EconTalk |
Robert Frank on Dinner Table Economics
Jan 4 2016

dinner table.jpg How can you learn to think like an economist? One way is to think about what might be called dinner table economics--puzzles or patterns that arise in everyday life that would be good to understand. Robert Frank of Cornell University and author of The Economic Naturalist talks with EconTalk host Russ Roberts about a number of these puzzles including why grooms typically rent tuxedos but the bride usually buys her gown, why bicycles can be more expensive to rent than cars, the effects of the price of corn on the price of pork, and why scammers who invoke Nigeria keep using the same old story.

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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.


Jan 4 2016 at 1:01pm

I enjoyed the admission of accepting invitations to formal events just because the guest already owned a tuxedo.

But if “Getting one’s money worth” is the name of the game, or as I understand it bringing down the cost-per-wear, why not just rock that bad boy to any event? Church, professional sporting event, job interview, eating a street-vendor hot dog.

There’s a lot of utility to be gained from being the insanely over-dressed man. Bonus points for top-hat.

Mike B
Jan 4 2016 at 5:37pm

A quick reply to the bike rental / car rental conundrum:

The utility of a car vs. the utility of a bike is much more widespread across the country. Unless you plan on staying within a city center, and that city is well equipped for bike riding (bike lanes + relatively flat surface) then the utility derived from a bike is much less than a car. A car can take you many places, carry your things, etc. So in this sense it is a scale issue.

If you do have a city where biking can be efficient then we have seen projects that have led to increased efficiency in bike rentals. In NYC you can rent a bike in less time than a car rental, its a swipe of a credit card plus any easy raise/lowering of your seat. Citi Bike stations are all over lower/midtown manhattan (and a good chunk of Brooklyn) the cost of renting is $10 per day, $25 a week, or $150 for the year. This would be much cheaper than renting a car, and when considering travel times and congestion in this area of NYC, it can often be a time saving, plus other utility derived (exercise, cost, etc.)

An issue in the bike/car debate is how over the years our policies have subsidized car ownership and urban sprawl, making the use of bikes less efficient. The only reason bike share is potentially viable in NYC now is because of the policies of reversing this.. removing parking spaces for bike racks, adding bike lanes etc.

Lastly I would be interested in knowing the numbers of people who have a drivers license, or are of age to have one vs. people of same age who know the basics of how to operate a bike (how to raise/lower a seat, how to pump air in the tires, and how to change gears). There is no reason why it should take 30 minutes to rent a bike unless you have to explain to the renter how bicycles work. Imagine how long it would take to rent a car if you had to explain to renters how driving a car works.

Russ Roberts
Jan 4 2016 at 6:03pm

Evidently, bike sharing systems lose money and are subsidized by the government so the prices in those systems are not really comparable.

Jason J. Ayala P.
Jan 4 2016 at 10:07pm

I enjoyed the wedding dress discussion. Would inventory costs really be that high? Is there no entrepreneur who could solve the problem? I can agree, but only after stating it in another way: Though many would be willing to “sell back” their dresses after the wedding (lots of supply), even for a fraction, few would be willing to rent a used, perhaps not-fully-customized dress unless the price was very low (low demand). Hence, there’s not enough profit to cover inventory costs.

Mort Dubois
Jan 4 2016 at 10:10pm

Interesting episode. It’s always nice to hear a couple of academics talk about business, untroubled by their lack of experience in running one. That said, I have a couple of thoughts:

Pigs: I agree that prices will rise in the short term and rise in the long term, but let me offer an alternative explanation, based on the cash flow requirements. What happens when corn cost suddenly rises? The cost of sustaining operations until sale jumps, and the rate of cash burn goes up as well. So the farmer has two options for raising cash: borrow it, or convert some existing inventory into cash. The farmer may already have maxed out the line of credit available based on current operating costs and expected sales prices, and will definitely have to pay more to replace the pigs in the future. So there’s strong incentive to sell now to raise cash, leading to an increase in supply in the market, and lower prices in the short term. The amount of cash raised will be in proportion to the cost of borrowing, and the increase in cost of keeping a pig alive for a given amount of time, not to the yield on savings.

Bikes: renting bikes and renting cars are so different from each other in every way that it doesn’t make much sense to compare them. Aside from the disparities in scale, there are also huge disparities within the bike rental market. I’ve rented an expensive mountain bike in Moab, Utah, and that was a very different experience from the crappy clunker that I rented from a resort hotel in Wisconsin. The user experience for rentals is dependent on a complex interaction of the quality of the bike (which varies much more than cars), the quality of the shop employees (in many places, like hotels, the people renting bikes have no idea how to keep them running), the amount of local competition, and the average expected customer.

