we'll delay the drugs because we're going to get paid off.'

Now, I think there are incentives to tamper with the drug approval process that does privilege existing competitors who make large contributions to politicians. So, I want to be careful here. But, I think when the FDA--when a team, a group of researchers and scientists have to weigh in on the efficacy or safety of a drug--I think it's their human failings that are at stake there: their fear of being branded as harmful, which increases their caution.

And that caution is often what we would--we blame the market for being insufficiently cautious because of the profit motive. We have a similar problem in the government side, perhaps, where they are too cautious out of fear that they might--because they don't get any of the upside; they don't get any of the returns from the pharmaceutical innovation in the form of higher stock prices. They just kind of focus on the downside, so they take their time. I get it. It makes some sense.

Michael Munger: But, you're right, that's not the way Public Choice people usually talk about corruption, but that's because Public Choice often takes a sort of shallow, self-interested view that Ludwig Von Mises, Gordon Tullock, and William Niskanen all wrote books on bureaucracy where the pathology you just talk about was the central theme.

Russ Roberts: Yeah. Not corruption.

Michael Munger: It is a--

Russ Roberts: Not corruption.

Michael Munger: Yes. It is a feature of bureaucracy that is a kind of self-interest. I get nothing if we approve a drug that goes through quickly. If it turns out to be harmful, I can get punished. If I say, 'No, no. We're really careful and scientific,' and we delay, there's only benefit. There's only upside.

Russ Roberts: Yeah.

53:13

Russ Roberts: Let's talk about the ugliest pig. I can't believe we haven't gotten there yet. And then I want to come to the harder cases I think we've kind of ducked a little bit.

Michael Munger: This is actually an example that Gordon Tullock used, although he used a Roman emperor and two minstrels. I'm a redneck from North Carolina and so I use pigs. So, at the State Fair, there are contests about livestock. But, imagine that we have an adult pretty pig contest. And, adult pigs are not pretty. So, there's only two entrants. So, we bring out the first pig, and the judges go, 'Gah! That's horrible! That pig is so ugly. Forget it. We're just going to give the prize to the second pig.'

Well, it's fair enough to say that the first pig is ugly. But, you haven't seen the second pig.

And so--actually, I used to use this example only in one direction, and I have come around to understanding we need to use it in both directions. There are a bunch of people on the Left who look at markets, and then they come up with a long list of outrages and indecencies--inequalities, terrible infelicities, awful things that they would change. Therefore: We'll use the state to do that, imagining that there is some set of institutions and the state would accomplish what they can imagine.

On the other hand, there are pro-market people who look at things like the Food and Drug Administration and say, 'Well, we could do this with reputation.' You know: the way reputations get formed is a bunch of people die. There are really big costs to having to develop a reputation or get rid of firms that have bad reputations in the production of drugs. If we got rid of the Food and Drug Administration, it is true that before long, we would start to see brand names solve the asymmetric information problem.

But, the costs of doing that would be really high. The fact that markets can do something doesn't mean that it's the best way of doing it.

So, there's a bunch of pro-market people who look at the state pig and say, 'God, that's an ugly pig! Let's give the award to markets.' That's just as bad.

So, I want to advocate for a comparative systems approach where we recognize that it's not true.

And Adam Smith understood this clearly. Many people think markets are what happen when the state does nothing. That's not right. Markets are what happen when the state does the right kind of nothing--which we've talked about before on the podcast.

The right kind of nothing is something that's really hard to do. You need to be a good state to do the right kind of nothing, to create a setting where permissionless innovation is possible. But, that means there's a set of property rights. There's a system for adjudicating disputes over property rights, all of which are operating in the background. And so, people who use the pretty pig approach in either direction are doing a disservice to their own argument.

56:14

Russ Roberts: That was beautifully said. Well now let's get to the harder cases.

There's a handful of firms that get fancy acronyms. We're not going to mention them, the acronyms, but large tech firms--Google, Facebook, etc. Should we do anything about them? Should we just let them make as much money as they--they figured out some really clever ways to make--and really cheap, ingenious ways to make money--selling, giving stuff away, and yet somehow finding a way to make money. And what they give away is incredibly pleasant to the people who receive it at no charge.

Does that bother you at all, the way that's working out, or do you think it's fine? And if so, if it bothers you because you think it's an ugly pig, do you have a prettier pig for me?

Michael Munger: I think that is the greatest problem that we face. And, let me cite an example from Daphne Kenyon at Stanford. So, the way that she phrases this example is, 'There are these platforms that have undue control over who gets to publish, and they're close to being common carriers.' And it means that it's--I mean, it's not really censorship because the First Amendment also protects against state censorship, but these companies are just too powerful.

