Michael Munger on Private and Public Rent-Seeking (and Chilean Buses)
Aug 23 2010

Mike Munger of Duke University talks with EconTalk host Russ Roberts about private and public rent-seeking. When firms compete for either private profit opportunities or government contracts, there are inevitably firms or people who spend resources but end up earning little or nothing. What are the differences, if any between these two forms of competition? How do they related to competitions that award prizes for discovering new technologies? The conversation begins with a discussion of a recent trip Munger took to Chile where he observed the current state of the Chilean bus system, a topic he has discussed in the past.

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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.


Robert Kennedy
Aug 23 2010 at 9:17am

OK, I’m confused. Munger notes that the private bus system had the disadvantages of pollution and increased pedestrian accidents. Then he notes that with the public bus system, there was an increase in private cars and an increase in vehicle accidents because of the bendy buses had to turn from the center lane, along with an increase in public commutes from 40 minutes to one hour and 40 minutes.

In his interviews later with passengers, he notes that no one wanted to go back to the old system because of the pollution and accidents.

Something seems missing here. In terms of pollution, I would have thought that an increase in private cars would have increased pollution, not decreased it. In terms of accidents, it sounds like pedestrian accidents were replaced with vehicular accidents.

So Chilean bus passengers were offended by the pollution from buses but not from cars? and they tolerated vehicle accidents as a replacement for pedestrian accidents. All at a cost of increased commute times?

As a commuter myself, I’d be fuming at the increased commute time. If someone offers me the deal of decreasing my commute time by an hour per day/trip/whatever and in return I have to be more careful crossing the street, I take that deal everyday.

It seems like there some other dynamic here that I’m missing. Any comments?

Mike Munger
Aug 23 2010 at 9:22am

RK: I found, and find, that mysterious myself. What is missing is a connection between the policy change and the bad outcome, I think.

Pollution has gone down because of the new laws requiring inspections of emissions on cars and taxis. Easy to require private buses to have same inspections.

But your next to last paragraph seems dead on. People want to spend less time commuting. What is missing is a connection between private buses and shorter commutes. They don’t agree. I was surprised, because to me the connection seems obvious.

Trent Whitney
Aug 23 2010 at 10:52am

First of all, another fascinating podcast, even with the phone ringing in the background at times.

One sidenote to the person doing your notes transcription: The plural of “bus” is “buses”; the plural of “buss” (which is a kiss) is “busses.” He/she will probably want to go back and edit the notes. And now you’ll know why I always laugh when I see a sign at a restaurant along a highway that “Busses Are Welcome.”

I continue to be fascinated by the Chilean bus system story, especially in the light of research I did on the Fort Worth “T” bus system back in the 1990s and the Pittsburgh transport system a couple of years ago. The short story is that there’s a lot of favorable PR whenever a transport system either shows, or comes close to showing, a profit…but those “impressive” financial returns only come because of massive federal subsidies that the system receives. The media, of course, never goes inside the numbers to find that out. And with those massive federal subsidies, there is very little incentive to try to curb costs or to innovate.

So what do you think the solution is when it comes to public transportation? If it is a privatized system, how do we get there? Whenever the issue gets raised in Pittsburgh, it gets demagogued by the leaders, who say before it was taken over by the government, there were 6-8 private businesses all competing with each other, all losing money…if the government hadn’t stepped in, they all would have gone bankrupt. I’m sure you can spot the economic fallacies in that argument, but it always goes over well with the media and most citizens.

It seems to me that the first step is to somehow cut off the federal subsidies. The logic is clear: Why should somebody living in Alexandria, Louisiana, be taxed to pay for the public transportation system in Chicago? Local taxes would have to be raised in the short run to pay for public transportation in each market, but I think those would decrease over time as citizens were forced to pay more attention to it. You’d see greater complaints at the local level to local officials, who would then be forced to find new efficiencies, try new programs, etc. And you could end up with a great system emerging in a place like Des Moines that could be emulated elsewhere.

Lastly, because you’re taking requests, the next time you get together, I’d like to hear your take on the tax-free status of state and local municipal bonds. Do you think that they give an incentive to state and local governments to spend well beyond their means? Are they a significant contributing factor to why we see everything from bloated pension funds to the high salaries among Oakland cops that Russ has pointed out in recent postings? Are there any significant risks in getting rid of that tax-free distinction?

Aug 23 2010 at 12:55pm

We always love it when Dr. Munger is the guest! 😉

And Longitude is one of my fav. books, a classic.

Aug 23 2010 at 1:54pm

Almost without exception, I am a big fan of Mike’s podcasts. However, Chilean bus system is an example where I think ideology is being pushed through the big door without its merits.

First, the study of Santiago is a “one-observation case study” that does not merit follow-up generalizations. On my recent visit to Guayaquil, Ecuador (which is by the way a smaller version of Santiago @ 2m people), I had an opportunity to see how privatized Santiago used to look like. Summed up in 1 word, horrible. Pollution, unbearable traffic, and fatal accidents are part of the daily décor – all due to fierce competition of desperate bus drivers for that marginal passenger (exactly as Mike described in Santiago). No neutral observer in his right mind would find this a bearable long-term solution.

I find it awkward that neither Mike nor Russ has described the Santiago’s problem as an example of natural monopoly. In the US we repeatedly observe government awarding (natural) monopoly contracts to sewerage, canalization, and land-line phone companies. Nobody wants to see 2 or 3 companies digging up our roads for that extra boost of competition – it is just not efficient.

Second, I disagree that profit outcomes necessarily lead to more efficient solutions or that they are more desirable social good. Why should transportation companies operate in black (if its citizens are willing to accept its looses in exchange for positive externalities)? According to the outlined logic, our defense department, for example, should not be allowed to go in red. We should, God forbid, employ our armed forces in various conquests to recover the initial investment. Hey, wait a second… perhaps I am onto something…

Thirdly, it is bizarre to me that Mike does not mention examples of successful public transportation systems, e.g., Tokyo and countless other cities in Europe. Libertarians begin and end with the assumption that public systems are static and not subject to change and technological change/innovation.

Mike Munger
Aug 23 2010 at 2:43pm

Chambana, perhaps we can parse out a bit more where we disagree, if in fact we do, about basics.

1. The old system was terrible. No one advocates a return to the old system.
2. My starting point for thinking of the policy world is this: Markets should be used to provide those things that markets provide well. Government action might be necessary in the case of market failures. But by and large, the advantages of lower cost, better service, and more innovation that come from markets make me lean in that direction.
3. The main example is public goods. Public goods are non-rival in consumption, and non-excludable in funding.
4. Subway services are largely a public good. A public system for subway/metro services makes some sense. On the other hand, most rail lines in urban Tokyo are private. Straight-up private, not public.
5. Roads may or not be a public good. Advances in technology of low-cost metering and charging mean that roads might be provided by private investors. And, in fact, take your Tokyo example, Chambana: Many high-speed connectors in Tokyo are in fact PRIVATE.
6. Buses and independent non-rail mass transit, ranging from buses to taxis, are not public goods. They just aren’t. They are rival in consumption, and excludable in financing. Now, you say governments can provide this service well. I say I once saw a horse that could dive off a diving board. But is that really something horses should be doing? Again, consider Tokyo: much of the bus system, except in the very center of Tokyo region, are PRIVATE.

I never claimed to be doing a large n study. But your own example of Tokyo actually raises my N to 2.

And even if you can give other examples of diving horses, such as the Ecuador system, that doesn’t prove that by and large private goods should be provided privately.

As for your claim that transportation is a “natural monopoly,” that’s clearly not true. Again, your own Tokyo example proves that private competition works fine. Tokyo’s transport system is more than half private!

Marcel Goic
Aug 23 2010 at 3:04pm

As most of the listeners, I enjoy a lot Russ-Mike conversations. However in this case, I think that Mike is missing some important points.

In the failure of Transantiago system, bus driver incentinves played some role, but it was not the main reason of the chaos of the first days. This was a huge engineering problem where all the routes where rebuilt. The origin-destination model was not properly calibrated. The buses did not have ready the GPS devices devoted to coordinate the system and there was not a good infrastructure to support the new transportation system (for example bus stations to transfer from small buses from peripheral zones to the larger Bendy-buses which only run in main routes). Moreover, in the first weeks the system worked with significantly less number buses (if I remember correctly, about 25% less).

