Michael Munger on Profits, Entrepreneurship, and Storytelling
Dec 12 2011

Mike Munger of Duke University talks with EconTalk host Russ Roberts about profit. What is profit's role in allocating resources? How should we feel about the people who earn profits or who take them in ways that may not be earned? How easy is it to discover profitable opportunities? Munger examines these questions through a series of stories, real and fictional, to illuminate the sometimes puzzling nature of profit.

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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.


Dec 12 2011 at 11:33am

Shoot! Sorry, here’s the link:


Per Kurowski
Dec 12 2011 at 11:40am

“Goldman Sachs did not deserve those profits. But it’s a little late, after they’ve already misallocated all of those investment resources into housing markets where they shouldn’t have been in the first place.”

It was the regulators who authorized Goldman Sachs to leverage their equity more than 60 times if they invested in what was officially held as having no risk, like the triple-A rated securities backed with lousily awarded mortgages to the subprime sector, otherwise if working with “risky” assets like loans to small businesses then they could only leverage about 12 times. And so the real truth about it is that bank regulators have told the banks where they can make great profits and where not… and this has of course nothing to do with efficient capital allocation.

And by the way… this is still so.

If Mr. Moderator allows it here is a video explaining current regulatory madness it in an apolitical red and blue! http://subprimeregulations.blogspot.com/2011/05/our-crazy-bank-regulations-explained-in.html

[URL changed to full url–Econlib Ed./aka Mr. Moderator]

Dec 12 2011 at 11:43am

It is my understanding that, among other things, the equity markets convert accounting profits to economic profits.

Why do hedge fund managers make so much money? May be because there are too many financial transactions and not enough managers to take advantage?

Since A and B do not know each other, they will always have the belief that the middleman got rich by taking advantage of them in some way although oth A and B gained from the transaction.

Dec 12 2011 at 11:44am

A part that’s left out is that every transaction has two prices, the buyer’s and the seller’s. The difference is profit that’s divided somehow between the two. It’s also where new wealth comes from.

Market clearing, if the market can in fact clear, serves to allocate to a global best where individual matchups only allocate to local bests.

With market clearing, some of the transactions that could happen locally might not be able to happen at all.

One instance where the market can’t clear is people with underwater houses being unable to sell in order to buy another underwater house, even though it only amounts to changing the names on the mortages. They can’t convert into negative dollars in order to make the transaction go through.

Dec 12 2011 at 11:59am

One way to view profits is that the magnitude of profits is itself a price signal. If I buy low and sell dear (say $1 to $2) in addition to making large profits in the short run, I’ll send a signal to other investors about the market demand for my product. They will then turn their investment capital toward implementation of my idea for themselves and eventually drive my profits down. Unless (1) they can’t because of practical reasons or government regulations creating barriers to entry into this market (2) the perceive high long-term risks, like an unstable government regime or (3) they receive market signals indicating higher yields elsewhere, like a $1 to $100 profit margin.

By setting my profit margins high, I send a price signal to the market that will increase investment demand, and rapidly drive down prices. If I set those margins lower, my potential competition may take longer to realize the benefits of competition until larger profit margins elsewhere are brought down, or until an there is an increase in capital investment, resulting in more investors who are willing to accept smaller profit margins. And if I set that margin very low, I may never attract competition. But of course, as I set lower profit margins I’ll realize smaller short-term gains. In other words, this is a sort of supply/demand curve for profit margins, where the “seller” doesn’t want to sell at all, and the “buyer” wants as high a price as he can get.

Dec 12 2011 at 3:24pm

Love the podcast and this episode is no exception. However, a recurring problem in the “neo-“classical framework is again reiterated in this session.

Munger and Roberts recognize two categories of seller gains: profits, which come from serving consumer sovereignty, and rents, which come from self-serving regulations. But there is a crucial third category: manipulation. Specifically, seller manipulation of consumer risk perceptions through advertising and promotions. Munger waives at this when he speaks of “fraud,” but acts as if this is a crystal clear outlier problem which can be easily whisked away or dealth with by … who exactly? The behaviorlist critique of the rational actor model demands full throated analytic attention to the problem of manipulation of consumer perceptions. The neo-classical model continues to pretend “misperceptions” cancel each other out, are just not important, or are somehow magically policed by prohibitions against “fraud.”

I don’t know if links are permitted, but here are two articles (by me, as chance would have it) discussing this issues:

The Consumer Interest in Corporate Law:


The Public Choice Problem in Corporate Law: Corporate Social Responsbility after Citizens United:


This criticism notwithstanding, love the podcast, keep up the great work!

Dec 12 2011 at 11:32am

Here is one working link to the paper “The Economic Organization of a P.O.W. Camp,” by R. A. Radford (noticed that no link is provided under the “Articles” link for the podcast. Hope this is of help.

Dec 12 2011 at 5:23pm

Russ and Mike,

Outstanding! The best one yet! Thanks.

Dec 12 2011 at 8:22pm

One of my favorite podcasts, yet.

One issue that I would have liked to hear addressed(though was probably outside the scope of this discussion) is the issue of Intellectual Property. That seems a clear case in which society deems that an individual’s property should be his for only so long a time.

This situation is complicated by the fact that first discovery is protected. So the government tells an inventor/company: come up with this patentable thing first and you have a monopoly on it for a given amount of time. Even if someone INDEPENDENTLY discovers, it is my understanding, that they cannot use that discovery if someone else already has a patent for it.

To me this seems a clear case of property rights being violated(those of the independent discoverer) for the sake of social good(if you didn’t have patents innovations would be less likely to spread through society, everyone would keep them secret). At least that’s the routine argument.

At the same time, this also puts a limit on the property right, in a sense violating the rights of the IP owner as well.

I know you’ve had at least one podcast on IP
rights, but I would have liked to see them talked about in this framework as well. In no small part because the ethics of IP and the economics of it are becoming so critical in the past few years, as the tech giants of the world are gearing up for what can only be described as huge patent wars(and of course the old issues of drug patents, entertainment IP etc also remain).

Dec 12 2011 at 11:38pm

[Comment removed for supplying false email address. Email the webmaster@econlib.org to request restoring this comment. A valid email address is required to post comments on EconLog and EconTalk.–Econlib Ed.]

Russ Wood
Dec 13 2011 at 11:47am

EconTalk’s podcasts are very good, but Mike Munger’s are outstanding, as illustrated by this week’s conversation.

However, Mike forgot the ending of his opening joke about the economist and the entrepreneur: “The economist then turns to the entrepreneur and says, ‘It’s unfair that you earned $20 more than me. We need to spread the wealth around!”

Dec 13 2011 at 6:52pm

I wonder if the Padre, by virtue of his being an itinerant priest, was uniquely positioned as an intermediary in the camp. It seems that all the various prisoner groups could not roam the camp freely, for example, the “British and Americans were confined to their compounds” and “not everyone could make contact with the French.” If my hunch is true, the Padre was, in effect, gaming the established regulations in order to earn large trading and brokerage profits for himself. Wow – this story now appears to be even more applicable to the current economic situation…

Pietro Poggi-Corradini
Dec 14 2011 at 12:39am

Whether you believe that profits are OK or not is a reflection of whether you consider them to be a positive or a negative externality. So even if profits accrue due to perfectly rational individual behavior of everyone involved, the total result on society as a whole can either be positive or negative depending on your point-of-view.

Pro-profit people will point to profits as a signal, as bits of information, as incentives for others etc…(note that the argument is not the the profit-maker is better off and that’s a good thing per se, or even that the profit-maker deserves whatever he/she gets).

On the other hand, the anti-profit side will cite the downsides of inequality on the rest of society, for morale(?), for the power that the profit-maker can exert on others, for the great things that could be accomplished if a providential hand could skim off those profits and sprinkle them around.

[typos fixed, per request–Econlib Ed.]

Dec 14 2011 at 9:59am

I don’t say that often enough, but I really appreciate the work that is done here on the podcast and I really enjoy it. Even if I do not agree with some things that are said here, the different positions are treated fairly and arguments here are always food for thought. Thank you for that.

Prof Munger phrased Rawls Theory of Justice in a way that made it sound creepy. Not that he reconstructed it wrong, he didn’t, but he used some buzz words that kind of drowns out the argument with emotions.

As Munger said, the basic question that Rawls asks is “What is just?”. Is it just that someone who has been born in Germany instead of Somalia gets to live a better life? Rawls answers: no, the birthplace is random chance. If one would say “I deserve to be born in Germany and everything that comes along with it.” one would also have to say “The Somaleese deserves to be born in Somalia and everything that comes along with it.”
Now imagine two people. A coin gets flipped. Head, A dies, Tails, B dies. Either way, does the condemned deserve to die because of his bad luck?
Same with skill or character: A person with the skill to solve abstract formulas earns a lot more today than the same person in 500AD would have. In 500AD he would have been clobbered over the head by strong people. Today, the strong don’t earn too well and the quants make money. So the worth of your personal skill is relative over time and space. At what point you end up, what skills you get and whether these skills get you rich is random, out of your control and thus you have no more a right to it than a lottery winner has a right to win the lottery.

Rawls concludes: Justice cannot be based on random chance.

What can it be based on then? Rawls invokes the “original position” (see Wikipedia. It’s a great thought experiment and I would like to know what Prof Roberts and Munger think about it). The agreed on society from this position would redistribute the benefit of skill to those who by chance got less of it. This does not mean total equality or redistribution, but the balance of ownership of product of labor and redistribution, that benefits society the most.
We want a skilled surgeon to be a surgeon, even if his skill was given him by chance. So we have to encourage him to become a surgeon and not an artist, which, all else being equal, he might like more, by paying the most skilled surgeons the most money. After all, the surgeon not becoming a surgeon would be wasteful.