So, you've got a company that gets to decide, 'We'll publish this. We'll not publish this. We will accept certain ad revenue from some people. We won't accept it from someone else.' So, we should break up--and we've got, like, 10-, 20-million people on this platform reading things at any time. So, clearly, we need to--

Russ Roberts: Oh, more than that. More than that.

Michael Munger: Wait. Wait.

Russ Roberts: You said 10, 20.

Michael Munger: Stop.

So, clearly, we need to break up the New York Times. So I'm talking about the New York Times. The New York Times is a platform where many people interact. They have comments. The New York Times gets to decide what they're going to publish, what they're not going to publish.

So, the nice thing about her example is that there's an unexpected punchline. Well, presumably, we're not going to break up the New York Times, even though it does have a gigantic amount of power.

So, the question is: Are there companies that--how big would be large enough?

There's a bunch of different companies that compete with each other. They compete with each other for eyeballs and attention.

Now, internally, it's true that they're a platform. The difficulty that we have, and the reason that I've become more concerned about this than I was, was that at some point, if a company is large enough, it is both a firm in the industry, and the industry itself.

And I don't mean just in a monopoly sense. I mean that Facebook is the place where people go to get information. And we may have some concerns that it is being used to provide information that is false.

Things are rarely so bad that government intervention can't make them worse. So, the proposal from the Biden Administration seems to be that we're going to have a bureaucrat in the Department of Health and Human Services that, all the claims about vaccines that are on Facebook and say, 'This will be allowed. This will not be allowed.' Which is a whole lot like waiting at the intersection to decide who gets to go through the intersection first.

So, I think there is a problem. I do think that all, and this is actually my current book, is a new anti-trust paradigm. So, what I'm trying to work on now is: Do we need a new antitrust paradigm? And, what would it look like? I think that I'm actually going to go full [inaudible 01:00:07] here. This is not a question of concentration. It's a question of power.

And it may be political power and I don't know what the answer is, but we may need political solutions to a problem of concentrated political power.

Russ Roberts: That's going to be episode 40 or 42. We'll see when it comes out.

Michael Munger: I hope 45.

Russ Roberts: You mean, the Jackie Robinson episode. Um, baseball allusion for you, Michael.

1:00:34

Russ Roberts: Let's close talking about poverty. A lot of interventionists, a lot of non-/anti-free market people, or people who think differently than I do, they want to intervene in the labor market in different ways.

One way you mentioned is licensing. They're worried about whether people might be deceived by the products that people are selling, the skills or services they're marketing.

But, more commonly, people are unhappy with market wages. They might believe, I think incorrectly, that market wages are set by the companies that pay them.

It's a reasonable thought; but in fact, I like to point out that I've spent my career--I did spend some time working at a race track, and I worked at Ho Jo's [Howard Johnson's], for you older listeners, when I was younger. I knew that'd bring a smile to your face.

I'll tell you, Mike. As a new Ho Jo's employee, one of my customers ordered two hot dogs. And I wrote it down on the slip, and I put it in the little thing that the chef, the cook uses to make the hot dogs. Five minutes passed, and 10 minutes passed, and 15 minutes passed. And my customer said, 'Where are my hot dogs?' I went back to the kitchen and I said, 'Where are my hot dogs?' And he said--he pulled the slip out and he said, 'We don't serve hot dogs. We serve frankfurters. Change it.' Lesson in life for a young man. I was probably 15.

Michael Munger: That guy now works for the Food and Drug Administration.

Russ Roberts: Yeah, exactly. And he didn't like me. I--you know, I don't really blame him.

But, I spent most of my career in academics. I am now very well paid. But, when I was younger, I wasn't particularly well paid, and I enjoyed it, and loved it, and was happy to be paid what I was paid.

The irony is, I could have gone to Wall Street. You could have, too, and we could have made a lot more money with a Ph.D. in economics. Isn't it weird that Wall Street pays more than the non-profit university? Aren't non-profits nicer? Isn't Wall Street greedy? Why would they give away so much money to higher wages of their employees?

The answer, of course is, they don't set the wages. They're set by a market and competition among the firms.

But, I think it's easy to think that it's otherwise, and to blame, as an example used earlier and say, 'You should pay for this company. You should pay more than the market will bear--because it's horrible. I don't like this outcome where certain people are earning low wages.'

How do you feel about that? Do you think we should intervene in those situations? That's very much a market outcome, the disparate salaries we face. Couldn't firms have less profit and pay more? Couldn't we require them to pay more than the market outcome? Wouldn't that be a better world?