Nobody want to go back because the previous system was really bad in many dimensions (unregulated competition looks like a reasonable explanation for most of them). All the pushing scene described by Mike is certainly true, but I feel it was even worse before where buses run with the doors open with people hanging from them. In the previous system bus drivers where very aggressive (for example they frequently did not stop in when you wanted to get off to stay ahead from other buses), the buses where dirty and uncomfortable, etc. Also, in the previous system, downtown where all the private owned routes converged, was impossible to cross by car…

In summary, previous system was bad. The new have good attributes that could make it better, but it is poorly implemented.

PS: Transport minister have recently announced that the bendy buses are going to be taken out.

Aug 23 2010 at 4:27pm

I would like to have heard how intellectual property fits into all of this. Given that things like patents and copyrights become government-sponsored monopolies, at least for a time, it seems that it would have been a perfect fit, yet it was avoided. Or has this been the subject of an earlier podcast?

Doc Merlin
Aug 23 2010 at 4:29pm

You are wrong Mike. Coase-ian bargaining is how government evolves and comes into being. It is the thief that bargains with you over your tv from your example.

Aug 23 2010 at 4:37pm

Thanks for the clarification. I have to agree about the nonexistence of any disagreements.

One follow-up comment on your points 4,5 and 6. I concur that governments may not be the best the providers of the service itself. All I was advocating is that governments ought to be involved in the process (in spite of the negative externalities). In fact, most of the time they are involved as they provide private companies with concessions or local natural monopolies (e.g., NYC cabs). After that, let the thousand flowers bloom.

The problem with Guayaquil or with past Santiago is that those governments eliminated itself out of the system and allowed the chaos to rule the unregulated city transportation.

About Tokyo transportation system from Wikipedia: (http://en.wikipedia.org/wiki/Tokyo_Metropolitan_Bureau_of_Transportation)

“TMBT is one of the two rapid transit operators in Tokyo, which along with Tokyo Metro and, effectively, the JR East Yamanote Line make up the Tokyo Subway.

The Toei lines were originally licensed to the Teito Rapid Transit Authority (the predecessor of Tokyo Metro) but were constructed by the Tokyo metropolitan government following transfers of the licenses for each line. The subway has run at a financial loss for most of its history due to high construction expenses, particularly for the Oedo Line. However, it reported its first net profit of ¥3.13bn in FY 2006.“

To sum up my position, governments should regulate markets by allowing most efficient solutions even if that means establishing the local natural monopoly (e.g., temporary local concession renewable upon satisfactory performance, as is the case in Tokyo).

P.S. Mike and Russ, thanks for the great public good! In my opinion (for whatever that counts) Mike’s appearances are Econtalk’s highlights. Keep up the great work.

Doc Merlin
Aug 23 2010 at 4:48pm

Your example with the Michigan legislature supports what I said above.

Aug 23 2010 at 5:49pm

First of all thanks for another great podcast.

Rent-seeking behaviour is certainly an interesting subject. It would be great if you could interview John Kay from the Financial Times on this subject, as his views are quite distinct and unique.

Aug 23 2010 at 8:25pm

This is a great example of Nassim Taleb’s new fixation with redundancy as a source of robustness against Black Swan type shocks to your system of travel. Of course the rationalistic planners had to remove redundancy because “it doesn’t make sense.”

Same goes for concentrating passengers into a smaller number of vastly larger vehicles. The per vehicle hazard rate for some delaying shock can’t go down with the bendy buses — they could even be more prone to such shocks because they’re a larger target and not as nimble.

Total number killed or injured is (hazard rate of major accident) * (number of passengers per vehicle) * (number of vehicles). The product of the last two terms stays the same whether people are concentrated or dispersed across vehicles, but the first term goes up when they’re concentrated, so more will be harmed overall.

Aug 23 2010 at 8:36pm

And if it makes you guys feel better, I’m 29 and I totally remember Beta. Most of our home movies early on were shot on Beta, using a gigantic device that looked like a Ghostbusters proton pack, only with a 50-pound camera where the beam barrel would be.

No wonder the kids these days are so flabby and lethargic — the gizmos they use to record video are about as heavy and bulky as an old audio cassette.

Aug 23 2010 at 9:56pm

Thank you Dr. Roberts and Dr. Munger, it seems that you have set a very high bar for what your adoring fans expect. There is also little doubt that your duo elicits the most and best comment to read after the podcast.

Robert Kennedy’s comment about why people feel that this system is better than what they had before was going through my head when Russ and Mike first brought it up. This is a true question that I don’t know the answer to:

If in “Why bosses don’t wear bunny slippers” we know firms are more efficient than each person marketing him or herself because firms exist, why then would we not say that transit agencies and government structures are more efficient than other options because they exist?

As for rent seeking, let us take High Speed Rail. California passed a ballot issue conditionally authorizing $9 billion in financing for the project. The Golden state is looking for $19 billion from the feds, $10 billion from the private sector and a few billion from the local governments.

But now, Wisconsin, Illinios, Minnesota, Iowa, Missouri, Florida, Texas, Maine, Pennsylvania, Virgina, North Carolina (Yes, its coming for you Dr. Munger in Raleigh) and many others now are in the game. All with their hands out since it is free money. There will also be the cornhusker kickback deals for those who don’t want to play as hard. I would guess that California Federal Tax Revenues going to other states (now or in the future) and lobbying expenses will mean the Californians will pay billions more than they recieve.

But now that the game is on. California Officials risk losing all they put into the federal game if they show any weakness in their resolve. You see the feds playing it up now proclaiming the success and public support because of all the interest in free money.

Aug 24 2010 at 12:46pm

Thank you for a great podcast. Great explanation of rent seeking – no feedback. Also liked the discussion about the lobbyist, how he maximizes his value but there’s no net value gained.

Regarding Santiago, were bus drivers held accountable for running over people in the private system? Seems like that might be a legitimate government involvement that could help solve one of the problems with the old system.

I couldn’t help but think about a previous podcast on minimum wage where you explained that regulations just push things to other margins, when you described how your large presence was an advantage for getting on the bus in the public Santiago transit system.

I may have to listen to this one again.

Scott Packard
Aug 24 2010 at 1:16pm

In the podcast Dr. Munger mentions he’d replace 4-passenger car-taxis with 6 to 8-passenger Super Shuttle-style vans to serve those passengers at the margins.

At our workplace we used to have the Super Shuttle-style vans (aka Dodge RAM) to transport us about 1 mile between a satellite facility and the main plant. Things to note: unlike a car, the van only has a small door for getting into the front passenger seat and a large double-door on the right-hand side for getting access to the rest of the space. The double-door was difficult to use on level ground, and very difficult on a crowned-surface road.
I’d have my hands full of stuff I was transporting and other passengers wouldn’t help close the door, so I’d have to dump the stuff on the back seat (after I squeezed past the passengers), squeeze back, close the door, squeeze past again. It was more fun in the stiff Santa Ana winds we have a few times a year. In the rain, well, I’d do what most Southern Californians do in the rain which is wait until it stops raining, unless I couldn’t. It is even more fun to deal with an umbrella and a load of stuff, on a crowned road surface, stepping onto smooth concrete curbing in the rain.
We now have a 20-passenger bus that’s built onto a converted clean diesel truck chassis. It has a proper full-height double-pane door, operated by the driver.

The second thing to note is that Google returns 18,700 hits to the phrase ‘”15 passenger van” attorney’.
I notice the California DMV is actively seeking to phase out the 15 passenger van.
http://www.abag.ca.gov/plan/rmm/rmm/vebp/Vehicles – Best Practices for Operation of Passenger Vans.pdf
Given the nature of the planners you mention in the podcast it may be better to stick with the 4 passenger cars. I imagine trying to keep 6-8 passenger van legislation intact as it works its way through the process will not be worth the effort.