Well, that became a longer text than intended…

Russ Wood
Dec 14 2011 at 11:12am

George, I was thinking along the same lines: if the Padre had unique access among the prisoners, then he was the beneficiary of rents (even if he was not a rent-seeker).

In that scenario, it’s an open question whether the government would be justified in taxing the rents generated by the favored position it gave him. I think that the govt should tax the rents above that amount necessary to induce the Padre to create the market. However, I have absolutely zero confidence in either the govt’s ability or its good faith (and not just because we’re discussing a Nazi POW camp)to make that calculation appropriately.

Dec 14 2011 at 12:39pm

While everything Munger and Roberts said about the morality of letting people keep their legal profit was interesting, they totally ignored what I believe to be a stronger argument. Oddly most of their points about the morality were theories or antidotes in support of the stronger argument.

Simply put, the moral reason to let people keep their profits is because when that practice is employed people all across the wealth spectrum and across the world experience (in an absolute sense) a more rapidly rising standard of living than under any alternative systems so far devised.

That rise is due not only to the greater number of jobs under such system, much of the wealth created goes to fund medical and general science research (which will inure to the benefit of mankind forever), ways to lower costs of necessities, and charitable contributions.

Such as system is far from utopia, and it countenances some immorality, e.g., people who have obtained unjust fruits get to retain more of it than under a redistributive system. Moreover, despite everyone’s more rapid rise in absolute standard of living a greater amount of envy is likely as wealth disparities increase, and happiness may fall. Nevertheless, because the benefits bestowed on mankind by such a system exceed the costs imposed by that system by more than any other system, it is the most moral system available.

Dec 15 2011 at 12:30am

Why can’t schools teach economics like this? I last two stories in particular were incredibly illuminating.

John Berg
Dec 15 2011 at 12:34am

Responding to Sebastian:

The US Patent Law was recently changed to take away the inventor’s rights and give them to the first filer. Indeed, as Sebastian notes, this will lead to much conflict and perhaps even more secrecy. Still much of the benefit of the patent systems accrues to those who develop improvements to existing patents.

For many years Software was not patentable and then, suddenly it was. This denied “property rights” to many who developed the early innovations who saw no benefit to not sharing their ideas. When software became patentable and created problems for those without “deep pockets” to fight for their rights, the basic practical problem remained: how to profit from their ideas.

But if I heard to the podcast correctly, the patent owners were only rent seekers.

John Berg

Dec 15 2011 at 1:29pm

Excellent discussion. I love the Professors philosophical approach to economics. The discussion on desserts/ deserts alone was worth it.

However as a one with a more progressive approach I see this constant desire to look at these issues in an all or none fashion. No one claims one deserves nothing of their profits… the claim is more about what he owes back to the society that fought the wars and set up the structure for some one to make profits before he ever came on the scene.

Steve jobs didn’t assembly or transport his own product. He didn’t even design it all. So I’m not sure how much of the value of his product he deserves. Could be way more than $6 billion could be way less. I don’t assume the market divide things out properly ilk some law of physics.

And on this point;

” The second is information. How would anybody know any of these things? If we had to decide them collectively we would have looked at personal computers and said: No, nobody wants that. ”

What? The government decided long before Steve Jobs was born to fund research into microprocessors and internet- like technologies.

When Steve Jobs was born the entrepreneurs before him were paying 90% marginal tax rates to kick back into the system. No one does it on their own we are collective. No one is denying the need for profit but we shouldn’t assume Steve Job’s would have been as successful had he been born in Hungary or had the Republicans won the 1932 elections or had Kennedy NOT decided to race to the moon.

Michael Munger
Dec 15 2011 at 2:11pm

So, here are my thoughts on the whole “the government knows what’s good” thing.

No, it doesn’t. Innovations happen at the margin, not the median.

As for taxation: I don’t think anyone said that the taxes on the wealthy are zero. Fine that they are progressive.

The question is the presumption. Several commenters seem to follow Rawls in thinking that zero of the profit is deserved, and only that part required can be allowed.

I would say that all of the profit is deserved, and then only that part required for taxes to finance public goods can be allowed.

It comes down to this: does society own us all, and we get to keep what the overmind allows us? Or do we own ourselves, and do we contribute through our consent to the common good?

I vote “b”.

John Berg
Dec 15 2011 at 3:33pm

Further to my response to Sebastian:

The US Constitution determined that:
“The Congress shall have power…To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries; … ”

There’s no mention of personal profit but I’ve always assumed that the founding fathers followed their usual style of not providing “happiness” but granted individuals the “pursuit of happiness.” Certainly contained in that phrase is an understanding of what would motivate an inventor to invent. Now I see the patent system as a great Sooner race across the plains of Oklahoma where the government arranges a starting point and points in the direction where “intellectual property” may be found.

John Berg

Dec 15 2011 at 4:52pm

@John: I do not disagree that some form of property rights are necessary in the intellectual domain. What I am wondering is how justified the current system is.

Should IP holders enjoy them in perpetuity, or for a limited time? If the latter how long should their ownership be maintained? Are there fair use exceptions(obviously in some cases yes, in others no).

My biggest gripe is with the fact that a patent can be filed for a certain technology, with varying degrees of ambiguity. That patent is unused for a decade. Then once someone else develops a technology that is similar, or the same, the old patent is brought up to attempt to extract what is essentially a rent that doesn’t benefit society in any way. This isn’t like a race for land. This is like someone getting a plot in Oklahoma and then being entitled to the plot that someone else developed in California a decade after, as long as the features of the land are identical(by some bureaucrat’s interpretation of identical).

In a different sense: it’s acceptable for Apple to sue Samsung for the latter basically making products visually indistinguishable from Apple’s. It is ridiculous for Apple to attack most other manufacturers for making phones that are rectangles with rounded corners.

That aside, my main question is how to think about IP rights in the context of rights theory? Most arguments in this area are much more compromising than material property rights arguments.

Justin P
Dec 15 2011 at 5:03pm

Re: the first Oliver Stone Wall Street: Gordon Gecko gives this iconic speech:

Dr. Williams agrees with Gecko. What is it about Greed that is bad? I’d suggest that there is a difference between greed and avarice. Greed is a natural human trait. We are all greedy, it’s the fundamental basis of economics; unlimited wants with limited resources. Greed is what drives innovation, not just greed for money (avarice) but greed for a better standard of living, more leisure time, etc…


“YOU CAN CALL IT GREED, selfishness or enlightened self-interest, but the bottom line is that it’s these human motivations that get wonderful things done.”

How what Dr. Williams’ says any different from Gecko?

John Berg
Dec 16 2011 at 1:26pm

An inventor can ignore the patent system if he can keep his invention secret. A vast body of Trade Secrets law exists. Coke formula offers a good example. But profiting from your secret and keeping it secret is tougher.

It’s not clear whether the Founding Fathers wanted to grant a property right to inventors or wanted to motivate the inventor to share his secret invention with the public–hence the bargain they made in the Constitution. My main point addresses making our successful (Should I put that in quotes?) patent system, under this administration, conform to the unsuccessful European system?

John Berg

Dec 18 2011 at 12:37pm



Dec 18 2011 at 1:57pm

Nice episode, but what I miss is a discussion on how some profits can become so ‘excessively’ high over longer periods of time.

In the hedge fund manager example (1 billion on averge for the top 25) you can say we are all better of with these transactions, but how can these become so high? Apperently the signaling function of profit does not work here.

One reason why free market transactions look attractive to me is that through competition excessive profits are competed away over time. Somehow that theory seems to be wrong for significant parts of the economy and I think it cannot be explained by just rent seeking.

Another current outcome of capatilism I find hard to explain, is the short-terminism. Why is it that firms and shareholders only seem interested in the short term? Rational behaviour should make them interested in long term profit I would think.

Jeff Dean
Dec 18 2011 at 2:30pm

Hi Russ,

I’ve enjoyed your podcast for a long time. I find a lot to agree and disagree with, and always learn something. This podcast on “desert”, profits and rent was interesting but aggravating.

I think a fundamental error you make is dismissing the distinction between economic rent and profits by confusing and mistifying the definition of rent. You and Mike Munger talk about whether a trader or a hedge fund manager really “deserve” their income or whether it’s economic rent, but you also talk about the house you bought. I wish you had pursued the question of the house because I think a crucial distinction could have been shown.

In your examples, I would say the trader and Steve Jobs earned their income fairly. However, for the person who sold you his house for ten times what he’d paid, in what sense did he “earn” that money?

When you bought that house, what were you paying for? Largely you paid for the site value – proximity to your job, no doubt, and all the other amenities that that location provides. None of those services were provided by the seller, though he took the money for them. These values were provided by the community, broadly speaking – population, infrastructure, jobs, stores, etc. Your salary and no doubt much of the other competing demand for that site were provided by George Mason University itself, funded largely by the government and student tuition. In addition, because land in proximity to your job is in fixed supply, the price cannot be competed down by having more entrants (except to a limited degree by building more density).

Yet the price of housing – that is, the building and the location together – is set through competitive demand and cannot be reduced – except by taxing it. Wouldn’t it be fair to have a higher property tax on land so that you were paying the community (through the government) for the services it provides? A higher tax would also hold down the purchase price of property in the first place – higher carrying costs through the annual tax would reduce the principal that anyone could afford to pay. Also, other more damaging taxes on labour and capital could be reduced.

The private earnings from land, not including the capital invested in the buildings and improvements, is all rent and not profit. Confusing rent of land with quasi-rent of certain forms of scarce labour does a disservice to the discussion. Obviously these are the ideas popularized by Henry George and I think that this and many of your podcasts, such as the recent one on urban development, would be better if you included them.