Most bikes are designed with a single rider in mind, who will presumably adjust it to fit themselves, once, and then enjoy many rides. Your bike in Boulder was probably one of those. (I won’t speculate on the relationship between legal pot in Colorado, the type of person who works in a bike shop, and the speed of customer service.) I’ve noticed that the bikes one finds in city bike-share programs, which are purchased in bulk by highly capitalized operators, and designed for quick adjustment for a wide range of body types, are much quicker and easier to put into service. They are also much simpler and tougher than your average bike.

Thanks for an interesting episode. Which reminds me: some years back you posed a question about what would happen to coffee cup sizes if the price of the coffee went up, or something like that. You never told us your answer. So what is it?

Michael Byrnes
Jan 4 2016 at 10:59pm

Another issue with bike vs car rentals is that in most places bike rentals are a seasonal business, whereas car rentals operate year-round.

Also, perhaps it is easier to steal (and resell) a bike than a car, so maybe greater losses due to theft in a bike rental business?

On the wedding dress vs. tux issue… at most weddings, all of the groomsmen are outfitted in the same style of rented tux wheras bridesmaids obviously are not outfitted in the same style of dress as the bride. If rental of dresses was going to work, it would probably be rental of bridesmaids dresses rather than wedding dresses. Probably still not going to work, though.

On the idea of buying a tux because there are many occassions to wear one… I think it would have to be a lot of occasions before a rental stops making sense.

Jan 5 2016 at 12:00am

This was fun and I would encourage doing this on a regular basis: “puzzles solved by the economic way of thinking”. Steve Landsburg’s book, the Armchair Economist, is filled with similar examples, and he’d be a great guest for this as well.

I have a quibble. In discussing the old wine you both agreed that the wine would have to appreciate at least as fast as the available interest rate that could be earned. You made the same point in a few other examples. It’s a frequent simplification but leaves too much out. Especially in an era of low interest rates, it’s worth mentioning that the relevant measure (or real opportunity cost) is the interest rate plus storage costs. The latter can easily overwhelm interest earned nowadays. Foregone interest is only a part of the full opportunity cost in the real world. The wine, like any other storable commodity would in need to appreciate at the foregone interest rate plus daily/monthly/annual storage costs.

Anyone familiar with futures & forward markets knows the principle–the futures/forward price is equal to spot price + interest + costs – yield (such as dividends or coupon).

Mike B
Jan 5 2016 at 12:20am

Yes, bike shares are largely subsidized. But not nearly as subsidized as travel by motor vehicle, and therefore the car rental industry. Gas and tolls pay ~ 1/3rd of the cost of road maintenance. Not including hidden costs of pollution etc.

So in a very narrow view, you can say that bike sharing is more subsidized than private car rental, but you’re THE Russ Roberts, you don’t have narrow views.

All goes back to the point being that the success of a bike share is correlated to the support it receives from the city. Having a city that is more adept for vehicle travel than bike travel means less opportunity for profit, whereas a city built on biking and walking would see higher cost of driving (congestion, adequate tolls and gas taxes)

Jan 5 2016 at 9:45am

The wine question leaves out too many things that could be labelled as aesthetic. I am sure there are people who would place zero value on a certain wine until it had reached a certain age, as the whole point for them is to drink it at that age or not at all.

Also, the age to value relationship is not straightforward. Some wines age predictably well, some do not and some age well but we only find out after the fact. Maybe wine buying is more like gambling than shopping?

Jan 5 2016 at 10:19am

The wedding dress explanation didn’t sit well with me. The argument was that, given that woman want to make a fashion statement with their dresses, the rental company would need to keep a very large inventory of styles and sizes to accommodate women’s desire for uniqueness. And the costs of this huge inventory would make the rental prices as high or possibly higher than the purchase price.

But the inventory issue with the purchase market would be the same as for the rental market, no? If you want to sell a unique dress to a bride, you’d also need to keep large inventory around. And if the inventory costs is the same, it would still seem cheaper to spread the cost of a dress across a number of renters and create a market that would be mutually beneficial to buyers and sellers.

I know I should be hearing alarm bells, but Russ’ cash-on-the-table argument seems more consistent.

Cowboy Prof
Jan 5 2016 at 11:01am

I like this style of episodes and would like more (Pete Leeson, Pete Boettke, Don Boudreaux, and Mike Munger would all do well in this format, in addition to Robert Frank).

1. WEDDING DRESSES. I wasn’t fully satisfied with the discussion, and Michael Byrnes puts his finger on an issue I hadn’t thought about — why are bridesmaids’ dresses rented (and usually coordinated with the tux)?

Possible alternative answer: High-cost signalling behavior. This is the answer that is usually used for the purchase of diamond rings — in order to show long-term commitment, you need to give some “burnt offerings” (up-front, sacrificial cost) to indicate that the man (groom) is not going to take-off after the wedding ceremony. Could the dress the flipside for the female (bride)? By investing in a high-priced item that deteriorates in use rapidly, the bride signals that she is in it for the long haul? Granted, the money would come out of joint account (excepting a pre-nuptial agreement), but the same is true with the ring. I wonder if there is something to the sequencing of these “burnt offerings” that could be worthy of study. Pete Leeson, I’m looking at you. (Call me if you want to work on this.)