Aug 24 2010 at 7:47pm

Having lived in Tegucigalpa Honduras, were they had a private or semi private bus system where the drivers raced to pick up passengers, I find it hard to believe that NO ONE advocates a return to the old system. I and my fellow USA expatriates living here loved the bus system. We used to say that it was the only thing that worked well in Honduras.

It was a little dangerous to pedestrians but people knew to stay clear of the buses (cars do not stop for pedestrians in Honduras either so people knew to stand clear of cars too).

Never the less great pod cast.

Eric Hosemann
Aug 24 2010 at 9:32pm

This was another in a long line of great podcasts.

I took Coase to mean in the Problem of Social Cost that the social costs of one firm’s failure are built in to another firm’s successes.

That is why I do not consider the failure of other MP3 players as waste. In the broader scheme of things, their failures were necessary to bring about the iPod as we now know it. The iPod’s useful features did not spring forth from Steve Jobs’ head alone. Certain aspects of them may have of course, but they were also refined and honed through competition. If the process of creative destruction did not exist, perhaps the iPod would have languished as little more than a tinier version of a transistor radio with barely a kilobyte of memory.

I appreciate the role of the entrepreneur in seeking out and satisfying consumer tastes, but we must remember that competition means he must reckon with other entrepreneurs that want to do the same thing. Therefore the initially creative act of the entrepreneur becomes more of a collaborative act and he absorbs the social cost of his competitors’ failures by either adopting the more successful features of their products or purchasing their means of production outright.

Some errant speculation: what examples are there of products that have been created in the free market but that have escaped the influence of competition, i.e. products that have been created in an effort to satisfy consumers but have essentially remained as they were when first introduced. I realize I could be talking about something produced by a monopolist, but I bet there could exist a situation in which a producer satisfied a market limited enough in population and free enough from competition that his initially creative act remained so for a long time.

Also, I thought it was interesting that Professor Munger never really came out and said that whether competition is good or not depends on context. In a political context, rent seekers really compete for political power. I can’t see how that could ever really end well. In a market context, entrepreneurs compete for the chance at a potential income stream generated by their satisfying consumer demand. Competing for arbitrary dribblings of political largesse is quite different from competing for the chance at one half of a mutually beneficial exchange. I suppose the radical capitalist in me would have preferred that he was more strident on that point!

Aug 25 2010 at 12:28am

It is a very important discussion regarding the merits of public transport, including bus-based ones. It deserves a well-worth action in ensuring public safety, vehicle fleet management, fuel conservation & improvements, alternative fuels & technologies, vehicle improvements and replacement, and, most of all, the proper training of drivers and conductors – yes, the proper training of drivers and tranportation staff in compliance with revised and/or existing regulatory policies.

Thank you very much.

Mike Munger
Aug 25 2010 at 10:15am

Yep, we should have closed the circle there, on competition, Eric.

Competition is bad in markets if it leads to increased negative externalities. This could be true in contestable markets, or a negative “arms race” where one firm gains a competitive advantage by polluting and other firms have to pollute also to avoid going bankrupt. But if property rights are clearly and exclusively specified, and the legal system operates at low transactions costs, this should rarely happen. So, very hard to think of examples in market competition where competition is bad, UNLESS there is government failure in enforcing property rights, or if property is held in common.

On the other hand, competition is USUALLY bad in politics. Competition between candidates or parties takes the form of bribing voters with their own money. And competition among interest groups takes the form of rent-seking, because direct transfers (bribes) are illegal.

Still, it is not true that more competition is ALWAYS better. It depends on context. Good point, Eric.

Aug 25 2010 at 10:19am

When I was a graduate student we solved the rent seeking problem of regrading homework and tests by telling them that we would regrade not just the problem in question but the entire test. Then they were told that if we found any questions where we were too generous that we could lower the score. Since it was possible to lose points in a regrade the number of regrades were low and usually justified.

Aug 25 2010 at 11:07am

Sorry if this ends up being a double post, but I haven’t seen my comment from yesterday yet.

I enjoyed the podcast. Best explanation of rent seeking I’ve heard so far (no feedback).

Question about the private transit model in Santiago: Were bus drivers held accountable for running over people? It seems stiffer penalties in that regard might solve one of the problems of the old system, without trading-off much of the benefits. It seems like this could be a minor tweak in government intervention into the old system that could have yielded results.

Mike Munger
Aug 25 2010 at 11:23am

Seth: Yes, I think that’s right. Some of the commenters seem to think that I want a return to the old system. Of course not.

What I would propose is this:

1. Emissions testing and licensing.
2. Enforcement of curb rights, so that private bus stops can’t be poached.
3. Encouragement of monthly fare passes, which give exclusive rights to private company. But riders can easily change after a month to a different company if they are unhappy.
4. Encourage redundancy in the system, rather than “efficiency.”

Aug 25 2010 at 12:55pm

Thank you. The redundancy point was excellent. I imagined that most of us sitting in a board room designing a ‘perfect’ system would almost always opt for efficiency. While we’re waiting for the bus at a stop, though, redundancy pops in importance.

When you described how your large frame was advantageous to gaining entry to the bus under the new system, I was reminded about your past conversation with Russ on minimum wage. Designing a system with too much emphasis on one factor just pushes the decisions to other margins.

I, for one, am thankful for my iPod and these podcasts and noise insulating headphones. I listened to this one while mowing the yard with my self-propelled mower. All the result of successful experiments.

Adel Antado
Aug 25 2010 at 4:00pm

Important criteria for a bus passenger besides price is the time of travel and time of wait at the bus stop for the bus.

In Seattle, the metro bus system, a public transit system requires bus drivers to follow a time timetable (published at every stop) along its route so that passengers know when its bus will arrive at its stop and how long the transit time will be to his destination. The timetable is based on real average traffic conditions and very reliable. If the traffic allows the bus to go faster, the bus driver will stay at its stop until its time to leave. While passengers are advised to arrive at its stop for the bus 5 minutes before the scheduled time, that is usually unncessary, the bus arriving within the minute of the published time.

Moreover, each bus now has a gps tracking system which is available on-line on “mynextbus.com” which allows system managers and passengers to track the buses on a personal smart-phone or on a PC/mac.

I find that a reliable timetable was not one of the recommenations to improve the Chile bus system in this conversation.

Mike Munger
Aug 25 2010 at 6:07pm

Well, Mr. Antado, your question is a fine one, but the “mynextbus.com” solution is better than a timetable.

The problem in Chile now is that there IS a reliable timetable, locked into place by the practice of paying drivers to be on time.

So they….DON’T STOP. I saw this dozens of times.

If buses come an average of five minutes apart, and I can check the GPS location, the requirement of a published timetable is obviated.

And that’s why it was not one of the recommendations. It’s expensive and unnecessary for downtown areas.

On the other hand, you make an excellent point, and rightly correct an error, on outlying areas where buses come only on the half hour or even less. Then a reliabe and realistic timetable is very useful. And in fact under the old system competition created incentives for being on time in outlying areas, and there were express buses all the way downtown from some neighborhoods.

“Publicizing” destroyed this.

So, yes, in a public system insulated from incentives you would need to be explicit about the need for a timetable. But in a private system, there would be a reliable timetable if consumers valued it. It would happen naturally, because in a private system consumers are in charge.

Eric Hosemann
Aug 25 2010 at 6:31pm

Re: Prof. Munger’s point #5 in his response to Chambana. It is interesting to consider the possible positive effects operating on private roads might have had on bus drivers in the old system.

Perhaps pedestrian deaths would have been greatly reduced. I can’t imagine a private road owner accepting the moniker of “death merchant,” and we know of a few cases in which private toll roads reduce congestion and commuting time.

Aug 25 2010 at 10:32pm

I think Mike Munger’s definition of rent-seeking could be misleading. He seems to imply that government MUST be a factor for an activity to be considered rent-seeking. I don’t think that is, strictly speaking, true. As an example, a ferry operator that provides the sole means of travel to an island might try to prevent competition from bridge-builders by, say, buying up the supply of timber – or more underhandedly, by paying off the lumberjacks to not cut any wood – thus depriving the bridge-builders of needed raw materials. I think either of these activities could reasonably be described as rent-seeking, no government involvement required.