Jeff Dean
Victoria, Canada

Dec 19 2011 at 9:15am

I always enjoy your podcasts; you do a great job and even when I disagree with you I come away with a better understanding and respect for your position. However, there is an area where I think that your own philosophy is a little underdeveloped. That area is around the concepts of intellectual property and copyright in the digital age.

As an example, in this podcast, in discussing Steve Jobs’ fortune, you say, basically, that no one should deny him his wealth because he brought new things to the world – obliquely referencing the iPhone, iPod, and iPad. But you also correctly point out that a large amount of Steve Jobs’ fortune is from Disney/Pixar. These two sources of wealth are very different; wealth arising from the creation of new gadgets is truly adding wealth to the world (assuming no negative externalities like excessive pollution or whatnot) because both the buyer and the seller are better off (in their own estimation) after the exchange than before.

However, Pixar is worth so much not because of free exchange but because of government penalties on copyright violations. If someone freely buys a Disney DVD, and has the technological know-how to make a thousand copies and sell them from a storefront, isn’t that a free exchange that a libertarian should support? In order to say that the government should prevent this, under penalty of fines and imprisonment, don’t you need to fall back on some sort of “Well, the content creator ‘deserves’ to be paid for his work?” – which puts us back in a “just deserts” theory, which is exactly where we don’t want to be.

Maybe it is possible, but I think that if you don’t want to deal with issues of “fairness” and “how much is too much”, then you have to develop a theory of intellectual property that doesn’t rely on what is “fair” to the author. You have touched on this a few times in the past (IIRC, with the fashion design podcast), but I’d like to hear more podcasts dealing with these technology issues, especially with legislation like SOPA right now.

Mike Davis
Dec 19 2011 at 11:45am

So, let’s think some more about whether Steve Jobs should be allowed to keep his profits. This question can be argued along lines of “justice,” which Mike Munger talks about in the podcast and also his comment of December 15. But the question also can be framed as a more pedestrian debate about economic efficiency. Mike and Russ also get into this but their discussion seems to me to be too narrowly focused.

I believe they are right in thinking that economic profits serve as an important incentive and provide a valuable signal—Jobs was certainly motivated in part by money and Apple’s success has shown other firms the value of innovative consumer electronics. Mike and Russ are also right in thinking that government control over profit is likely to led to all manner of mischief (e.g., rent seeking).

There is, I believe, another important reason for not confiscating economic profits. That is (and, sorry, I can’t think of a more elegant way to describe this) the efficient allocation of power. Remember, economic profits in even smaller amounts than the billions we’re talking about really don’t have much to do with consumption. Stories of vulgar excess not withstanding, most rich guys spend only a small fraction of what they earn (think Warren Buffet or Michael Milken). The bulk of economic profits are redeployed in other endeavors. Some of this money is devoted to charitable activities—e.g., the Gates Foundation—but most is reinvested. So, the question is, do we think the government should be given the power to redirect these resources or do we think the people who accumulated the billions are best able to decide where they will be spent?

The case for letting the guy who made the money reinvest the money is obvious—he’s already shown he’s good at innovation and investment and so is much more likely to successfully pick projects that create value—especially when compared to a government directed by rent seekers.

This argument, however, leads me to ask a couple of follow-up questions. First, is it then ok to confiscate wealth at death? I’m pretty sure a healthy Steve Jobs would have done cool things with his $6 billion but I’m less sure that he can manage his legacy from the grave. Second, should we try to walk up the slippery slope of deciding when someone’s economic profits are deserved–and hence deeming the profiteer as the best person to manage their future allocation—or is it possible to distinguish gains that result from rent seeking or pure luck?

I would have not raised this second question before the financial crises but since then my disgust at the rent seeking in the financial sector has colored my views. I hate the thought that some of these Masters of the Universe still have mountains of cash at their disposal (a view that is shared, I’m sure, by many of John Corzine’s associates and customers!).

Mike Patten
Dec 20 2011 at 10:07pm

I loved this episode and I’ve loved all the episodes with Mike Munger. I’m also a big fan of Ayn Rand so I have to say that I think this episode illustrates why egoism, and not altruism, must be the moral basis for any argument supporting capitalism.

The mancgere, the priest in the POW camp, and the verger all did what they did for their own benefit, not to make the city or the POW camp better off. The fact that the larger group is better off is just a side benefit of the fact that every member is either in the same state or in a better state than he was in before these transactions happened. Can anyone give a justifiable reason why “society,” a.k.a. the government, is justified in coming in and saying that he made “too much” in any of these voluntary transactions?

Dec 21 2011 at 7:16am


Someone notify David Graeber, who is getting lots of media attention lately for “overturning” the Adam Smith notion that bartering proceeds the invention of money.

On another podcast, I just heard him say, “We’ve been looking for that place where people say ‘I’ll give you twenty chickens for that cow’ for about 150 years now. Believe me, if it was there we would have found it by now.”

I guess he didn’t look in a POW camp.

Dec 22 2011 at 12:52pm

You didn’t take the Padre story far enough in this podcast. The price signal the Padre created was of real value to the community. He showed everyone there was a price imbalance in the camp so great he could earn a whole extra Red Cross box. The camp then created a board thereby bypassing the Padre. The Padre served as the catalyst letting everyone know there was not a price equilibrium in the camp.

Dec 23 2011 at 9:54pm

Why the rote dismissal of “greed is good” guys? I guess it would be hard to stay employed in academia if one developed a reputation for quoting Gordon Gekko …

Mike Munger
Dec 24 2011 at 12:58pm

AKoller: Good point!

Raja: I think you should pick one. Was it a “rote dismissal,” when in fact we gave detailed reasons? Or was it cowardice and fear of being fired, even though we both have tenure?

An alternatve explanation is that we actually believe that consumer sovereignty is the best argument for capitalism. This is the argument that has been consistently made, from Smith through Mises and right up until modern times.

Raja, you should try actually listening to the podcast. Work can be even more rewarding than trolling in comment sections.

Scott Packard
Dec 26 2011 at 8:46pm

I enjoy Mike Munger as a Econtalk guest. That said, this was one time where the entertaining value of his oration sort of got in the way of some of the message he was trying to convey, and I felt Mr. Munger’s points were important. I listened to the podcast twice, reversing it a few times on my “vintage” ipod, then came to the site to leave the above comment because my wife’s two separate listenings hadn’t allowed her to grasp the difference between profits and rents.

I see several people have left comments prior to me showing they understood his points, so maybe this is just a problem me and my wife are having. But, understanding rent-seeking is important to his next point: “…But my first thought is, once you give the power to the state to allocate the rewards you are not going to be in the world of justice like you hope. You are going to be in the world of rent seeking and power.”

So, it’s a small criticism, and it’s not that I don’t really enjoy the related things he brings to a show (and the Econlib Ed. exasperation/comment of having to be the transcriber of the French and English variances of desert). Mr. Munger does have some important points to be made; what I found is sometimes I was focused more on his art of speaking instead on the meaning of what he said. I came to the website, read the transcript, and found more punch in the written word.

Compared in my recent listening to Richard Epstein in IQ^2’s “Congress should pass Obama’s jobs plan piece by piece”, where Mr. Epstein seems to me to get a lot of information into few words. I can’t turn away or even take a break from listening to what Mr. Epstein says lest I miss a point, however, he’s much less entertaining than Mr. Munger.

Dec 27 2011 at 3:37pm

Russ and Mike, you are a great teaching team!

Mike Linksvayer
Dec 27 2011 at 11:25pm

The mancgere is doing something that makes people better off. Well, my opponent might concede that but say: Okay, but then we’ll only give them enough profits to motivate them to do what we should want them to do. We don’t have to give them the full amount.

And as an economist, I have two thoughts on that. I don’t know how persuasive they are to non-economists. But my first thought is, once you give the power to the state to allocate the rewards you are not going to be in the world of justice like you hope. You are going to be in the world of rent seeking and power.

I suspect a market skeptic would say we are always in a world of rent seeking and power, and it isn’t obvious that no taxation (ie let them keep the “full amount”) is going to minimize rent seeking and power. It could lead to concentrations of potential power which are too tempting to not realize, putting the most successful wealth producers or their heirs on a path to becoming tyrants. It may be a “government failure” if the very wealthy via well-begotten means can turn the government to their favor and collect rents, rather than a “market failure”, but it doesn’t make the result prettier, and most humans will blame “the market” anyway.

Is it not possible that arrangements that result in lessening rent seeking and power will vary tremendously depending on context, and level of taxation just one of many aspects of an arrangement with relevant effects?

My second thought is, so okay, I’m willing to admit that people would still be hedge fund managers–assuming they do something valuable, which I think many of them do. Not all financial folks are doing productive things these days, but many do. And you’d say: I concede the point that a billion is too much in the sense that less than that would still motivate them to do a good job. How would you pick the number that you think was the right number, and how would you enforce it?

Difficult and fraught with rent seeking opportunities, but unless one is going to argue for zero taxation, it is an unavoidable question.

In a comment above Munger writes “I would say that all of the profit is deserved, and then only that part required for taxes to finance public goods can be allowed”

How do we figure out what the right number required to finance public goods is?

The second is information. How would anybody know any of these things? If we had to decide them collectively we would have looked at personal computers and said: No, nobody wants that. And turned it down. We wouldn’t have any.

This second part (made again discussing the excellent tobacconist story, in which limiting profits is assumed to involve nationalization rather than mere taxation) seems a bit of a leap. Taxation doesn’t imply a command and control economy with total loss of entrepreneurial discovery. It certainly increases the chances that more resources will be allocated stupidly and discovery crowded out, but the connection between the level of taxation and amount of central planning is at the very least not 1:1.