2. CAR RENTAL. At first, I thought the car rental puzzle was going to focus just on cars and the difference in rental between Florida and Duluth, MN. That one I thought was easy – simple price discrimination. Duluth rental is higher since it really isn’t a vacation spot, with more price sensitive consumers, but rather business travelers who work on a third-party account. When others are flipping the bill, like with airline seats, you can charge a bit more.

When turning to bicycles, my glib (tautological) answer is that “bike renters can charge more because they can” (the market knows more than the academic). However, less glibly, I would say there must be some sort of difference in consumers who want bicycles than for those who want cars. It may be that “vacation bicyclists” tend to be more upper class in their tastes and have more disposable income. Again, price discrimination on a quality of consumer we cannot quite figure out yet, but bike renters know. Whereas bicycles used to be for people who couldn’t afford cars, it seems to me it is for those rich folks who are rejecting their cars (but still have the Jaguar parked in the car hold).

Cowboy Prof
Jan 5 2016 at 11:06am

One other comment. I fully enjoyed the first fifteen minutes of the podcast about your pedagogical approach to teaching economics. You have talked about this before, but that was the pithiest discussion of it yet and you hit all the high notes.

I have shared this philosophy for at least 17 years since recalibrating my own political economy course away from a syllabus that was handed down to me, so it is no wonder why I gravitate to this program and urge my minions to listen regularly.


Jan 5 2016 at 1:14pm

Your Wine problem is wrong. You assume the price will be higher in the future, do you have a crystal ball? Nobody can predict the future. Not all wine gets better with age so the question is too vague. The best question is why are doctors and engineers working on issues that directly effect people held liable if wrong and economists aren’t liable in any way?

Jan 5 2016 at 2:20pm

I would posit that firearms would be a better example than wine. Firearms do not depreciate unless they are damaged in some way.
Also, the shoe thing struck this old warhorse as a wee bit odd. Of course black shoes shined in the old fashioned manner are acceptable for formal wear; the ‘super-shiny’ tuxedo shoes only exist for those folk who prefer to trade money (higher cost of patent leather shoes) for time/work (the effort required to spit-shine leather).
Additionally, count me as multiple tuxedo owner. I prefer the kilt rather than pants (as my grandfather called them “bloody Saxon trews”) for formal wear but I have several kilts and several different Prince Charlie jackets to go with each.

Jan 5 2016 at 3:14pm

while the bike sharing example might be subsidized by governments or corporations (Citi Bike in NYC), I think that the “sharing economy” might be able to solve (in theory) the bridal gown conundrum.

The podcast mentioned that the cost to a rental business of wedding dresses would is too large to be sustainable given that the inventory would need to be very large, in many sizes and styles, and individual dresses may never be rented.

However, if second-hand wedding gowns were offered for short-term rental by owners who wanted to monetize the garment sitting dormant in their closet – and if an internet-based marketplace could bring together many thousands of renters of dresses and borrowers – “uber for wedding dresses” if you will – then it could, indeed be viable. An individual renter of a particular dress would be better off renting it even *once* for whatever the daily rate is than having it sit dormant in the closet.

Logistics of getting the dresses to and from where they need to be, and alterations aside, this concept of peer-to-peer secondary markets could change the dynamics and make dress rentals a better do.

TSowell Fan
Jan 5 2016 at 4:07pm

One commenter mentioned that a market for rental bridesmaids dresses exists. In my experience, the styles and colors of those dresses vary more than for wedding gowns. Given that, the renter would have to carry more of each style, color and size because there are multiple women, not just one bride, attending each wedding. But, a quick Google search revealed that they do indeed exist. Perhaps, it works because the availability of lower-cost rental bridesmaids dresses causes brides and their attendants to choose from a reduced set of choices, ie to compromise.

Google also reveals that there is a market for rental wedding gowns, probably because of that ‘leaving cash on the table’ thingy:

Russ Roberts
Jan 5 2016 at 5:01pm

Mike B,

I should have made the purpose of my observation more transparent. Yes, cars are subsidized, too. (And taxed–gasoline being the obvious example.) But my point is that we want to look at the cost differences. After whatever subsidies and taxes are in place for cars, they tend to sell for $15,000 and above. Bikes that you rent at a bike shop at only hundreds of dollars rather than thousands. So you’d think it would be much cheaper to rent a bike. In practice, not so much. That suggests there are other costs that might keep sellers from competing and offering bikes more cheaply or there are non-obvious discounts (from manufacturers say) that make it profitable to charge relatively little to rent a car. The turnover factor is another not-so-obvious effect on the cost and price.

Given all of the above, my only point in the above comment was that because bike sharing programs are subsidized, it’s not surprising that they might be much cheaper than bike shop rentals and even possibly car rentals depending on the size of the subsidy.