Aug 26 2010 at 12:01pm

First of all, thanks for a great podcast, yet again – always a pleasure to hear Mike and Russ discuss these topics.

I am a bit conflicted on this one though, with respect to the control of mass transit. First off, I like hearing how much everyone commenting seems to appreciate mass transit – public or private to decide later.

As for Trent Whitney’s early comment, however, “Why should somebody living in Alexandria, Louisiana, be taxed to pay for the public transportation system in Chicago?” Doesn’t the infrastructure in Chicago help make the economy as a whole more productive, thereby potentially improving the lives of folks in Alexandria, LA? (Is this an extension of a free trade argument of a rising tide lifting all ships, or am I mistaken?)

Similarly, if folks in Alexandria, LA had a need for funding for nearby Kisatchie National Forest, wouldn’t some taxes from Chicago go to that project as well? Chicago is better off for having a better rail system, and Alexandria is better off for having their pristine landscape. Both are better off also for the possibility of visiting the other and taking advantage of the differences each has to offer.

As for the general discussion of public vs. private transit systems, Mike mentioned that the Santiago private system needed to be changed to be improved (pollution, safety, etc.), and that the public system also had many problems that needed to be fixed. However, he also mentioned that the rail system in Santiago (which I believe he mentioned was public) was very well run. Are we to believe that the same organization that runs a good train system is incapable of, over time, developing and running a good bus system as well? I imagine private development could achieve a good system as well, but it may be hasty throwing out the potential for good public works, seeing as there exist examples of good public systems.

Aug 26 2010 at 8:15pm

You mentioned the talent versus hard work topic as being for another discussion.

It’s been long in coming. When’s that podcast going to happen?

Pietro Poggi-Corradini
Aug 27 2010 at 11:24am

I’m not sure I understand why Betamax (which sounds like a cereal with lots of fiber to me) is to be considered as “waste”. It doesn’t seem wasteful to the consumers of Betamax, they bought it and presumably enjoyed it. I myself used cassettes tapes all through the nineties. No one uses them now, but I enjoyed using them then.

Aug 27 2010 at 12:17pm

If people do not get their return on equity for being a member of society from sources like wages then they will get it from government infrastructure. This is an intuitive idea. Despite the focus of much bad history, people generally size up other nations or another people out of a sense of who the average member of that society is. The unconscious aspect for this could reasonably be stronger in a nation of immigrants.

In this context profit for profit’s sake is a problem. Profit only makes sense when it comes from having improved society such that society will place more of its surplus in the hands of those who are at least partly responsible, in the hope that the gains for all will continue.

Shawn Reed
Aug 27 2010 at 1:09pm

One thing I didn’t understand, *if* pedestrians had strong rights to sue for injuries under the old private system, and if the drivers themselves were partially liable for any injuries caused, wouldn’t that truth, coupled with the likelihood that the *next* stop would have lots of passengers too just work to make the drivers drive less like Ben-Hur’s charioteers? As in, isn’t it rational for drivers to put up a small race, but then quit quickly so that they can get to the next stop first?

Mike Munger
Aug 27 2010 at 2:28pm

My understanding is the Metro in Chile is operated privately, under contract with the government. So it is a regulated monopoly along the lines proposed by Demsetz in “Why Regulate Utilities?”

Aug 28 2010 at 7:55am

Suggested reading … Gridlock: Why We’re Stuck in Traffic and What to Do About It by Randal O’Toole, a senior fellow at the Cato Institute.

Aug 29 2010 at 1:25pm

During the talk about all the wasted resources that go to rent seeking and how those resources could better be used in helping people, etc. I had a thought, hopefully others can help me if I am way off the mark.

Munger mentioned that their was a whole floor at a particular housing organization dedicated to getting HUD grants. I agree this is wasteful and ridiculous, although I don’t think it is directly comparable to production aspects of private firms. To me it is more comparable to advertising. Companies often dedicate large amounts of money and resources to advertising, money which does not go towards making their products cheaper or better. Isn’t petitioning the government closer to advertising? After all advertising is NECESSARY for product recognition, similarly the government isn’t going to go out and investigate who should get such and such grant, organizations have to come and essentially “advertise” to them.

Also does advertising not fall outside of your initial formulation of your private sector “no loss” argument?

After all I agree all ingenuity is beneficial, even if the company goes out of business, the productive process is what is important. I agree 100%.

But what about advertising? Obviously advertising gets better and more efficient, but it is a multibillion (probably not trillion?) dollar industry dedicated not to improving products, making them cheaper, or more efficient, etc. but simply to getting us to purchase them, often regardless of quality or better alternatives.

Now I don’t think a completely horrible product can survive based on advertising (although I think there are probably examples), but advertising can often overcome product problems. The best product in the world won’t be purchased without people knowing about it.


Aug 29 2010 at 1:33pm

Mr. Munger-

You said in response to another comment “But in a private system, there would be a reliable timetable if consumers valued it. It would happen naturally, because in a private system consumers are in charge.”

But there was a private system where the consumers were “in charger” and it was apparently, according to you, SO unpopular that politicians won’t even dare suggesting to return to it.

Am I correct in this evaluation?

Aug 29 2010 at 4:12pm

I am an armchair economist and i have been listening for the last several months. I enjoyed hearing a libertarian viewpoint on economics. However, this podcast disappointed me to hear how have cherry picked and slanted the information to prove a point. The point I came away with was a private bus system was better than the public bus system. I would appreciate a more rounded discussion and comparison between the two systems not based on two people with almost the same ideologies.

At the link to more information on the econtalk website, I think full disclosure of where the funds come to support this program would help me not view this program with suspicion as a libertarian (similar to the cato institute) tool.

[EconTalk is part of the Library of Economics and Liberty, provided by Liberty Fund, Inc. Additional information is available on our About page. Links to our About page and to Liberty Fund, Inc. are prominently available in the sidebar and at the bottom of all of our website pages.–Econlib Ed.]

Aug 30 2010 at 12:59pm

I agree with Seth’s comment about holding the drivers accountable for their actions like running someone over. I guess when one of the public buses pulls off a car’s bumper the government has immunity which isn’t right either.

It just seems that there is a large issue in Central and South America with property rights and personal rights. When a society has a low value on human life things go awry.

Aug 30 2010 at 4:02pm

I’m a little late on the draw here, but I was just thinking over agnostic’s comment about redundancy.

In both private and public systems, redundancy is a significant factor in design – too little redundancy is too fragile, too much is burdensome. In extreme cases with a transportation system, a system with few large bus routes is fragile, based on agnostic’s argument about too many people concentrated on a few buses, making each one very vulnerable to accident. On the other hand, dropping our passengers per vehicle to 1, everyone has a car, which is a huge capital expense, not to mention the congestion and road infrastructure that would be required to allow that type of traffic. Finding the right balance is obviously the best answer.

This, I suppose would get back to something like Hayek’s knowledge problem – how can a central authority have enough information to build the optimally balanced system? It can’t, in this argument, because so much information is required regarding dynamic traffic flows, customer preferences, desired routes, etc. A trial and error private system is supposedly better at solving this problem by allowing those who guess wrong to fail, and the successful companies are on the right routes.

I would argue that a public system that is also allowed to have tried and failed routes and bus selection, as Santiago is currently doing based on descriptions of changes in bus selection (Marcel Goic’s comment), may also be able to adapt and solve this problem over time. It may not be an either/or proposition, just allow flexibility in either system. As a system, if it is acceptable for private institutions to succeed or fail, is it also acceptable for public institutions to succeed or fail, and be redefined to adapt?

Mike Munger
Aug 30 2010 at 7:28pm

There are a number of comments here, with a rather surprising increase in hostility. I’ll just assume you folks were having a tough day, and try to respond politely.

1. “Funds to produce”? Russ Roberts interviews all sorts of people. Those people don’t get paid. (At least, *I* don’t get paid!). Now, zero is my market wage, I understand.

2. The current public system is in fact better than the old private system, overall. Everyone seems to believe that. I’ll accept their judgment, because I never saw the old system.

3. But I believe that there is a third system, a new private system, that uses licensing, emissions controls, and private excludable curb rights. Many cities, including Los Angeles, Tokyo, and London use this kind of private system and it works well.