You are entitled to it because as a liberal society we are going to adopt a value of personal autonomy. It can be overcome–you commit a crime, you lose your autonomy. But it’s a pretty high bar to say unless you do something that harms other people, you own yourself. You own your own labor. And that definition of autonomy would mean while I don’t deserve the profit in some moral sense, I’m entitled to it in the sense that we accept that in a market society people who take certain actions and create value get to reap the rewards. So, it’s a question of ownership and property, not moral desert.

I bet that a market skeptic will find this leap from personal autonomy to entitlement to all of one’s profits unless one commits a crime (yes I added the word “all”, but it seems implied) very tenuous, and more likely cardboard — they would argue ownership is often unclear and problematic if not unjust or the result of injustice, and that most people will feel more autonomous if the state takes care of certain things, paid for via taxation.

In another comment above, Munger writes:

As for taxation: I don’t think anyone said that the taxes on the wealthy are zero. Fine that they are progressive.
The question is the presumption. Several commenters seem to follow Rawls in thinking that zero of the profit is deserved, and only that part required can be allowed.
I would say that all of the profit is deserved, and then only that part required for taxes to finance public goods can be allowed.
It comes down to this: does society own us all, and we get to keep what the overmind allows us? Or do we own ourselves, and do we contribute through our consent to the common good?
I vote “b”.

As stated, the distinction seems inconsequential, with “deserved”, “own”, and “consent” particularly fluffy. And the implication that only profits required, and no more, must be allowed, seems unfair to previous commenters — I don’t see any making that strict argument. How might taxation and other arrangements be changed to produce better consequences (which I view as a terribly difficult concept, but not fluffy)? That’s what I vote for.

Roberts said:

I think the incentive effects are of unknown magnitude. Economists who want to defend low rates of taxation and small levels of government will often invoke large incentive effects of taxation as a way of saying: If we raise taxes too high, people won’t do creative stuff, and we need this for incentive reasons. I don’t know if that’s true; and I don’t think there’s any good evidence for it other than our armchair theorizing.

That kind of questioning (and related, fairness to guests who aren’t in such strong agreement with Roberts and Munger is) is one of the main things I love about Econtalk. Thanks!

Commenter Nick above writes that Jobs’ wealth gained via Pixar and Apple ought be viewed very differently, as the former relies on copyright protectionism. But so does Apple. Those are important policy points, but independent of those, far too much credit is given to Jobs (or Apple generally) for inventing various gadgets. Everything mentioned existed before Apple’s versions thereof. Apple arguably made or does make the slickest versions of many of those classes of gadgets and reaps appropriate rewards (modulo those attributable to excluding competition via government copyright and patent privileges; hard to tell what the balance is), but holding Jobs and Apple up as singular giants does a disservice to story of decentralized discovery. Wal-Mart’s innovations, mentioned in the next next EconTalk with Tabarrok are a better example, if a giant institution must be used.

Jan 3 2012 at 6:00pm

Good interview.

A theme here which I have never understood is why there is such decisive distinction between “the government” and corporations. Is there any economic justification for this?

It seems very strange to me that in the same paragraph Russ and Mike say we can not reasonably limit prices but we should limit taxes. The same arguments for limiting taxes (power distortions) can be applied to pricing and the arguments for unregulated profits (ignorance and incentives) applied to taxation.

from my perspective the government provides some services I want and some I don’t want, bundles them together, and charges me for all. The phone company does the same. Both are sufficiently inconvenient to leave but technically I could choose alternatives. the difference between the local grocery store and the phone company is the same as that between the phone company and the government. Why is the dividing line so stark in the latter case. It seems non-rigorous for this discussion.

Mike Munger
Jan 3 2012 at 7:36pm

Scott Packard: Richard Epstein may be the most articulate person I know. It’s terrifying to argue with him, precisely because he packs so much into so few words. To say Richard E is a better speaker than I am is like saying John Lennon was a better songwriter than Vanilla Ice.

Still, I’ll give it a shot here. Rents and profits are indistinguishable, from the perspective of the entrepreneur. No difference, couldn’t tell even a hint of difference. Both are rates of return over and above the opportunity cost rate of return, and greater than the costs required to obtain them.

The difference is where these returns come from. Profits come from creating a product, service, or idea that produces more value than it costs.

Rents are an artificially created value, something that may on net destroy value in the society.

So, profits would come from producing a new car, with higher quality and lower price than imported cars.

Rents would come from giving money to members of Congress to pass trade legislation raising the price of imported cars. The form of the rent would look like “profits,” and in fact would be as far as any accountant would be concerned. But the rent would be collected in the form of higher costs paid by consumers. And dead weight losses would be paid by consumers who would have paid a price above the free trade import price, but do not buy a car at the import plus tariff price; they don’t buy either an import (because of the tariff) or a domestic car (because of the rent)

Mike Munger
Jan 3 2012 at 7:48pm

Steve: What phone company are you thinking of? Sprint? Verizon? T-Mobile? ATT? (I could go on, with Skype phone, Vonage, other VOIP deals). Doesn’t sound like a monopoly to me.

A tax is set by a technocrat, and the only way you can avoid it is to leave for another jurisdiction, which is expensive.

Now, if you are old, like Russ and me, you remember a time when Ma Bell ran the world, as a government protected monopoly. Then your question is a good one. I agree that Ma Bell is more like a government agency, in 1971, then like a competitive firm.

But if you remember a little chink, a small opening, was allowed. MCI got to compete on long distance. And costs plummeted, because it went from being a tax (Ma Bell the government agency maximizing rents) to being a price (MCI and Ma Bell competing, at least a little).

There is a modern example of your point, and that is the attempt to get the Feds to take over the internet. The goofballs who favor “net neutrality” are imagining offenses of monopoly so awaful that they want to create a government monopoly, preemptively.

In my view, Steve, and I think Russ agrees, private monopolies are very difficult to sustain without government help. So, that’s the difference: taxes are monopoly prices, charged without reference to the cost of the services. The government takes in money, and provides services, yes. But the money is not EXCHANGED for the service! Taxes are collected, all lumped together, and then services are “free.”

There are exceptions, like user taxes (entry fees at pools, gasoline taxes used to pay for highways). But by and large there is no relationship between taxes paid and services consumed.

Even for Ma Bell, the more you used the phone, the bigger your bill. But there is no relationship between the amount of taxes you pay and the amount of services you consume. That’s not government’s fault, because the marginal cost of public goods are zero. You can’t charge p=mc in government.

Paul Samuelson showed this, “rigorously,” in his 1954 paper, “The Pure Theory of Public Expenditure.” You cannot finance government with prices, you have to use taxes. http://chula.livocity.com/econ/Micro/Charit/Publicgoods/publicgoodSamuelson.pdf

Jan 9 2012 at 6:10pm

I always like the $20 dollar bill story, but when you guys used it in this podcast, Munger changed it to an Economist and an Entreprenuer. When that happened, it made me think a bit more about the fable.

I think the Economist is generally right, there are no $20 bills laying around, they’ve all been picked up. There are, however, untold amounts of $20 bills that are both seen and unseen. Some are just under the surface, a little digging and voila! Some are clearly visible right behind a currently insurmountable/noneconomical wall. Many are just under a heavy boulder that takes $19 to move. Moving boulders produces a lot of dry holes, no $20. Most are not even glimmer in their discoverers eye.

All of them take work to get. Even the ones lying on the ground had to be uncovered by someone.