Russ Roberts
Jan 5 2016 at 5:45pm


I didn’t mean to say that as you hold wine in your cellar, its value must go up. What I meant is that in general, older vintages sell for more than more recent ones. Maybe scotch is a better example. A 21 year old scotch that is newly offered on the market tends to sell for a higher price at the liquor store than a scotch that is aged. Yes, most people find the older scotch smoother. So they are willing to pay more. But that isn’t enough. If the costs were the same, I’d expect competition to drive the price down so that the prices were equal and if indeed everyone prefers smoother scotch to rough scotch, there simply wouldn’t be any young, rough scotch available for sale. There’d be no point. The older scotch would dominate. But the costs can’t be the same. The older scotch has the cost to the distiller of keeping the scotch in the cask rather than selling it now and investing the revenue.

On the flip side, if you hold your wine until it becomes vinegar, you won’t get a premium simply because you had higher costs tying up your money in the wine.

Michael Byrnes
Jan 5 2016 at 7:14pm

TSowell fan wrote:

One commenter mentioned that a market for rental bridesmaids dresses exists. In my experience, the styles and colors of those dresses vary more than for wedding gowns.

I think my comment was misunderstood. I don’t think a market for rental bridesmaid dresses exists, only that such a market is more likely to exist than one for rental wedding dresses. But the more I think about it the more I think such a market would be a disaster. Among other fatal flaws, not every bride has the same number of bridesmaids. A bridesmaid rental shop would need to hold more dresses in inventory than it could ever hope to rent.

I amagine there is a market niche there for some brides and bridesamids (as your google seach showed) but until cultural sensibilities shift radically it won’t be much more than a niche.

Jan 5 2016 at 11:45pm

Tying the price that wine sellers are able to command for old wine to the fact that wine sellers need to be compensated for not spending their time and money doing else seems at best incomplete. If that were the main driver, then you would could expect that any old good would command a premium just by virtue of being old. However, I don’t think I would be successful trying to sell a 30 year old computer at a high premium.

There must be something somewhat particular to wine in this case. It seems to me more to do with scarcity, somewhat justified claims of increased quality, and good branding. Otherwise the argument becomes “I must be able to command a high price now or otherwise I would have acted irrationally by storing this wine all this time”, which seems to have an odd relationship with time and causation.

Something has value only if a customer sees the value, no? Then why are we focusing on the supplier cost structure to explain the market price?

Michael Byrnes
Jan 6 2016 at 6:54am

KT wrote:

Tying the price that wine sellers are able to command for old wine to the fact that wine sellers need to be compensated for not spending their time and money doing else seems at best incomplete. If that were the main driver, then you would could expect that any old good would command a premium just by virtue of being old. However, I don’t think I would be successful trying to sell a 30 year old computer at a high premium.

The idea is that a producer of wine can sell his inventory immediately if he so chooses, investing the proceeds in the stock market or back into his own business, and he can expect a positive return on that investment.

Or, he can hold back some of his inventory, foregoing investment returns and incurring storage costs; in effect, leaving some of his capital tied up in the stored product.

Why would he choose to incur such costs (both direct costs of storage and opportunity cost of having his capital tied up)? Because he expects to be able to sell that wine at a higher price (enough so to offset those costs) after aging it. If he doesn’t expect to make a profit by holding the wine, he will not do it.

Lots of table wines are not stored long-term because there is no benefit to doing so – the mere fact of storing a wine does not impart value. Only those wines that a producer believes will benefit from storage will be stored.

Jan 6 2016 at 7:50am

I really liked and learned a lot from the USNews article Russ suggested in an earlier comment, focusing on the cost-benefit problems of bike rentals in big cities.

I just want to add to the mix that one of the evident big-cost items mentioned regarding repositioning cars and bikes–transporting the equipment between high- and low-demand areas to accommodate peak demands–is pretty easy to address with the computerized pick-up and return software already in place for at least some big city bike rental companies such as Citi Bike in NYC.

Just give a discount or computerized rebate to those returning bikes during peak periods to any stations where the pickup demand is known to be high at those hours, or expected to be high in the next few hours. A discount or credit would provide an obvious incentive for subscription bike riders to drop off bikes in known high-pickup areas during peak pickup periods. (Car renters are similarly incentivized with lower rates when repositioning cars, though no one seems to discuss that discount.) Or charge a small premium to pick up a bike from a peak-demand station during the rush hour period. Or a bit of each.

I think any business owner gets this and has many other creative entrepreneurial ideas. Likely some companies such as Citi Bike in the NYC area get this. They certainly have the software in place already for it. My main question is: are bike rental companies such as Citi Bike allowed to charge differential rates when they are contracted to the city in which they locate and accept services? It’s possible their contract with their city of operation–so, Citi Bike in NYC?–doesn’t allow such creative, interactive, responsive flexibility. They may even be able to survive without any kind of government dole in NYC; but the big question is: Are they ready to take that plunge?