4. And I have sought to document that the current system is a disappointment. In particular, Pres. Bachelet famously apologized for the failure. And La Concertacion really did lose the election, partly because the bus system is so bad now.

5. So, for those of you who heard “any private system is better than any public system,” I am sorry for the ambiguity. I don’t believe that, and to be fair I never said that. But I do believe that there is at least specific private system that is better than the current, and deeply flawed, public system.

6. The one comment about routes and scheduling is right, but we are comparing apples and oranges. The old system, the private system, was CLEARLY better for convenience in terms of scheduling, because consumers were in charge. BUT, it was not better overall, because of the externalities and other problems. So for you to imagine that there is a contradiction seems a little strange, pumpkin.

Aug 31 2010 at 6:01am

Technology applied to disrupt the taxi business and improve transportation: UberCab.

Sep 1 2010 at 1:21pm


I hope you don’t feel I was being hostile. I happen to find you very reasonable, competent, intelligent, and well spoken even if I occasionally disagree.

The main point I was trying to make was that you seemed to be arguing that in a private system, if something is largely desired, the market will provide it. By this argument the market system should have worked wonderfully in the original bus system. This seems in contradiction with what seems to be your larger argument, and what I consider the more reasonable argument.

Markets do many things well, or at least better, than a more central or “governmental” solution. On the other hand sometimes governmental actions can improve on a system.

In either case I believe that a free market fallacy often perpetuated is that if people want something the free-market will always provide it.

Mike Munger
Sep 1 2010 at 7:28pm

AHBritton: Ah, now I see. You have put your finger on one of my own concerns about the free-market side.

We often devote great effort to showing that markets can (could) provide the service.

And then conclude that therefore markets SHOULD provide the service. But that doesn’t follow.

The question is how to provide the best, cheapest service and put consumer/taxpayers in charge.

The problem for Transantiago is that no one in the current system has a stake in improving service, EXCEPT through fear of being voted out. Buses are unusually well suited for private service, though with considerable government action.

And I do, again, concede that the new public system is better than the old private system.

Paul Richter
Sep 2 2010 at 10:36am

I enjoyed once again hearing about the Chilean bus systems, including the story about timetable-driven drivers whizzing by waiting passengers. I’m puzzled though: don’t passengers need to GET OFF?! Surely they’d stop to let people off, and let people board at the same time. Or does this phenomenon take place only on morning commuter runs, where nobody needs to get off until the last stop, downtown, where the offices are?

Mike Munger and Chumbana:
As someone who’s been riding Tokyo public transport for decades, I’d like to add a few comments.

The Tokyo Metropolitan Bureau of Transportation’s subway and bus systems are quite significantly smaller in scale than the private networks (four subway lines compared to the private Tokyo Metro’s eight), and their lower ridership is apparent to anyone who regularly rides them. So as an example of an efficient public-owned system, it’s pretty weak.

Outside the central Yamanote loop line, the suburban commuter rail lines (surface lines which interoperate with the subway system), which carry stupendous loads of rush-hour riders, are all run by private companies. These companies, though, aren’t just rail companies. They also operate bus lines, department stores, supermarkets, hotels, even large-scale suburban housing developments. Basically they provided “one-stop-shopping” suburban development in the postwar years. So while the train lines and supermarkets probably all make a profit, they can, and likely do, operate the bus lines and department stores at huge losses. So you can’t really say they’re good examples of well-run private bus systems either.

Sep 3 2010 at 3:47pm

Dr. Munger –

Your last point “no one in the current system has a stake in improving service, EXCEPT through fear of being voted out” raises another question in my mind; namely, how well would a system (of any kind, transportation or otherwise) work if the elected people decide the level of government involvement, and the administrators are accountable to performance like any private business manager?

I imagine this is how much of the world’s government-run organizations work already. However, how well might that system work, if the capital investment was essentially decided by an elected official, and the administration of the budget was run by a non-political business leader? It seems to me that is the maddening part of any public system. If representative A wants some feature (that may or may not make sense), they can withhold necessary funding for essential parts of the operation, making operations leader B look incompetent. Does this reduce the system down to requiring a degree of self-sufficiency financially in order to be run well, in essence making a government office a pseudo-private entity?

Back to the original question, can the administrator do anything about it if a new elected official decides the government should no longer be involved at all in the sector it once controlled? That instability would also be somewhat unnerving.

Mike Munger
Sep 4 2010 at 4:21pm

Paul Richter: Wow! How useful to have someone who actually knows something. Thanks for the info…

And chi_town rick: Yes, if voters held government agencies accountable the wa private business manager does, then sure things would work better. But:

1. Business managers can fire bad employees. A voter cannot fire a bad public employee.
2. THe incentive to acquire information is attenuated, because knowing won’t help.
3. Even if a voter DID know, there is a huge collective action problem in voting. My vote has no impact at all on the outcome.

Sep 6 2010 at 1:32am

Nick Szabo made a similar point on the Coase Theorem on his blog.

Robin Hanson said that investment should be taxed due to “winner take all” aspects of Apple/VHS issues discussed above.

On Amazon, Russ almost sounds like he’s giving the “labor theory of value” argument from (the socialist) B. Traven’s “Treasure of the Sierra Madre”:
Howard: Say, answer me this one, will ya? Why’s gold worth some twenty bucks an ounce?
Man: I don’t know. ‘Cause it’s scarce.
Howard: A thousand men, say, go searching for gold. After six months, one of ’em is lucky – one out of the thousand. His find represents not only his own labor but that of nine hundred and ninety-nine others to boot. That’s uh, six thousand months or five hundred years scrabbling over mountains, going hungry and thirsty. An ounce of gold, mister, is worth what it is because of the human labor that went into the finding and the getting of it.

Sep 16 2010 at 9:11am

I loved the podcast (as always) and agree with most of Mike’s comments. However, I completely disagree with Mike’s example of the search for a better longitude technology as a good use of rent seeking. First of all, there was no certainty that a better technology would be discovered so the administrative costs associated with the prize could have been completely wasted. More importantly though, I fail to see how the discovery/invention of a better technology would automatically become a public good. What was to stop private ship owners from funding closely held research into a better technology? Nothing as far as I can see. And then if that private funding produced positive results, there would have been nothing that I know of to force them to share the technology freely. Perhaps the prize offering crowded out private investment…?

Sep 18 2010 at 10:32pm

Read “Jennifer Government” by Max Barry. Fiction on unrestricted capitalistic competition

Nathan Hill
Sep 19 2010 at 5:46pm

Is government funding for scientific research anything put rent seeking? In the UK funding bids have become very competitive recently to the point where the net result will soon be resource destruction if we are not there already.

I would like to hear a discussion of what other forms of funding for ‘blue-sky’ research might be, in particular in the humanities, where a clear-cut commercial benefit is unlikely.

Comments are closed.