Michael Munger: You raised a bunch of questions. Let me try to take them quickly. Why is it that football players make more than teachers? Why is it that people on Wall Street make more than college teachers?

And, that's the diamonds and water paradox. The fact is at the margin, the marginal soccer players make less than teachers. If you're only looking at the very top soccer or football players, yes, they make a lot. But, at the margin, teachers make quite a bit more than the very marginal soccer players.

And so, there's a lot of people on Wall Street, who are no longer on Wall Street, that are now waiters at Ho Jo's--until it went bankrupt.

So, at the margin, if I just look at averages or top salaries, I'm going to get a strange picture of the labor market.

The second thing is: A solution we often propose is something like minimum wages. And, the idea is that the company could afford to pay this and it would benefit the workers, so it's a Pareto improvement: We'll just pass a law and everybody will be better off, because it won't really hurt the companies because they'll all pay that.

If you go into a McDonald's now, you will probably not talk to a human being. You'll punch in your order on a kiosk. And notice that you used to go in, you looked up at a board, and you would say some words that you were reading aloud, 'Big Mac, fries, Coke,' and they would find the corresponding words on their cash register and press them. All you have to do is turn the cash register around.

Oh, wait. That's a kiosk. I press the buttons now, and that person has lost their job. That has been accelerated by minimum wages. That process was going on anyway, but the people at the very bottom of the scale, whose jobs can be replaced by software, minimum wages are going dramatically to accelerate that process.

So, there's a difference between the intent of the policy--and when I say I think minimum wages are a bad idea for this new reason, I'll have students say, 'But, minimum wages are just good. It's something that good people want.' And actually, it's a moral test for them, maybe precisely because it's not a terribly good idea for economic reasons.

But, that brings me to the last part, which is: I think politically, this ship has sailed. There is such a large amount of political support for, 'We have to do something.'

And so, I'm going to take the Milton Friedman view here, and what we need to do is do the thing that is least damaging.

As you know, I think that the answer is Universal Basic Income. I don't think that there's any system better than that. Because the people that I know that are against Universal Basic Income are not saying, 'We need minimum wages instead of that.' Well, no. What we need is a way to recognize that politically, people are very worried and upset about what they see as the unequal application of the benefits that come from economic innovation and the changes in the economy. What they see is an increased precariousness for those at the bottom of the income scale.

We're going to do something. And so, I think that universal basic income is the best of the bad lot. And I'm happy to have that debate.

But what I would like to see is not a rear guard action against, 'We should do nothing about poverty, either because people who are poor deserve it, or because, well, there's nothing we can do.' We're going to do something, politically.

And so, I wonder if universal basic income is not the best of the ugly pigs.

Russ Roberts: Hmm. Well, okay. There's a lot to say there. My answer to that is kind of a cheap answer. I don't really love it. My answer is: we have a really lousy public school system in America. And so, the way you're going to cope with that, instead of making it better, you're going to artificially change the prices of labor.

Michael Munger: And, you think we can just make it better? That's a great idea. 'We should make the public school system better. Let's start now.' Who is this 'we'?

Russ Roberts: It's going to be like Athens, actually, or like Shalem College, where I am now.

Michael Munger: I'm not opposed to making the entire public school system better. I'm with you. Let's do that.

Russ Roberts: Yeah.

But, I actually have a way to make it better. Now, you could argue it's just an even uglier pig. But I do think that a more incentive-driven system, with more freedom of choice, and less top-down government design of that curriculum, I think would be a better system. I think I could make a case for it.

But I accept the point. It's an excellent point that I think is very hard for people to face.

When they're told to tell their alternative, they say, example you gave earlier, 'I want like it is now, but that'll be different, and nothing else. That's what I want.' That world is a fantasy. It may be a comforting fantasy, by the way.

I think Universal Basic Income--we've talked about it before on the program, maybe not enough. Maybe we should come back and we'll do a longer episode on it. It's interesting that you invoke Milton Friedman. Milton actually was one of the earliest, if not the earliest advocate for a negative income tax, which has become the Earned Income Credit.

I think it's not sufficiently appreciated that that is one of the handful of innovations that he actually proposed that got accepted. It would be the Earned Income Credit. He would have liked to get rid of all of the welfare programs and replace it with that--

Michael Munger: I was going to say--

Russ Roberts: But, some of the--

Michael Munger: He ended up being against it because they didn't take everything else out. And that's my UBI [Universal Basic Income] proposal, also. I want to get rid of everything else, including minimum wage. If you're not going to do that, I'm not for it.

Russ Roberts: Okay. We'll talk about it. To be continued.

My guest today has been the great Michael Munger. Mike, thanks for being part of EconTalk.

Michael Munger: It was such a pleasure.


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