Jan 6 2016 at 1:52pm

Regarding the Tuxedo comment about wearing it whenever and whereever — “just rock that bad boy to any event” — I heartily agree. However, it’s good also to remember that tuxedos are properly evening wear. If rocking it for lunch or a morning interview, you’re not actually overdressed, but rather improperly dressed. Sometimes it’s nice to work within the convention (NB: for non-evening events get a morning suit!)

Jan 6 2016 at 8:03pm

Michael Byrnes wrote:

Why would he choose to incur such costs (both direct costs of storage and opportunity cost of having his capital tied up)? Because he expects to be able to sell that wine at a higher price (enough so to offset those costs) after aging it. If he doesn’t expect to make a profit by holding the wine, he will not do it.

I agree that a wine seller would not hold onto inventory unless he has an expectation of earning a higher return on it by doing so. But that’s not quite the same as explaining the market price that bottle of wine actually gets in the future. It only speaks to the presence of supply.

In order to have a market price, you need to explain the heightened demand too. Otherwise you’re not cutting with both sides of the scissors, as they say in the podcast.

A good cannot become valuable simply because of the effort or costs incurred by the producer. A good is valuable and therefore can command a high price only if there is demand for it. Tying the price of an old bottle of wine to the storage costs incurred seems both to depend on sunk costs and only the supplier’s point of view. It seems more reasonable economically to me to explain the high price in terms of customer expectations, only then explaining the supply by what the supplier could have rationally expected years before.

If the bottle of wine becomes more expensive because of the forgone investment opportunity, wouldn’t we be creating some kind of storage (labor) theory of value?

Michael Byrnes
Jan 6 2016 at 10:18pm

KT wrote:

A good cannot become valuable simply because of the effort or costs incurred by the producer. A good is valuable and therefore can command a high price only if there is demand for it. Tying the price of an old bottle of wine to the storage costs incurred seems both to depend on sunk costs and only the supplier’s point of view.

I don’t mean to suggest otherwise. The price of a bottle of wine, aged or not, is set by demand (ie, customers’ willingness to pay). But producers are only going to be willing to make that investment for wines which they expect to benefit from aging. And they are not going to invest in an asset whose expected return is lower than their other potential investment opportunties.

Well, they might, because they don’t have perfect knowledge of the returns on all potential investments. But in general, they will try to invest in the resources that benefit most from that investment.

Jan 7 2016 at 6:56am

Another reason the price of pork should decline in the short run is that farmers may decide to shrink their ‘herd’ because the equilibrium demand for pork is now lower with the higher price of corn.

One way to make that adjustment is to murder some pigs you have now.

Jan 7 2016 at 12:42pm

Great episode! I just wanted to add a data point to the wedding dress discussion.

My wife and I got married in 2010 in northern Virginia. She is of Korean descent. She actually DID rent her wedding dress. It was from a Korean shop in Annandale and I am told rentals are typical among the Korean community here.

The rental actually included two dresses (one for the church ceremony and another for the reception), which provides some extra fashion opportunities.

The rental business also offers planning services, makeup artists for thr bride and bridesmaids, and referrals for photographers, florists, etc. Some of which we took advantage of, some we did not, but certainly those added services are part of the overall experience / value proposition too.

Which makes me wonder how much of the traditional US practice of buying dresses is a cultural quirk rather than hard economic necessity. Or maybe the broader range of services offered makes this the exception that proves the rule? I would be interested to hear others’ takes on this example.

Another Rob
Jan 7 2016 at 2:41pm

I think one important reason you see fewer scam e-mails these days is that spam filters have become much better at detecting them and weeding them out before they get to your inbox (at least, that applies to Gmail).

Russ Roberts
Jan 7 2016 at 3:48pm

Cowboy Prof,

In general, you need some sort of monopoly power to use price discrimination. Or an implicit cartel. Otherwise, even if the demand in Duluth is relatively inelastic because it is business travelers, I’d expect competition among the multiple number of car rental companies (along with the new competition from Uber and other relatively pleasant alternatives–car rentals by individuals) to drive the price down to near the cost. If it is much more expensive to rent a car in Duluth than say Miami, that suggests the cost is higher in Duluth. What I was suggesting in this episode is that if turnover is relatively low, then the cost of renting will be fairly high. As a renter, I have to pay a premium to reserve the car because the fixed costs of renting (the purchase price of the car) is going to be spread over fewer rentals.

Luke J
Jan 7 2016 at 6:15pm

I am sure in this discussion that R.Roberts and R.Frank did little to justify the importance of retaining econ principles post course completion. With the exception of the price of wine, these examples seem to apply only to the unicorn universe. Why would in the real world care?

The pig-corn example had too many unstated assumptions as to produce any kind of “right” or “wrong” answer. Basically, the correct answer is “prices can go up or down or remain constant in the short, mid, and long-term, depending upon what I think the professor is assuming in the example.”