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Podcast Episode Highlights
0:36Intro. [Recording date: August 16, 2010.] Spent part of this summer in Chile, earlier podcast on Chilean bus system. Revisit with new observations. System now changed by government policy changes. Reprise and summarize what you'd seen happen there. What was the system like before that? There nearly 3 weeks this time and rode the bus a lot. In the mid-2000s, well after the Bachelet Presidency, Concertación, center-left coalition ruling the government, worried that the bus system in Santiago--city of about 5 million people--wasn't serving the needs of those people. They had three main objections. One: the drivers of buses were too greedy. We would recognize it now as a common pool resource problem--call it overfishing. So, a driver might see two or three blocks ahead 50 people waiting at a bus stop, and then another bus pulls up beside them. Rev their engines; what happens after the light turns green looks like Roman chariot race scene in Ben Hur where they try to run each other off the road, because the first one to get there gets all the 50 people. This was a private system run by private entrepreneurs, right? It was competitive--more than 3000 private different bus companies. Not saying 3000 private busses. Competing with each other for different levels of service and different routes. The routes were not what anyone told anybody to drive--were wherever you thought you could make money by picking up passengers. So the first problem was driver greed and competition that was destructive. And one of our themes today is going to be: Is competition always/sometimes/never destructive? In this case, they thought that competition was destructive. There were a lot of injuries, fender-benders as these busses jostled with each other to try to pick up passengers. Second problem: pollution. The busses were not very well-regulated, since they were not licensed; hard to fine all of those busses that didn't have proper pollution-control equipment. Pollution was getting rapidly bad in the basin of Santiago--like Denver and some other places, you get an inversion, particularly in the winter. It's an enclosed valley. Third thing they were worried about: profits. They were very upset that anyone was making profits because it seemed like extortion or exploitation that what should be a public bus system was making US$60 million in profits per year. I look at that and say: You mean a major metropolitan transportation system was operating in the black?! Unusual. Don't think profit-mongering is anything to laugh at. Low income people without cars being exploited potentially in the eyes of some of the politicians by these greedy bus companies profiting from their--greed. The fares were quite low. One of the things people talk about right now is that the busses would move along quite quickly and pick up a couple of passengers. They would open the back door, somebody would get in the back, and somebody would hand up their 2,000-peso note; next stop the bus driver would take it, make change, and hand back the ticket, like a hot dog at a baseball game. There was a lot of trust present in that system.
5:17Also some concern about the inefficiency of it, wasn't there? This is also an argument people make about these kind of systems that emerge rather than from the top down--routes are duplicated; obviously would be more efficient to only have one bus. There would be people waiting for a long time rather than having it be synchronized. They would say there was congestion--too many of these busses. And paradoxically people had to wait too long because the busses didn't go on the routes people would want. Didn't mention that one, find it strange: What the government saw, it was inefficient; but the government, from their perspective, a lot of these busses ran parallel to metro routes, which meant that if the metro got stopped--the metro is the subway. Beautiful subway system. A lot of redundancy in the system. If you want a system to work, you want to have backup and redundancy. What the government wanted, was a more efficient system--and they wanted a hub-and-spoke system. So the busses would pick up people in neighborhoods and go to the nearest metro stop; people would then get off the busses and go to the metro and go to their destination, get off, and take another bus. Because then you increase ridership on the metro. Quick comment: Always a question as to how important these concerns were relative to other concerns that would be less attractive. Say that busses would often stampeded toward bus stops and get into accidents--you'd want to know how prevalent that was. Those are the kinds of things a bus driver would want to avoid--yes, they'd want to get to the stop, but they wouldn't want to wreck their capital. So when we hear about these kinds of complaints, always want to hear what the ratio is: is it one a day, one a week, one a month? Did some research on that, and there were relatively few serious automobile accidents in Santiago during this period, but the number of minor pedestrian accidents was as high as Mexico City. Is that people hit by busses, cars? A lot of them were hit by busses. Really stood out. Both a time-series and cross-sectional difference. There seemed to be a problem that was largely caused by the bus system, and other kinds of increasing congestion. You could say it's increasing congestion because the country was becoming more and more affluent and there were more people with cars. Combination of roads and customs--habits of driving--hadn't adjusted. Russ there in the summer of 1977--really frightening to be in a vehicle there. Sure it's gotten worse. People then drove extremely differently than people in the United States unless you are talking about New York City. Or Washington, D.C.
8:42So, the government looked at this bus system and thought there was an opportunity to improve it. So what did they do? They genuinely were concerned that a lot of people were being harmed and that profits in particular were a bad way of doing this. So they said, let's publicize this: moved to a public bus system. Bought these enormous bendy-busses from Volvo--looks like it's got an accordion in the middle, two busses attached with an accordion, because you've only got one bus instead of four or five. Decided they should take incentives out of this. Drivers were being paid based on how many passengers they picked up--that meant that the drivers were driving too aggressively. Paid them instead based on how on-time they were. Also changed the route system to hub-and-spokes; and we'll do this all in February. February in Chile is like August in Washington, D.C. or Germany--everything closes. Summer vacation. Could lie down in the middle of the street and not have a problem. What year? 2007, implement the new policy, and the average commute immediately goes from 40 minutes to an hour and 40 minutes. The average commute by a bus rider or a car rider? By people using the mass transit system. Bad set of outcomes that surprises everybody. They really had the best of intentions, really wanted to make things better. The problem was--let the listeners think for a second. The drivers were being paid by how on-time they were. So suppose you are a driver; traffic's gotten a little worse, because since the average time on the public system got worse, people are using a substitute called private cars, taxis. So congestion goes through the roof. Illegal taxis, started driving together; a lot more cars on the road. So, you're a bus driver; you look ahead of you and see a whole bunch of people waiting at a bus stop, and they've been waiting for an hour. Do you stop? No, absolutely not! You've already missed your timeliness on that arrival point. You might be able to make it up because their assuming time at each stop to load passengers. Shoot right by them, and by the next one. Delight of the people in line! They're thinking maybe this one will be on time. Go, go, go. Mostly care about the welfare of the driver. And the whole system being well. That's a negative unintended consequence. Also, the streets in Santiago, an old city, are not really wide enough for those big bendy-busses, so accidents went up: the only way you can turn in those big bendy-busses is from the middle lane. Whether you are turning left or right, can't be in that lane. Cars pull up and just take the front bumper right off: little tiny car, giant bus, and then the fender flies. Saw it myself while there. Can't plan this without using information: decided they were going to live in the world they wanted to live in rather than using any information they had about the routes they wanted to use or the busses that operated efficiently on those routes. Other problem was the coordination between the busses and the overlap disappearing. Two problems that they did solve. It had been that the metro was operating at 80% capacity. It immediately went to 120% capacity. People hanging on the straps; fist fights. The other problem they solved was profits. It now loses $600 million per year. So instead of operating in the black, it now takes a subsidy of at least $100 for every single citizen in Santiago just to have a bus system. Not to use it; just to have it. Wanted to see if the claims about this were correct, so two years after our last podcast that I wrote about this. I rode the bus every day to different parts of town, and it would often take me more than an hour to get on. And when I did, finally, get on, it was because I'm 6'1" and weigh 250 pounds. I can swim past abuela--past grandma. Not proud of this. Saw women crying, pushed aside, little children stepped on. Incentive is: you don't get to exchange your money for a ride. What you do is exchange a small amount of money for a chance to push your way on. Saw sometimes 8 or 10 half-full busses pass large groups of people. They're furious, ready to fight. This is on this last trip? This is three weeks ago.