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Podcast Episode Highlights
0:36Intro. [Recording date: November 14, 2011.] Profits; and you want to use three stories that you've chosen to illustrate the role of profit and error. Get us started. I'm going to start with a joke, because it's never a bad thing to do that. This is a joke I think most economists tell most intro economics students, and yet it's awfully useful. There's an economist--a neo-classical economist--and an entrepreneur walking along a street. The entrepreneur glances down and finds a $20 bill. Being an expansive sort of fellow, he says: "We're walking together. Let's split the $20 bill. We both saw it." And the economist says: "No. Actually, in equilibrium there couldn't possibly be a $20 bill because somebody would have picked it up. So, no thank you." The entrepreneur shakes his head, picks it up, puts it in his pocket and keeps the whole $20. It's a real knee-slapper. I tell that joke also, but I tell it with a psychologist, and I put the joke in quotes. Well, you mean it's supposed to be funny. Well, it's a gest. That's correct. It's a jibe, even, at economists who believe that profit opportunities disappear. The thing is that today we are going to talk about profits. The question is: What is the source of profits? And the neoclassical economist would say it's a nonsense question because there is generally no such thing. The only way you could have profits is a rate of return that's above the competitive rate of return; and as we all know, if we make the assumptions necessary for competitive equilibrium, there will be no profits. They will all be driven down to zero because price is driven to the cost of production. Now that's one of the genius things about competitive economics. That's certainly right. The question is: Why is it in the real economy we see profits? And why do they seem so important? And the reason I was interested in this was because it seems that profits have kind of become a bad word. It's something that the people involved in Occupy Wall Street and around the country are angry about. Yeah, I agree. Profits have always received a mixed welcome from the populace at large. It depends where they come from. Remember the movie Wall Street in 1987, the first Oliver Stone Wall Street: Gordon Gecko gives this iconic speech: "Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures. The essence of the evolutionary spirit. Greed in all its forms--greed for life, money, love, knowledge--has marked the upward surge of mankind." Gecko is not the hero of that movie. I hope you are reading that. Yes. Good. Maybe you liked it enough to memorize it. It's an evil speech, because capitalism does not celebrate greed. Capitalism takes greed as a given and celebrates consumer sovereignty. So, anything that starts with "greed is good" is wrong. It's a mischaracterization of capitalism. No one has ever believed that. What capitalism does is try to harness greed and use it for the good of consumers. We've talked about this before, but the idea that somehow the Wealth of Nations is about greed being good because it gets channeled by competition's help to consumers is not a Smithian idea. It's a caricature of Adam Smith. He obviously understood that people are self-interested, but he saw greed the way we use it in everyday language to be not a virtue. It is not a virtue; and one of the reasons I'm sympathetic with the Occupy Wall Street protesters is: We have created a society which under some circumstances has confused profits with rents. So, profits are what you do when you produce something that somebody else wants to buy and you do it at a low enough price that you can make more revenues than it costs you to make it. Rents are when you invest in government policies for protection, for price floors, for barriers to entry that actually are more profitable in an accounting sense, but produce nothing for the society. You should clarify another expression you used earlier. When economists talk about 0 profit, we don't mean that you don't have any left over. Want to clarify that? Sure. Economists and accountants argue about this all the time. And you can just imagine how exciting that is! I think it's a new reality TV show coming out on cable: accountants versus economists. And they'll both argue in technical language about what profits are. For the account profits are the amount of money you make over labor costs and the cost of materials. For economists, you have to include in your costs the rate of return that you would get on your capital. So, a zero-profit condition means that the person who has invested their money gets exactly the opportunity cost rate of return on that capital. Meaning? If the rate of return is 10%, I've got $1000, I'm making $100 profit. It's just that that's the profit I would get from investing it somewhere else. The next best alternative. We call that zero profit. A zero profit means I'm doing no better with my assets than I could do with them elsewhere. And that would include my time. So an entrepreneur who starts a business and is able to pay himself a salary of, say, $3000 because that's what's left over after paying all the costs and taking in the revenue--those are negative economic profits because he presumably could have done something more valuable with his or her time that would pay more than $3000. You might choose to stay in that field if you had enough of a cushion and you loved doing that enough, but in general we would say that's not going to be a going concern. So, the accountant and the tax man say: You are making $3000 profit. The economist would say: No, you probably could make $5000. Or $50,000 as an employee somewhere else. And that's your opportunity cost, and therefore you have negative economic profits. That's a loss to the economist, but profits to the accountant.
7:14So, that's the story when profits earned through pleasing customers are good. And when not earned, say by getting some special privilege, are bad. Anything else to say? I think it is important, and the reason I wanted to start with that, as you pointed out, hilarious joke, that we need to recognize what the source of profits are. The source of profits is correcting errors. The economy around us is full of errors. And what I mean by errors is a maladjustment, a divergence between what we are actually producing and what we "should" produce in order to use the stuff that we have--our mental resources, physical capital, labor--to produce the highest possible level of satisfaction of what the public wants. So, there's this unobservable thing that nobody knows and nobody can know, and that is: What is it that a consumer-sovereignty oriented society would produce? How are we going to allocate our resources? There's all sorts of mistakes in the way we are allocating resources. If we not making iPods, if we are not making things that people want to buy, even if they don't know that they want to buy it. The genius of Steve Jobs was to say: Here's the way people want to buy these things. They don't know it, but if we do it, we correct this mistake. I can make a lot of money and people will be able to get the music they want in a very cheap and easy way; and they can listen to it on the street. And he could have been wrong. In which case he would have lost a lot of money. He was wrong about the Apple II--it was a disaster. So, he had a history of some really bad mistakes. But you are constantly trying to correct mistakes, not in the sense of: Oh, you've said 4+4=9. It's not a mistake anybody could recognize. It's a mistake that resources are misallocated now, and I can allocate them in a way that will produce more value for the society than it costs to produce it. Profits come from correcting mistakes. And where does that lead us? In trying to illustrate this I have the three little stories that we've talked about before, but I think it would be nice to link them in the podcast today because I think they have a nice unifying theme. Before you do that, I just want to add one footnote to the economist and the companion walking along the street, where the companion sees the $20 bill and gets excited and the economist says: Don't bother; if it were really there, somebody would have picked it up already. And although, of course, there has to be a first person, and that's what the economist is relying on. That's the sort of paradox of zero profits. You've claimed that there aren't any profit opportunities in equilibrium--to the extent such a thing exists--but you have to recognize that the reason there aren't is that somebody has to have been the first person to see it. I think the value of that story, and I'm going to make a little plea for it, is that so many times people think they have inside information or they know there is a bargain or they have a great stock they want to buy or they think they can make a lot of money; and that joke about the economist walking down the street is a very useful cautionary tale. Because your first thought should be, and this is wonderful advice: Be careful. It probably isn't there. Someone probably picked up that $20 bill before you saw it, and it's an illusion. Or worse: someone's trying to sell you something by implying there is such a thing. I'm really amazed at how many of my colleagues, quite politically left, actually had 100% of their money invested in the stock market in 2007, 2008; and now they can't retire. They thought it was a sure thing. We are very prone to the sure thing psychologically; it's so exciting to get a free lunch. When someone says, it hasn't gone down, or this goes up 10% every year, or the average is 10% for the last 100 years; you can't lose money on it--think of that story. I don't know if we've ever talked about this but there's this story that at lunch at the U. of Chicago faculty club, some time back in the 1960s--George Stigler used to tell this story--that there was this arbitrage opportunity, meaning two goods of the same quality were selling for different prices. Which means you can buy the cheap one and resell it at the place where it would be more expensive; and it's a sure thing. You can't lose. I think it was a ton of wheat in the United States and a ton of wheat in England. This is an embarrassing story; we won't name all the names; but George Stigler told the story that they got all excited. They bought the wheat in the United States, a contract prepared to sell it in London; only to discover that a ton in England is not the same as a ton in the United States. George Stigler used to summarize that by saying: It's the most expensive lunch I ever had. Of all people, a Chicago economist should have realized that there's no free lunch; there are not $20 bills lying around. But if you are lucky, you might be the first person to find such a thing. Isn't it interesting that the problem is that hard. One Christmas in the 1970s I got a thing called a Pet Rock. And it was a rock in a box. If you had come to me and said you had an investment opportunity--we are going to put rocks in boxes and sell them to people and we're going to sell millions--I'd have said: I don't think so. I'm going to leave that $20 bill on the ground, thank you. Every once in a while. If you think you have inside information, you are almost certainly wrong. If Bernie Madoff comes to you and says: I can make triple the return and there's no risk--it's a lie. It's not true. So, the question is: Why does anyone ever invest? Why is it that people take these chances when we all know, if we think about it, you're not going to; although secretly we think we are God's special snowflake. And in fact, no, I can probably guess.