Wedding dress rentals… my wife was rolling her eyes in the car. Many women do rent dresses, and women’s clothing stores can and do stock many sizes and fits. It is just goofy to presume a store could not rent dresses, or sell at a discount and still realize a profit, and leave enough market share for higher-priced stores to also profit. One woman can pay $10K on a dress, and another woman $100 on a very suitable wedding gown. Renting vs. buying isn’t about supplier cost only, but also consumer preferences, which was mentioned but dismissed as almost irrelevant.

Car rental vs Bike rental: lots of good points in this example, but I was surprised that neither Roberts nor Frank mentioned theft. Rental bicycles are much more likely to be thieved than rental cars, and those stolen represent a greater loss (both nominally and % of inventory) to bike rental companies than car rental companies.

I really enjoy Economics and EconTalk but this podcast illustrated why many people dismiss economics as not based in reality.

John N
Jan 8 2016 at 12:10am

I was very surprised to hear Frank attribute the price of old wine to the supply-side costs. The price of vintage wine is high for one reason only: consumers are willing to pay a high price for vintage wine.

If the high price was simply a reflection of the cost of storing the wine (including the implicit opportunity cost of tying up capital), we’d expect all wines to appreciate at roughly the same rate. That doesn’t happen. The price of a vintage bottle of wine is far more a function of that wine’s desirability – either it tastes better once it’s aged, or that particular grape, terroir or vintage is currently in fashion. Whatever the reason, the consumer values that wine at a higher price than the new wine.

Frank’s got it entirely the wrong way round – cellars are prepared to bear the cost of storing wine and typing up capital because they expect to be able to sell it for a higher price in future. Wines don’t sell for a higher price because a cellar has borne the cost of storage in the past.

Of course, there’s a survivor bias happening as well. Cheap wines are drunk quickly (cf beaujolais nouveau), whereas better wines are put aside for a special occasion. Therefore old wines that aren’t yet old start off valuable (and then continue to appreciate).

Daniel Barkalow
Jan 8 2016 at 2:47am

I think some of the ways the puzzles were presented were fishing for “wrong” answers; e.g., in the wine example, saying “Why does old wine sell for more than new wine?” suggests that you’re presupposing that both are available in the store and both are sensible to stock, and you’re asking why there’s demand for both at the asking price. But you’re really asking, “Why do stores only stock old things of types which are worth so much more when they’re old?” Alternatively, “Why are stores willing to sell wine that hasn’t yet reached its maximum value?” That would naturally lead to trying to explain the aspect of the market that your answer explains.

Michael Byrnes
Jan 8 2016 at 6:56am

John N wrote:

I was very surprised to hear Frank attribute the price of old wine to the supply-side costs. The price of vintage wine is high for one reason only: consumers are willing to pay a high price for vintage wine.

I don’t think he did this – his context was opportunity cost.

Russ Roberts
Jan 8 2016 at 9:51am

There remains some confusion here in the comments not just about the particulars of the examples that Bob Frank and I discussed but also with the general approach we were taking.

Of course economists don’t know much about “reality.” We don’t know the details of the wedding dress market, or wine sales, or car rentals, or many many other complicated real world examples. And we necessarily abstract from many of those details. The goal of that abstraction is to hone in one aspect of reality that might otherwise be hard to see.

I’m not surprised that a woman can rent a wedding dress. And sometimes, particularly in poorer countries, they don’t even rent. They borrow. But the interesting part is why anyone buys given the unlikelihood that they will wear the dress again. That’s what we were exploring in the conversation. Renting is actually likely to be more expensive than you might think. Or more precisely, renting in a world where a lot of people want a somewhat unusual or particular style for either fashion or fitting reasons is going to be more expensive than you might think.

On the wine issue, there is of course uncertainty about appreciation and yes, how much people are willing to pay does matter. But being willing to pay a lot is necessary for a high observed price in the market. It’s not sufficient. The point worth understanding is that costs matter. Because if costs of providing a service are low, the price will be low even if consumers are willing to pay a high price, as long as there is sufficient competition. In the real world, there might not be much competition so that sometimes, low cost items sell for a lot because consumers are willing to pay a lot. But that doesn’t change the insight we’re trying to convey which is the power of competition.

The goal isn’t to get the “real” right answer on these kinds of problems, whatever that means. I have no idea what the right answer really is. The world is a complicated place. The question is what can economics help us understand that we might not have understood otherwise. That’s what we’re trying to illuminate. I’m trying to enhance your sense of imagination.

Ben R
Jan 8 2016 at 3:37pm

I think you got the rent/buy tuxedos/wedding dresses problem exactly wrong. The correct answer is that the tuxedo rental market is *much larger* than a wedding dress rental market could ever be.