14:51Puzzled, two things that I find strange. Based on your analysis--of course you are an economist, you are wise, you eat right. Eat a lot. A lot of fish, tremendous for the brain, at least according to P. G. Wodehouse. Hearing your story, talked about this before, the administration was embarrassed and even apologized--very unusual. You think there would be two things you'd do right away. First, you'd get rid of that pay the bus drivers for their timeliness, and the second would be to get rid of those bendy-buses, which must be an enormously bad decision. Yes, it's hard to phase out expensive capital; hard to admit you've made a mistake. Have either of those changed? They pay the bus drivers more now in a lump sum, but everything at the margin is based still on how on-time they are. And they still have the bendy-busses because they have decided they are more efficient. That's what they bought. So, what's the public stance of the administration? Sounds like everyone's furious, still. There's a new administration. The Bachelet administration and La Concertación had a dozen policy failures like this, where with the best of intentions they said, "Let's try this." And when it was a failure, they said, "We didn't do it enough. Let's do it more." And, they lose. New administration, Pinera, center-right group, majority in Congress also; looking to change it. Problem is how to change it at the margin. It is not politically popular to go back to a fully private system. Have some ideas about that; got to talk to some officials about that. Famous book, called Curb Rights, Dan Klein and two others wrote 10-12 years ago: in it they point out that the main thing you need to prevent the overfishing of passengers is private bus stops. All you need is a private system with private bus stops. We basically have that now--the police prevent people from being picked up at anything but a real bus stop. And, licensing for busses to make sure they don't pollute. If they move to a private system with those conditions, all you'd really need is one more thing: a ticketing system that gives you monthly discounts, so it's not profitable to try to poach somebody else's passengers. Why? Too expensive to have private stops everywhere. Why the monthly discounts? The Smith Bus Company normally charges $1 to pick up a passenger, let's say? But I can sell a monthly pass for $20. Nobody else is going to honor that because they can't get money for it. Do you speak Spanish? Did you talk to individuals on the busses about it? What were their thoughts? Did they understand--tell me what the fare was relative to the past and did people understand that the difference was being made up by taxes? They thought that what was needed was more busses and better bus drivers. None of them wanted to return to a private bus system, because their memories of that were horrific. Because? Their perception, at least, of the accidents and the pollution. So, that non-marginal quantum leap, that discrete change, is impossible. No support at all. The real policy question would be improving that versus the current system. You could do some things to make the private system better, but since that sounds hard for folks to absorb, they are going to stick with the current system and hope they can tweak that. They have a taxi system where taxis can take up to four passengers at once and drop them off at different places. Hybrid jitney system. What I would do at the margin is expand that to minivans that could take 6-8 passengers. Take a lot of the pressure off. Supershuttles, like we have in the United States. Did you ride the metro? Was it super-crowded all the time? It was very crowded all the time. Really beautiful system. Very cheap, always on time. Crowded but not impossibly, except right at rush out. I could avoid that, but a regular worker can't avoid that. Had you ridden it before, under the old system? Yes. Wasn't one of your insights from the last podcasts that the duplication of the bus systems along the metro routes allowed for an excess capacity that was needed during rush hour, allowed the system to be more flexible? Must have disappeared. Because the private bus system would add routes at times when it was needed, so it reduced the peak load problem. Now it gets all on the metro or the surface roads, because a lot more people do drive now. Were you going anywhere? Sometimes just riding along to talk to people; other times going up to the University or going downtown to meet with government officials. Once you get used to a mass transit system in a city like that, it's really darn fun. Santiago's a beautiful place. Did take a long time? Not as long as driving! Driving's pretty serious. You could read.
21:54Any other thoughts on Chile, their economic system? Going to hear a lot more from the Pinera regime. Democratically elected administration. Seems to offer an alternative to Hugo Chavez's claim that Latin America can only be organized as a socialist country. Interesting to hear what people in Peru say about Chile. They say: You Chileans, you are like the Swiss. You are just different. Those institutions just don't travel well. We could not have a free market system like you have because you Chileans work too hard. What do you think? Really interesting that Chile didn't have really particularly free-market institutions till the introduction of the ideas of the Chicagos during the 1970s. Now, a lot of bad things, awful things, inexcusable things happened in Chile during the 1970s; not for a moment saying I'm going to defend them. During Pinochet. But the economic ideas that took hold then were not at all part of the Chile of the 1950s or 1960s. So it is possible to change. Can look at Chile of a kind of laboratory of the wealth that is created by free market institutions in an open economy. Interesting that that era did not poison the public against those economic policies. To the contrary: they are basically pre-disposed towards at least free market economics when it comes to trade. Will hear more down the road. Interesting time there. Will see what happens with the bus system--which was the rare private bus system in the world. Very few major cities of that size in the world that had a private bus system. A pure private bus system.
24:16Listener question--Robert Eaton (sp.?), asked about previous podcast on rent-seeking. Talk about the traditional public choice view or rent-seeking and the waste that it's caused. Is competition good? Economists tend to have a knee-jerk reaction saying competition's always good. One of the things public choice theorists did was say, well, not so fast. Depends on the incentive that align what individuals want with what happens as a result to the society. When we think of competition generally, we are thinking of competition by firms to sell their products to consumers who decide which to buy based partly on quality and reputation and based partly on price. That's where this idea of consumer sovereignty comes from, because the consumer is in charge--not in any king-like way; they make little decisions every day; but because it's a consumer-directed economy because consumers decide where resources go and who doesn't get resources. They vote with their dollars. May not be a good way to describe it: Some people have a lot more dollars, get more votes; kind of stupid because you'd only get one outcome; but that's the way it's often described. Mention that is not a good metaphor because when you vote in an election you get only one outcome. We don't just get rich people getting cars, though--we get rich people getting Lexuses and poor people getting Hyundais that work really well. In Chile, you got some people really nice busses, fairly expensive, and poor people riding less expensive buses that were really convenient to them. Not planner looking at map. So, returning: what's the analysis there? In economics, we look at competition as a pursuit of profits. A company in pursuit of profits may spend resources or even fail, but since it was in the pursuit of profits, we can say the long-run result is that consumers benefit. But suppose that the government says: I feel bad for some people; let's try to give away money. But let's try to do it correctly; don't just want to give it away--that would invite corruption. Going to say: You have to write a long proposal and describe how you are going to use the money, and when we give the money away at the end of that, the competition for money that we are giving away--which is called a "rent"--an artificial amount of prize that is going to be given away. Might want to give it away to people we think are more deserving, or might want to give it away because we think it's a matter of public policy. Might want to help someone. We've talked about a lot of examples before on different podcasts. One example: We want to give away higher wages than the market can support. Might want to give away lower price for an apartment than the market can dictate. Usually when we think about rent-seeking, the example I've always thought of: the city of Charlotte used to have a whole floor of its municipal office building whose whole job was to pursue Housing and Urban Development (HUD) grants. Study found that almost half of the money they were getting from HUD was being spent on being paid the salaries of those who were writing grants trying to get more HUD money. Relatively little going to the citizens who were supposed to be benefited. What rent seeking does is create competition for a rent, but since you have to spend some or close to all of the amount that's being given away. Paradoxically, competition for these artificially-created prizes means that you are actually giving away much less than you actually thought; and you are wasting resources, because you are giving people an incentive to compete. So, you could even imagine rent-seeking where that competition was so excessive and dramatic because the prize was so large that people would spend more money in total than the amount of the prize. Each person would not, but they'd get close, especially the more corrupt a regime is. When a regime hands out goodies--HUD grants are goodies--purely arbitrary. People are going to spend resources, flattering and cajoling people in power. Summed up across all favor-seekers; maybe not social benefit. Just reordering money toward the regime's friends. That would be purely wasteful. Economically not inefficient. Maybe adjust, not wasteful. Maybe just a transfer. People who study rent seeking would say it's not just a transfer. Transfer dissipated by the competition of the people who are going to receive it. Just suppose two sides. The people who are for it are going to be lobbyists. Great hair, really expensive suits, nice offices, speak well--this may be the highest valued use of their time. They can make $50,000-$600,000 a year, more, being a lobbyist. But their self-interest is perverse. From their perspective, they are profit seeking. They are making money. In their self-interest. Waste a lot of resources. But their self-interest is in society's perspective. Question George Stigler raised in his article: Why don't we pay members of Congress? So instead of paying them we take them out on nice sail boats, attractive young people give them drinks, backrubs. If we could give them money it would be corrupt, it would be a transfer. Instead, we have something we can't give back. In economics it's called an "all-pay" auction. Has the property that--and I have done this in class, and you may have done this in class--held up a $20-dollar bill in class: how much would you pay me for this? Whoever pays me the most gets it. However, all of you would have to pay me for all of your bids. Whatever you bid, whatever you win or not, you lose the envelope. All of you lose all of your bids. So, let's suppose 30 people in the class, each bid $1, I got $30 to give away $20. Now the winner: About got $20 for $1. You could easily bid $1.50. You could easily get more than the $20. Not so inefficient in the sense that it's a transfer. I get $30, you give away $20. Still a zero-sum game. The losses of $30 from the class as whole are divided between the $20 to the winner and then $10 to you. But rent seeking has two parts. One part: for listeners' intuition, is an all-pay auction. They have to pay all of their bids, but they don't have to pay all of it in money. Have to pay it in time, making cookies. I burn all of them--used up or used by me, trips to Vail. Not highest valued use.