13:43You proposed to me that we discuss three stories, three that we have talked about in the past in various amounts of detail. And now we've set this in the frame of profit and correcting errors. So, let's start with the first story. Tell us the story. We'll do it chronologically. I'm a very egotistical person, and I Google myself 8 or 10 times a day. You're God's special snowflake. But it was harder for me to Google myself in the 11th century. But I did find a way to Google myself in the 11th century by trying to find out what was the etymological origin of my name, which is Munger. So, a few hundred years ago it was Monger. In Anglo-Saxon in the 11th century, it was the the word Mancgere, which meant merchant, just the lowest sort. And it turned out that there was a mention of the mancgere in translation by a woman named Sharon Turner in a 3-volume history of the Anglo Saxons, which was published in 1836. But this is from 1050; it was a psalter, that you would sing psalms from, but they also had stories, character stories. And this was in the Northern Hanseatic League. A trading organization. A bunch of city states loosely affiliated by trade, but it was pretty dangerous. So, the mancgere introduces himself in the psalter by saying--and you can tell he's defensive, he's not calm about this--I say I am useful to the King, to the elderman, to the rich, and to all people. I ascend my ship with my merchandise and I sail for the sea-like places. Sounds like it should be Monty Python. And I sell my things and buy dear things which are not produced in this land; and I bring them to you with great danger over the sea. And sometimes I suffer shipwreck, with the loss of all my things, scarcely escaping myself. And in the interlocutor asks: What things do you bring us? Skins, silk, costly gems, gold, various garments, pigment, wine, he goes on. Will you sell your things here as you brought them here? And it sounds like asking if was going to change them. And he says: No, not only am I not going to change them; I will not, because then what will my labor benefit me? I will sell them dearer here than I bought them there, that I may get some profit to feed me, my wife, and children. So, what he's doing is traveling, pretty far, at considerable risk to himself, bringing back stuff that he thinks people want to buy. Is he changing them in any way? No, there's no production. Parasite. There's no pretense that he is doing anything but being a parasite. I'm a mancgere and I'm okay; I sleep all night and I sail all day. So, this is 1050, a thousand years ago. It's a remarkable document because it's timeless. It's exactly the way an economist would defend the role of a merchant, and in particular one whose--you could gussie it up and call him a retailer, but he's not even a retailer. He's just a middleman of the most uncreative sort on the surface. He provides transportation services, I suppose you could say. But he's not saying: I'm charging for transportation. He's saying: I'm going to charge the most that I can get, because otherwise what would my labor get me? And the defensiveness hasn't changed either. Not long after this, Thomas Aquinas--the sentiment had been there for a while--had asked in, I think, Question 74 of Summa Theologica: Is it a sin to sell something for more than it is worth? And it's important that we take some of the parts of Aquinas's objection about the just price doctrine. Is it a sin to sell something for more than it is worth? Well, suppose that he sold something for gold that in fact was just iron. That would be fraud; that you can't do. Suppose it was coercive; suppose I didn't have enough information to know what it was you were selling. All of those things might be a sin; we might now say they should be illegal. So, let's put all those things aside. Let's suppose that all he has done is made a very large profit, more than it cost him to transport the stuff by a lot. He went and bought the stuff, he brings it to you; he represents precisely what it is; and asks me how much are you going to pay for it? A number of people are clustered. They are lined up because all of them want this, and they bid against each other. He ends up making a huge profit. Has he committed a sin? Or in modern terms, has he done something that we would now say that we were going to make illegal? He's brought back an orange from the Orient and people don't get oranges in 1050. He's brought back spices that mean the spoilt meat that I eat in my soup actually doesn't taste so bad. Might not make you sick. So, the question is: Has he behaved evilly? And Aquinas sort of goes back and forth on this; and he makes an exception for a just price on people, primarily merchants; and he says: Well, they are not behaving morally, but they are not behaving immorally. This is just a region of our civil life where the usual questions of our morality don't apply. That's a tepid endorsement but you could do worse. It's sort of monstrous, but we'll make an exception. What are you going to expect? These people are traders. Always there has been this idea, in some ways in Confucianism--not so much in Islam. Mohammed was a trader, so trade was okay in the Islamic world; and that's part of the reason why the Islamic world flourished for a long time--between 800 and 1200 there was a lot of trade in the Islamic world, before really there was in Europe. The question is: what is the status of the trader? And here's the argument that I would want to make. The fact that this man, the mancgere, is making profits is prima facie evidence that he is making a huge benefit to people who are voluntarily buying the stuff that he brought back--provided that there's no fraud and no coercion. He's doing a huge public service. He should have been celebrated rather than this tepid endorsement--yeah, you know how traders are.
20:36It's an incredible thing. That attitude really hasn't changed. I don't know where it comes from exactly. Some of it's maybe cultural; some, in some dimension hardwired into us. When I talk to my students about this--and this illustrates another example of the difference between economic profit and accounting profit--economists tend not to care about historical price, what you paid for the good originally, but rather what replacement cost is. And when I first moved to Washington, D.C. the house I wanted to buy in the neighborhood I wanted to buy, it's public information, I was able to see that the owner, who had bought the house about 25-35 years before I had--he had paid one tenth of what he was charging me. And if I had gone to him and said: You know, I think 5 times what you paid for it would be plenty. That would be enough to motivate you to take care of the house. He would say: Well, I can get 10 times, and that's the market price. And in that situation nobody is outraged that the owner of the house is gouging me, because that's what houses of "comparable" amenities and size and location tend to earn for the seller. And so no one objects to the fact that he was charging what everyone else was charging. Now, one of the things that's unusual, and we've talked about this a lot in previous podcasts--if you've got the only orange, somehow it does feel different than if there are 40 orange sellers, all of whom have gone to the trouble of going to get them. Which is what a grocery store is doing. They've incurred costs; we understand they are entitled to a profit. But they don't earn the profit because of competition that they might earn if there were only one grocery store. It raises the question: Does anybody earn profits? There's a big question in philosophy about desert, and I've become interested in this. The word "desert" is complicated. There are a number of forms of the word "desert," as you probably know. One is the sweet stuff, that we are going to ignore. I think it's the same word. It's the same root--what you are entitled to. Dessert with two s's means to clear the table. You de-serve, middle French, des serve, with two s's. To clear the table after the meal, and that's why we have sweets. There is a very similar word, deservir, with one s, that means something of virtue or merit--I deserve it. The strange thing is, French is a very irregular language and deserte is to deserve, that is to merit reward or punishment. So, I'd always assumed that they were the same; but they're actually completely different. And that's also different from the idea of deserting or leaving, which is also middle French; and that's deserver, with an e [N.B. Pity me, the typist, yet?! Hope I got this close to right.--Econlib Ed.] which means to leave. So, the water has left the desert--you leave your military unit. So, it's actually three different words for very similar English words. So, the phrase "just deserts"--I actually did some research on this--the second word has one s, not two. But there's 4 million instances on Google with two s's. So, just desserts, with two s's, should be like a cake shop--we don't sell pizza. But "just desert" means I justifiably expect to get to keep that. So, the question, and you've raised it very well, is: We can split the difference. Sure, you deserve some profit, you deserve some part of the increase of the value of the house. But not that much--that's too much. And so you don't deserve all of the profits that you have gotten because you haven't earned them. So, the question that John Rawls raised in the Theory of Justice and elsewhere was: Why would any of us think that we deserve any of the character or effort or intelligence that lead us to perform well? So, suppose that we make a theory of desert in the sense that you deserve this because you own in some sense your own talents. Well, Rawls says you got those from your parents. You won a genetic lottery. Those are morally arbitrary. We may decide to keep some of it, but only what is necessary to motivate you to do what's good for society. The things that you know, that you do, your character--those are collectively held. They are not privately owned, according to that theory of desert. That's a very discomforting idea, isn't it? It's widely held. That's the basis; you really set this up perfectly. I think a lot of people, maybe not for a house, but, say you are making too much profits. So, we are going to have an excess profits tax. These oil companies, these other kinds of companies that are making big profits--they don't need that much. We'll take away half, and that will still motivate them to do what they should do. We recently did a podcast with Steven Kaplan on the top 1% and he had this remarkable statistic that in a recent year the top 25 hedge fund managers earned in total $25 billion in that year. And it's a skewed distribution, so the top 5 earned more than $5 billion. But the average of the top 25 was a billion apiece. Surely that is more than enough, right? I think that would be the average person on the street's response. And it might be true. If you start from the premise that all our talents and character are collectively owned because they are morally arbitrary, then the only reason that anyone gets to keep profits is to motivate them to do what we want them to do for the public good. So, I just made an argument saying profits are actually a sign that I am doing something for the collective. I am creating value. The mancgere is doing something that makes people better off. Well, my opponent might concede that but say: Okay, but then we'll only give them enough profits to motivate them to do what we should want them to do. We don't have to give them the full amount.
27:37And as an economist, I have two thoughts on that. I don't know how persuasive they are to non-economists. But my first thought is, once you give the power to the state to allocate the rewards you are not going to be in the world of justice like you hope. You are going to be in the world of rent seeking and power. My second thought is, so okay, I'm willing to admit that people would still be hedge fund managers--assuming they do something valuable, which I think many of them do. Not all financial folks are doing productive things these days, but many do. And you'd say: I concede the point that a billion is too much in the sense that less than that would still motivate them to do a good job. How would you pick the number that you think was the right number, and how would you enforce it? It is really interesting that most of us think, if we are defenders of capitalism--no one that I know would defend the greed claim. What we defend instead is that what the price system does is provide information about the scarcity of resources so that it's easier for us to correct mistakes. I say: Wait, you are using tin for this? It's much more valuable over here. I will buy the tin from you, sell it over here, and correct a mistake that makes everybody, including me, better off. The person I bought it from is better off because he's not using the tin but he's got more money than he would have made. The other guy who values the tin more creates something more valuable. And I make a profit for doing it. Well, the response, yes but you don't need all of that, implies that somebody else has this information about how much it takes and they have this information about where the resource should be directed. So, the price system provides both information and decentralized motivation for people constantly to be looking around. A number of people who have studied entrepreneurship, because that's what that is, entrepreneurship--entrepreneurs correct the errors in allocations of resources, and profits are what they are looking for. They are looking for opportunities to correct allocations of resources. So, Israel Kirzner and others have called this awareness. What I'm looking for is a way to figure out how I can correct a misallocation of resources; I'm constantly looking around. Entrepreneurship rests on awareness. Well, I think the best answer to Rawls and the people who say these are morally arbitrary--I suppose that it is, and that's why I wanted to have the second story about "The Verger," because "The Verger" illustrates how morally arbitrary some of these features are. But the Nozickian answer--that is, Robert Nozick's answer to Rawls--was of course, it's too high a standard. It's silly to say that you deserve this all the way back to some kind of primeval having created something so fundamental that the society couldn't do without it. But we could settle on something intermediate, which is: You are entitled to it because as a liberal society we are going to adopt a value of personal autonomy. It can be overcome--you commit a crime, you lose your autonomy. But it's a pretty high bar to say unless you do something that harms other people, you own yourself. You own your own labor. And that definition of autonomy would mean while I don't deserve the profit in some moral sense, I'm entitled to it in the sense that we accept that in a market society people who take certain actions and create value get to reap the rewards. So, it's a question of ownership and property, not moral desert. It's a misrepresentation to insist you would have to deserve it if property and entitlement get you to the same place. I think underlying that--the easiest way for me to think about this is Steve Jobs, since he's such a dramatic example. Underlying that idea is the reason I'm entitled to it is the presumption I'm helping others, not just myself. If life were a zero-sum game and by engaging my skills, say as a warrior, I was able to amass wealth and goods by plunder, we'd say that's not moral. The fact that you were born stronger than I am, that you had better weapons because you had