A wedding dress store has substantial inventory costs regardless of whether it is renting or selling. (It is true that a wedding dress store would have higher inventory costs than a tuxedo store—from more different sizes, styles changing more frequently.)

But the more important difference is that tuxedos are used much more, so rental tuxedos have higher utilization that rental wedding dresses could hope. In the same geographical area, the market for tuxedos is one to two orders of magnitude larger than the market for wedding dresses. (The average woman wears a wedding dress about once in her lifetime; the average man wears a tuxedo many more times.)

If I’m right, then perhaps in larger market areas, like Manhattan or Los Angeles, you would see rental wedding dresses. Or possibly over the Internet. Indeed, see this NY Times story [1].

I think inventory utilization is also a part of the explanation for why rental car rates differ. A company that can reliably rent its cars out every day can offer lower rates than one that has fewer rentals, but has to deal with occasional surges because a conference comes to town. However, there are other factors going on here, too, and I am not sure your observation (vacation areas cheaper than non-vacation areas) is entirely correct.


Matěj Cepl
Jan 8 2016 at 6:22pm

One comment about tuxedo’s and bride’s gowns: I believe in most of Europe bridegrooms don’t have tuxedos but a business suite (obviously their own) and most brides I heard about (that could be the Eastern Europe thing, I live in Prague, Czechia) rent their gowns. Rental stores claim they can use gowns only four times on average (for reasons you described) but still they are substantially cheaper than having a new one.

How much of the factor is a buying power of the average American, i.e., you guys don’t know what to do with your money? How much is the signaling factor (i.e., bride wants to show wealth of her parents)?

Great show, thanks.

Jeffrey C
Jan 9 2016 at 12:25am

I like the idea of trying to encourage the economic way of thinking, but I wonder if the economic way of thinking is really something else. I think the economic way of thinking really comes down to curiosity. It is wanting to understand the seen and the unseen of any situation. For me the study of economics came very easily because I felt it provided useful answers to questions that I was intensely curious about. It also gave me new questions to be curious about. There is no substitute for wanting to learn something.

Regarding the wedding dress example, I think my sister is the exception that proves the rule. There were really a couple of reasons that she went against the grain, and rented her dress. First as opposed to the brides mentioned in the show she was just not that interested in having a unique and special dress. On a more practical note, she did not want to own a wedding dress. After the wedding, it is just another thing to store. So as per the discussion dress rental only works if the brides are not all that picky about the dress.

John N
Jan 9 2016 at 1:34am

Russ wrote:

The goal isn’t to get the “real” right answer on these kinds of problems, whatever that means. I have no idea what the right answer really is. The world is a complicated place. The question is what can economics help us understand that we might not have understood otherwise. That’s what we’re trying to illuminate. I’m trying to enhance your sense of imagination.

Absolutely right. I neglected to mention in my previous post that I really enjoyed this week’s format, and was playing along at home by pausing in the right places. As ever, Russ’s and Robert’s incites were thought-provoking and challenging, and the number of comments on this episode show that people were engaged and want to share their own thoughts. That’s a feature, not a bug ☺

Russ wrote:

The point worth understanding is that costs matter. Because if costs of providing a service are low, the price will be low even if consumers are willing to pay a high price, as long as there is sufficient competition.

In a market like corn, which is deep (both on the producer and consumer side), is for a fungible commodity, has very good knowledge symmetry, and has a stable and predictable demand, then Russ is 100% correct – competition forces the price down to close to the cost, and the consumer captures almost all of the surplus. It’s not obvious to me that the same is true for vintage wines, which is a comparatively shallow market, where the products are unique or low volume and not fungible, where there is a lot of knowledge asymmetry, and where the demand for a particular wine is not predictable.

A cellar may store many different kinds of wine, some of which appreciate a lot because they turn out to be a particularly good vintage or the type of wine becomes popular, some of which appreciate a little, and some of which spoil or depreciate in value. That simple fact should be enough to make us think that there’s more to the price than the costs of production or storage.

Of course, the supply side of the scissors has some part to play, but explaining the price of wine simply by referring to supply side and not the demand side gives an incomplete picture.

Great episode, lots of fascinating thought experiments, and plenty of material for my next dinner party. Thanks!

Paul Farmer
Jan 9 2016 at 5:55am

Hi Russ

Great show Russ, not a long time listener but it’s great to find a blog unequivocally pushing the benefits of free markets and competition. I just want to comment on the pig question. I live in Australia and have an under grad degree in economics and finance and work as an accountant of a pig farming and processing business, the largest one in Western Australia, so I can bring some applied knowledge to this question.

We spend approx $25 m per annum on feeding our pigs before we bring them in for slaughter at our abattoir and this sort of question comes up every now and then here in daily working life. In Australia we feed pigs usually a diet of wheat and other related grains but that makes for little difference in the concept. The treasury yield or some savings rate absolutely has no input at all into the decision making process. However if by treasury yield , you mean some sort of proxy for opportunity cost then the answer is closer to the mark.