34:19One of the reasons I don't regrade homeworks. It was a 5-point question and my answer was really close to yours and you only gave me a 4. First starting, would weigh it. Justice requires they should always get a voice. Decided homeworks would be a small percentage of the grade. Alternative is you will lobby me, beg. There are people in the class who have dignity, too. Wastes a lot of time and has distributional content. Rewards the grovellers and the people who can't appreciate the law of large numbers. There are a lot of homeworks; when I give you a 5 when you deserved a 4 you are not going to come back. It's not free to regrade. Rent-seeking problem we have raised asked a question I've become fascinated with: How do you tell? Find somebody who is going out and investing their time, trying to get better at something--is it profit-seeking or rent-seeking? Often say people acting in their own self-interest are led by an invisible hand to serve society. We know society is not served. Theft. Often misdescribed as a 0-sum game. Someone takes your television--one more for you, one more for the thief. May be immoral and despicable. The problem with that is that it's not a 0-sum game; it's a negative-sum game. If I think you might break into my house, I will put locks on my door, perhaps have a weapon; put TV in place harder to find it; and you will work on skills of breaking in. All that extra stuff is the net cost of crime. The Coase theorem, which I'm a big fan of in profit-seeking settings, is actually dangerous when it comes to theft. Guy goes by my door, knocks, says, "I was going to break into your house, was going to break the window, probably would have gotten $5000 worth of your stuff but I could only have fenced it for $800. So I thought I would come by and talk to you today. Let's split the difference." Well, no. There'd be a line of people doing that. The Coase solution doesn't work when property rights not specified at all. It's my stuff not yours; Theft is not allowed. Robert Eaton, listener, said: Imagining when mp3 players first came out. Apple, with their i-Pod. Clearly the other two firms making them didn't do as well. Go out of business altogether. It's obvious that Apple's a big success; not obvious that the gains by Apple more than offset the losses by the other two companies. Implicit prize--not a government prize, goodie lobbyists are going after--but music, a bunch of firms compete. Might have been 7-8 firms in reality; some might still be in business. All of the wasted resources, research. Wouldn't it be better for the government to have chosen: Here's the standard; we're going to have this kind of mp3-player. When VHS was competing with Betamax--two different sizes, two different standards. Sony, their own standard for cassette tapes. A lot of people ended up with cassette players that were useless. Hours at Sony, all for nothing. What about the MBA: think of all the kids bouncing basketballs instead of studying economics. They say they have some chance of making the MBA. Very few people make it. Isn't that a giant waste to society? All those hours practicing, books saying it isn't talent, it's effort. How do you tell the difference? Rents are artificially created. The only feedback you get is the creating party's decision to award it. So all the competition is likely to dissipate more than the total value. In the case of the MBA, we get an overall improvement in the level of play. Yes, it's a shame that a lot of people waste their time. In the case of technology, we get improvements we couldn't have dreamed of. If the government had chosen one standard, that would be it and new entry would be foreclosed. The fact that one of them encourages new entry, new products, justifies it. There's a reason Schumpeter called it creative destruction. There is a lot of destruction in profit-seeking. If that's all you look at, might be easy to conclude we are better off with regulation. Other thing missing: the knowledge problem that Hayek identified. We don't know in advance the best technology. When Amazon came along, it lost money year in and year out. It's their money. The investors took their chances. Amazon's now a profitable business. They don't compensate the other firms that tried to enter the digital marketplace. But it's not really true that nothing good came of the other firms' efforts. Those efforts pushed Amazon to find the most effective ways. Those ways were discovered; nice piece by Buchanan. Not only not known but not knowable. We can't know in advance. Apple tried the Newton, hand-held device to help you run your life, take notes. Perfect product except that nobody wanted to buy it. The Palm Pilot, superseded by the Blackberry. That creative destruction, that swirl--no one knows how it will come out in advance or if even should come out.
44:57Isn't it interesting that the risks are being taken by capital, not by consumers. Some consumers take small risks. If you are an early adopter, might by a product that doesn't last long. Mostly for the benefit of consumers. Other point: go back to those HUD grants. If the government's handing out $25 billion in 250 different Congressional districts and in each of those districts people are struggling to write the most attractive grant, the one that looks the most appealing, most political appeal to the grant-hander-outers, does it really matter who gets the grants? If it literally doesn't matter then the whole thing is a waste. If it does matter, could say there is a countervailing force in the way of benefit. In the case of the private market, Corfam shoes, product you didn't have to shine, but didn't breathe. Market fixed it: don't keep putting money into it. Feedback. With grants, you generally don't get feedback. If the government's handing out goodies and it doesn't matter then it's all waste. In the private sector, that doesn't last very long. Is there ever a case where rent seeking might be justified? Yes. It's when it's difficult to internalize the public benefits of a new discovery. The British government set up a contest to solve the problem of calculating longitude. Ships running aground. Latitude they'd been able to solve. Two ways you could do it. One is if you could get sightings on the stars and the other if you had accurate time-keeping--need a clock. Two different avenues to try to calculate. Whoever did it wouldn't be able to capture the full private benefits of this public good. Bounty of 20,000 Pounds--huge fortune equivalent. A lot of people worked on it for more than 40 years. The money was given out--a few times. It advanced something that really was a public good. But it's not obvious that you want to set up rent-seeking contests just for the sake of giving away the prize. Result needs to be that the research itself has a public benefit. Longitude, by Dava Sobel, book.
49:19We've kind of glossed over the issue of magnitude. Easy to say the mp3 player Apple came up with is a delightful device; but it doesn't prove that it didn't lead to investments by other firms that outweighed those benefits. Taken that for granted. Longitude example helps you see it: government prize motivated people to come up with something probably a great investment. Could imagine private companies offering prizes that are totally mistaken, totally wasteful, dead ends. What's different between the two are the incentives about the size of the prize. True that longitude measuring saved a lot of lives. But you could pick a prize that's too big. Desirable social ends--as opposed to the HUD grants that probably produced a lot of dog museums; teapot museum. Longitude was a bargain. But you could imagine a prize so large that even though the outcome was a boon, all of the resources thrown in by the losers offset that. Happens constantly. England, France, Spain, titles of nobility weren't worth very much, but were highly valued. Competition was for something you could use to get people to do almost anything. Most of the time the government is in a position to set up these contests where the value they are giving away is very valuable. But what they are spending on it is going to be tremendously wasteful to the society. No social benefit to setting up all these titles of nobility. Nothing like longitude. Benefit itself is relatively small. What the private sector, profit system does--example in Russ's book The Price of Everything, of a battery that lasts a lot longer. Travel, even when home, challenge of keeping all devices fully charged--shaver, Kindle, phone, computer--one reason I don't have an iPad because I don't want another charger! Love Kindle because it lasts so long on a charge, over a week. Benefit from longer-lasting batteries; but that prize sitting out there implicitly designed by the market place--the magnitude is set by how much consumers really want it. More or less accurate feedback. Would still be consumer surplus. I wouldn't capture the full value of it. But I would capture an enormous portion. And the value is correlated. Whereas in a government contest, the government just has to guess. Don't have enough information. No knowable. Sometimes too low, sometimes too high. If it became known that Mike Munger was continually auctioning off $20 bills in his class, if it was found he was taking money from his students. If you do it every day, you are a Congressman. The student who puts in a $100 bill if he wants a good grade shows how corrupt the process can be; how quickly it could become corrupt. Had a friend, Michigan legislature in the 1970s. At beginning of session they would put maybe 20 bills in the hopper, legislation on a particular industry. As soon as they received compensation from that industry, the bill would be removed from the hopper. Serious? Absolutely. Just understood. Liberal Democrat; says in retrospect it was a little embarrassing, but that was just the way things worked. You set up these competitions. That one was pretty efficient: specifically sectoral, so those are just transfers. Clever enough to say if there's a rent-seeking competition, we'll lose the money. Want to be able to have the direct payment, in this case in the form of a campaign contribution. But you can't do that--it appears corrupt. So instead, get handsome lobbyists and trips to Vail. Extortion, not so much rent-seeking. You just hate liberty to call that extortion. Other thoughts? Reiterate: the difference is feedback, not the absence of waste in private markets because clearly markets do waste things. Not long after VHS won, people don't even have video cassette recorders--they have DVDs. Very wasteful. But feedback: value is correlated with the size of the public good. In rent-seeking, it's not. Also, imperfect or unknowable information. No alternative way to get to the Blu-ray player. Can't skip ahead 20 years. Demsetz: the Nirvana fallacy, idea that we could somehow at 0 cost get to some kind of outcome. Hope you have a year of great productivity. Gonna stay off the busses for a while.

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