inherited them through your family or created them through gifts that bestowed by nature or God, that's irrelevant. It's ultimately got to come down to the fact that you makes folks better. So, I look at Steve Jobs; he dies and his estate is reportedly worth about $6.6 billion; $4.4 billion of that is Disney stock that he got from selling Pixar to Disney; $2.2, roughly half, came from what most people think of when they think of Steve Jobs, which is the profits from his Apple stock at the time of his death that he owned. Part of it's death--death has some reputational effects. Before he died, people complained he didn't give enough of it away. He wasn't charitable enough, didn't do enough for human beings. It's clear to me he did a remarkable lot for human beings. He gave us, to some extent, Pixar; he wasn't the only one, of course, but he gave us those remarkable visual treats. And then he transformed the music and information business through the iPod, the iPad, and the Mac computer. Those are just glorious gifts from which we benefited. So, his $6.6 billion is a fraction of his total contribution to the world. A trivial fraction. So, we got most of it. He got a lot. So, when somebody says he got too much--yes, he would have done it anyway for a much smaller share. But I think the reason we celebrate the man is we realize that the pie got bigger by so much more than that $6.6 billion that we say: That's okay. As it turns out. We couldn't have known that in advance. I wrote some articles a time ago. He tried several times at first to sell his computers to Hewlett Packard (HP) and they said: Are you kidding? Nobody's ever going to buy this. It was that awareness. Yes, he also made some mistakes. But overall the things he created, it's a huge amount of value. Many people now who are saying he got too much are reading about his death on something that would not exist if he had not lived. They are looking at a device that would not exist. Ironic. He had certain gifts; he used them to the fullest. His sister delivered a rather extraordinary eulogy that was reprinted. She chronicled among many other things his relentless work effort. Many people are given great gifts and they don't pursue them. My eighth grade teacher, Miss Keneen [sp?] used to say: It's better to have a half-gallon capacity and fill it to the top than to have a gallon capacity and only fill it up to a quart. She's right. Many gifted people don't use their gifts; and many people who have average gifts use them with such ferocity and intensity that they still make an important contribution that's greater than that of the gifted person.
35:34Why did Steve Jobs do that? Why did he work so hard? He can't really claim any credit for having been born with the character and raised by his parents with the character. The drive. It still should be collectively owned if you are going to insist on a theory of desert. That's why I think a Nozickian entitlement theory makes a lot more sense. Insisting on desert means nobody ever owns or deserves anything. We're making collective decisions; we've raised two problems with that. One is the incentive problem that you raised, where we'd constantly be litigating about whether I get anything, or arguing with Congress. The second is information. How would anybody know any of these things? If we had to decide them collectively we would have looked at personal computers and said: No, nobody wants that. And turned it down. We wouldn't have any. Ex ante. It's a very deep point. It's hard to remember and hard to appreciate it, that ex ante, the knowledge isn't there. And the process--that James Buchanan piece I've cited here--it's the process that creates the knowledge. The knowledge isn't given to the participants. We often, and this is like the $20 bill--John Stuart Mill, in 1848, in his Principles of Political Economy, tried to make a distinction between production and distribution. He said: production, we have to do obviously through something like capitalism, because that produces the most; that's the way of organizing society, and production that's most efficient. But it's not like that with distribution.
The things once there, mankind, individually or collectively, can do with them as they like. They can place them at the disposal of whomsoever they please, and on whatever terms.
So, we can divide the benefits from capitalist production as we want. And the problem with that, the things once there. He's assuming that which has to be proved--that we wouldn't have iPods unless Steve Jobs had had enough autonomy to make that decision, partly in search of profits. He was motivated by profits, but not solely. He was motivated by fame. Commitment to an artistic vision, a thousand things. But still, we can't assume that the things were there. We can't just say: Production is one stage, but distribution is entirely separate. The maladjustments that will come from not having the incentives to capture the profits from things that I create will metastasize back into our distribution decisions. I agree with that, but I also have to concede, and I'm curious what your thoughts are on this--I think the incentive effects are of unknown magnitude. Economists who want to defend low rates of taxation and small levels of government will often invoke large incentive effects of taxation as a way of saying: If we raise taxes too high, people won't do creative stuff, and we need this for incentive reasons. I don't know if that's true; and I don't think there's any good evidence for it other than our armchair theorizing. Which is real; I think there is an effect. But I don't think hedge fund managers without a billion dollars would work a lot less hard. Other than to say that they would go into other investment opportunities. So, the market's a funny thing. If it has all these related payments that do matter to the participants, it's obvious that if you lower the wage to lawyers, fewer people go to law school and may become something else. But if you lowered the after-tax wages of all high-skilled activity, it's not obvious to me that the world would be a dramatically poorer place. I think it might be; it's a risky procedure. But my main argument against confiscatory taxation--I don't mean literally but high tax rates--isn't so much the efficiency effects but the power effects. The distortions that are going to occur. I don't think those two elements can really be separated. The incentive problem and the distortions that come from having to argue about it all the time, and I would say agnostic position, where we just don't know enough to set prices right, means that we are often going to accept levels of profits in some areas that just look obscene and in fact cannot be justified on any sort of moral claim.
40:04[Spoiler Alert--Econlib Ed.] Let's move on to our second story, which is Somerset Maugham's short story, "The Verger". Published a couple of times, once as "The Man Who Made His Mark," in 1929; but then it was republished in 1936 in a magazine called Cosmopolitans under the name "The Verger." A verger is a kind of helper, a lay helper for the priest or the vicar because these are Anglican churches in England. He worked in St. Peter's, in Neville Square, and his name was Foreman. Started when he was 17; now 37, so he had been working there for 20 years. And had done a great job. Was very committed but he'd done a great job and he had a little house out back and he got paid in food. So he was basically paid in kind, and had committed his life to St. Peter's. They had a new vicar and they had representatives of the lay committee that helped the vicar at St. Peter's, and it turned out one day that Foreman, the Vicar, had never learned how to read or write. He had left school early, and then had hooked on as Verger when he was 17, and had never learned. The Vicar was appalled at this: This is the modern church. We can't have people like this that work for us--it's embarrassing. So, they called him in and they said: Look, you've done a great job, we're really sorry, but we are going to have to let you go. And he was disconsolate. He couldn't believe he'd been let go after all this loyalty, 20 years. No one doubted he'd done a great job. In fact, he asked: What of my work is inadequate? Well, nothing; but you can't read and write. And we can't have that sort of person here; we need to have someone who is more sophisticated, more able to deal with the increasingly sophisticated parish here at St. Peter's. I want to emphasize: This is a short story; this is fiction. My memory of the story is that it was just embarrassing; they felt it was unseemly. He clearly could do all the things the job required, but they felt they should get someone who looked better because he could read and write. And it would be embarrassing if it came out. They thought it would be embarrassing for the Church and for other people. They weren't really worried about him. They were mostly worried that it would be embarrassing for the Church. And so what happens? He's not happy. He's not a drinking man, but he does think he'd like to have a cigarette. Looks up and down this long street of houses, and there's no tobacconist. And he thinks: That's odd, there's no tobacconist on this whole long street. He has a little bit of money saved up because he had no expenses the whole time he'd been living there; and he rents a place, buys a few supplies, and opens a tobacco shop. And works really hard; and before long is able to open another tobacco shop. And his rule is pretty simple--he can't read or write, but he walks around neighborhoods and the place where there is no tobacconist for 3 or 4 blocks, he opens one. It's very small. It's the Starbucks model. With very low costs. He's going to hit 'em where they ain't, as Willie Keeler said about baseball. He ended up with 10 tobacco shops. And after a period of 15 years he had saved up 100,000 pounds--gigantic fortune. From his profits. He had saved up from the excess of his revenues over his costs, 100,000 dollars, and those were profits. Those were evidence that people found the products that he was selling cheap, convenient; and it was repeat business in the sense that they kept coming back. In some ways, tobacco is tobacco; but it was low-priced and it was low-cost because I could just walk half a block instead of four blocks to another tobacconist. He had made a large amount of money on very small increments by giving people what they wanted. Now maybe it's unfortunate that this is tobacco; it's not okay that this is tobacco now. But when he wrote it, it was a more beautiful, inspiring story. At the time, yes. Tobacco was an okay thing to sell; in fact, movie stars would smoke on screen. And athletes would sell them and advertise them. Well, he's worried about having all this cash--at the time, it was a fortune. So, he goes to the bank to deposit it, and the man at the bank is very impressed that he managed to save all of this just from simple profits just from this simple trade. And gives him some forms to sign. And the ex-verger says: I'm sorry, I can't read or write; I'll need to get somebody to read these for me. And the banker is incredulous, and says: You have amassed this fortune; you can't read and write; imagine what you could have done if you could read and write. And Foreman says: Well, I know the answer to that. I would be the Verger at St. Peter's.
45:36It's a little Somerset Maugham humor. Economist and the stock brokers. It's an unusual Somerset Maugham story because it ends with that little punchline. It is sort of a shaggy dog joke. You might see it coming, but you also might not. Well, this guy doesn't deserve profits in the sense that he did something very simple. He can't even read or write. He is not someone like Steve Jobs, who sort of transcended genius. This is a guy who said: You know, I think I can make some money. And he had no vocation for selling tobacco. He didn't pick it. He's like the mancgere in that way. The only reason he picked this was he thought he could make profits from doing it. He had no deeper motives to say: All right, I want to help people. It was tobacco. He was selling cigarettes and pipe tobacco and supplies. And made a pretty large fortune simply by filling a need that no one was aware of. And that's the hard thing about profits--if you are aware, you make a guess about what it is that people would like. And if you are right, you make profits. I am motivated to do something that no one else has even noticed. So, it's not a policy question we are debating in Congress where we pick A or B. We don't know that B exists. We don't know that C exists. This alternative has not even been raised. It's something new. So, here's what I challenge my students with, if I used that in my class. Maybe I should; it's a great story. So he creates, he discovers, implicitly knowledge that wasn't there before, which is there aren't enough tobacconists in this location, where he has put his 10 shops. Now that he's done that, that's done. So, what we should do is we should take away his franchises and run them through the government as state-owned tobacco shops, and lower the price to a place where--again, neglecting the fact that people now say tobacco is a bad thing, but we do this literally with alcohol, although we don't always lower the price--we're going to take this knowledge that he's created; we are going to lower the price, and we are going to give people the benefit of this discovery. It's already been done; he got some profit out of it; and now that's enough. Let's not let him continue to exploit people. Because he's charging more than it costs him; and we know that because he's making profits. A lot, over time. And so, we can do a public service by nationalizing his tobacco shops and running them for the benefit of the people instead of the benefit of this illiterate. Because this guy--maybe he's okay, but he has gotten what he deserves and at this point he is behaving immorally by charging a price that's actually higher than it needs to be in order to sustain the service. They are ill-begotten; in fact, this is again the efficiency argument--I'm going to argue it's run amuck--but the argument would be: He's already created the value and he's had enough; let other people do it. Now, the standard argument against that is: Well, that will discourage people in the future. And the response would be: Well, not much, because he's got to make 100,000 pounds. We didn't take it all from him. We didn't say: You get nothing. We're just going to take the future benefit. He's got enough. I've got an argument against that, but what's yours, Mike? Fundamentally what we've already talked about is the problem of autonomy as a presumption. And we've talked about the John Stuart Mill observation that the things, once there, we somehow think, if you accept the argument you just made, that we know enough to be able to say how much is enough. The autonomy claim is the one that I think I find more persuasive, because otherwise you are in the position of power, where the government would say: We are going to take it. He would hire a lawyer, and everyone at every point in time is trying to justify their property. That sort of tenuousness--I mean, maybe the government operating it would be at lower cost. Maybe it wouldn't. Subjecting him to a continued profit test means that he is actually providing the service that people want at a cost that's lower than the amount they are willing to pay for it. Once the government starts to provide it, we no longer have that information. I think the last point is the key point, which is: Maybe there are going to be new ways of providing tobacco more cheaply. Maybe there's new products to be provided. All those incentives would be destroyed. And we have no idea. And we shouldn't look. Or, maybe there shouldn't be tobacco shops there after a while--which turned out to be the case, as tobacco was decided, found to be harmful--we don't have to make that decision. The consumers are going to stop buying there because they are going to be cutting back on the tobacco. Why not have a shop every 12 blocks instead of every 3? All those decisions, all that information that's dispersed is solved by letting people pursue profit. And of course we'd also say: Well, let's let new tobacco shops open that might drive the price down. And mean that he won't make as much money down the road. We'd expect him to make money in the beginning; he found something that wasn't there. But other people might compete and open a shop across the street. He might, because he has 10 shops, be able to do what Walmart has done and take advantage of economies of scale in purchasing. We don't have enough information. The fact that profits are earned or not earned is a really important piece of information; and it provides motivation. So both the decentralized incentives to act in certain ways and the information about scarcity is something that you are giving up if you say we are going to have the government operate this. And it's a very difficult argument to persuade people of. Because the argument you gave makes so much sense. Okay, we know; now we can do it at a lower price; now we are going to cut out the middleman and there's not going to be any profits. It's always tempting. And of course tobacco smokers really find it appealing. We always have to remember it's a bootlegger-and-baptist argument. The direct beneficiaries of this are going to describe the benefits for society at large but they just might want a cheaper smoke.
52:24Do you want to talk about The Padre? We've talked about it several times, and in fact it was in a conversation with you that I first realized what an interesting example it was. The way that it worked was a man named Radford, an economist, was captured by the Germans and put into a prison-of-war camp in 1944. And they got these Red Cross packages once a month; and they all had exactly the same contents. So, we're in a sort of thought-experiment world where everyone has the same endowments but different preferences. And it might be that for a while I noticed that you didn't eat your tinned carrots because you don't like them and were going to throw them away; and I said: I'll tell you what. Why don't you just give those to me? And Radford said they quickly, very soon after capture people realized it was both undesirable and unnecessary, in view of the limited size and equality of supplies, to give away or accept gifts. Good will developed into trading as a more equitable means of maximizing individual satisfaction. Isn't that amazing? Good will developed into trading as a more equitable means of maximizing individual satisfaction. Otherwise, I might say, every month: I expect you to give me can of carrots. But somebody else would actually give you one cigarette for the can of carrots, where I was expecting them for free. So if I give you something, it's a one-time thing. But since this is repeated, over and over, every month we get the Red Cross package, we think that trade is more equitable than good will. I think that is a remarkable observation. That is a remarkable observation. It reminds me of the person who collects something. Might be knick-knacks that have a particular animal--there are people who collect dog items or pig items or whatever it is. And after a while everyone realizes this is easy now: I can find an easy knick-knack/gift they have for them, I just have to locate this theme. Sports, or whatever it is. Of course, sometimes a person gets tired of that, decides to drop the hobby. And they never buy another one for themselves. But they keep getting those gifts. Oh, another pig! Oh, that's great! But anyway, sorry: Carry on. So Radford then describes what he says was a priest with a sharp eye for exchanges. Stories circulated with a Padre who started off 'round the camp with a tin of cheese and 5 cigarettes. And returned to his bed with a complete Red Cross personal to his original cheese and cigarettes. So, what this guy did was he started out with a small amount of stuff; bought low, sold high. And ended up with a complete Red Cross package, which was of considerable value--some amount of cigarettes, some beef, some marmalade, some chocolate. Produced nothing of value. All he did was extract stuff from other folks. Take and take and take. He should be beaten. Well, less for everyone else. You can't deny that. Because the claim is: He not only got a different mix of stuff. He has the same mix he started with, plus everything else. Which because there is a fixed amount, there is no production in this society. Which is why it is interesting in this experiment. He clearly extracted stuff from folks. And yet he was probably doing good in the camp. That certainly not the view. That was certainly not someone you should emulate. This was someone who was evil. They called it "sharp practices." When I was talking to this, I thought it was kind of cool. Your reaction to it made me realize this is absolutely fundamental to a significant question in philosophy. I've actually written two papers about it since. And it's the Rawls/Nozick debate. The problem goes like this. How can there be a justification for redistributive taxation, taking from the wealthy and giving to the poor, if every individual transaction that made me rich actually creates benefits for the poor? Now, fraud--that would be a problem. Coercion--I hold a gun to your head and make you engage in a transaction--that would be a problem. But the premise of this example seems to be the Padre went up to a bunch of different people and said: I have something; I'll give it to you if you give me something. And in every instance--in every instance--the partner in the trade thought he would be made better off. And if we allow that subjectively people are autonomous, and informed--and in this case, they are. Because they know what's in the tin. They know it's not fraud. He made every single person better off. So the fact that he made significant profits was actually evidence that he had performed a brokering function. There was a person, A, let's call them, who would like to exchange at a certain price; and there is another person, B, who would be willing to take that price and give A something that he wants. And they've never met. The Padre acted as middleman or go-between, making both A and B better off. And implicitly letting them trade via him. But he took his own little slice. But the slice by definition has to be less than the total value or benefit that is created by the transaction between A and B if it happened. He can only make money if A is better off and B is better off. He takes some slice, but they both have to be better off. By definition, if it's a voluntary transaction.
58:17And so, to take the analogy with the Verger: It's obvious how to make this camp better off. We ban the Padre. We just get A and B together without the Padre's slice. And there's even more for A and B. Because they would have gotten the slice. The slice reserved for the Padre. Who did nothing. He did nothing except be a parasite. But the problem with that is, A and B can't find each other. It's a big camp. Furthermore, as Radford points out: This was a symptom of sort of a new camp where prices were not yet unified. Actually, what happened was that the Verger--forgive me, the Padre--the thing that he did, if prices were high in one part of the camp, he would go and sell a bunch of stuff, driving the price down. And he would take it to the place where prices were low. And that's where he would buy what he sold. By buying low and selling high actually drove the price together. He picked up the $20 bill. There was no $20 bill any more. So, they did find each other. They found each other by posting prices on a bulletin board. But the Padre had business eventually. Yes. But you want to pick up the $20 bill. That's what entrepreneurship does. It means that there are no mistakes; there is no misallocation. If I eat a tin of carrots, when there is somebody out there who will give me chocolates for it but I don't know it, that's a misallocation. If I give my carrots and get my chocolate, we are both better off. All that the Padre did was correct errors. He picked up the $20 bill. It's true that after his activities, there was no more to pick up. But the question is: Why would that ever be a justification for saying you have too much money, that's evil, that's a prima facie evil and we're going to take it and give it back? Because he was motivated by the profits. The reason that he did this was he wanted to collect that little slice.
1:00:35I'm going to give a counterpoint to that argument, which you may not agree with. When, in the aftermath of the 2008 financial crisis, I've seen this quoted. I've tried to Google it; it's a little hard to find; it may not be an exact quote. But this is how the paraphrase started to get into general parlance. Which was that Lloyd Blankfein, who was the head of Goldman Sachs, said: Well, we're entitled to our profits because "we are doing God's work". And by that, he meant: We're allocating capital to its highest use. When I heard that, I thought: Hmmm. Trillions of dollars going into the housing market does not strike me as allocating capital going to its highest use. And that perhaps, as long-time listeners know, perhaps the source of that profit was the opportunity to avoid losses that had been public policy for a while. Which allowed Wall Street firms, investment banks, to borrow a lot of money rather than use equity in investment. And the lenders of that money were less prudent than they otherwise would be because they thought they would get it back. And it turns out they did. Almost none of the creditors and bond-holders lost money after 2008. Very few. And so, in that case, those profits were not particularly well-earned. They were not providing a public service. What are your thoughts on that? There's two ways to earn profits. One is to create things that other people value at a price that is below what they are willing to pay, at a cost below what they are willing to pay. The other is rent-seeking. Particularly investing in the political process. In this case, to enlist the government as a co-signer on our loans. If I win, I get to keep it. If I lose, somebody else will pay. Those profits were ill-gotten. So, one solution would be to take them back after the fact. I would say the solution is not to make those sorts of promises in the first place. We've talked about the problem of power. Once the authority has the power to make those sorts of deals, it's not irrational for companies to "invest" in the political process, because they can make more profits by doing that. From the perspective of the investor, rent-seeking and profits are indistinguishable. But from the society's perspective, there is a big difference. So, I'd like to get government out of that business in the first place. But sure, given what we had done, Goldman Sachs did not deserve those profits. But it's a little late, after they've already misallocated all of those investment resources into housing markets where they shouldn't have been in the first place. So, far from correcting misallocations, these perverse incentives increased the misallocations. They got profits. We made good on their loss. It's hard to think of a worse policy.