Pig farming is actually a great application of the theory you learn at under grad about producing until your marginal cost equals your marginal revenue. Believe it or not many agricultural courses at unis around the world teach pig economics because the discipline in terms of micro economics is quite instructive. Our farm manager from Peru proudly says he studied pig economics at uni. MR= MC however plays out in effect at an individual pig level for a farm and the decision to slaughter. The primary cost is feed by a mile followed by medication and then general farm overhead.

You grow out an animal to maximise revenue, and the growth rates of the animal means that the revenue from the animal are increasing through time just as the costs are , as they consuming more feed. Both of these are functions of the weight of the animal multiplied x wholesale value at market for revenue and the cost of feed that creates the weight increase for marginal cost.

As a producer our decision becomes well, if I leave the pig on the farm another week , it will grow x kilos, be worth $x more and if my cost to have feed and medicated him for another week is $y dollars and if x is greater than y , then it makes sense to continue the growout. Lol at no point are we reaching for the financial press to look up treasury yields.

Therefore if the price of our major input being feed rises, this will change the point in time at which these two curves intersect and in theory that would mean you might send an animal to slaughter earlier.

However in Australia the market place has little requirement for overly heavy or fatter pigs ( we normally process an animal to give carcasses weight of approx 65-70 kgs) and prefers smaller size cuts, so we never reach a point where a change in feed costs can change our behaviour to process an animal earlier. Invariably at the point we send to market our MR still remains well above MC For the individual pig , but if we continued to grow out there would simply be no demand at all for the animal. So in the case of Australia the inference supply would increase in the short run is highly unlikely.

America from my knowledge processes much heavier carcasses, approx 80-90 kgs I understand ( maybe a producer over there can comment). As you can imagine this makes usa producers much more cost competitive because they are more efficiently maximising production up to the point mr = mc. By time of slaughter they have a much heavier animal and hence kgs to amortise all the cost of production across.

At the margin though again I seriously doubt the increase in feed input would push their supply curve outward. The increase in feed would have to be very significant to quickly push their marginal costs past their marginal revenue particularly when you consider that not only is the cost of the animal rising significantly in latter life due to its growth but also its revenue function.

An animals growth function is more accurately described by a log function then a linear function , so you would need to assess that effect on both marginal revenue and marginal cost given the logarithmic function of animal growth to know if this were possibly true that MC has jumped ahead of MR requiring a rational producer to now slaughter the animal.

Howeverjust like here in Australia , you then need to reference back to the demand side of the equation to see if this equation even has any bearing on the analysis to kill . It may well be that even with a feed price rise ,MR may remain above MC , hence the feed price rise becomes an irrelevancy in the short term and all the happens is the producer makes less profit per pig. As we know this then may cause the supplier to cut production in the longer run……. which is not in dispute.

The other issue that makes a supply curve move outwards in the short run implausible in any material sense of the word is that there is at any point in time only so many pigs on the ground in various stages of grow out.

Ok, suppose marginal cost is now above marginal revenue earlier and hence every producer decides to kill there animals somewhat earlier. It is likely this might mean an animal is killed a week or two earlier than normal and this would apply to every age cohort going forward.

But so what……., ordinarily animals are sent to the abattoir for kill in an orderly progression, you may have one week where kills jump with the change to a shorter life cycle but then the flow to market per week would normalise back to what it was .

Technically this very temporary one week movement out of the supply curve and then back again ,is a short run move of the supply curve outwards but because it would snap back equally quickly as the flow to market would normalise I seriously doubt this would move the market clearing price , or if it did it would be by a very small amount and for a small period . In my view again I doubt you would see any material change in price in the short run.

Anyway….. I look forward to remaining an interested listener……. again great to know there are resources like this that are not obsessed with Keynesian economics and big government is the answer to all economic issues.


[minor formatting edits made to improve spacing–Econlib Ed.]

Kendall Ponder
Jan 9 2016 at 1:50pm

It may be true the Economic Principals course could be taught in better fashion, but if if it is the course which is taken by non-majors because they have to take it (or some other class they are equally not interested in) then it doesn’t surprise me they don’t remember anything significant about it 6 months later. People will only remember things they find interesting or they have a need to know. It may be hard to believe but some people don’t care why old wine costs more and no matter how you present the material they will never be able to apply the economic way of thinking to the problem.

Kendall Ponder
Jan 9 2016 at 2:01pm

The idea the fact students are happy when a class is cancelled tells us anything about the worth of the class doesn’t make sense to me. I don’t know of anyone who would claim a football or basketball team doesn’t need to practice to be a good team, but I guarantee players at any major University are just as happy if one of their practices are cancelled as students are when their classes are cancelled.

The response tells us more about how people balance short term pleasure vs long term gains. The immediate pleasure of no class or practice seems more valuable at the moment than the real improvement in my long term skills. If I am trying to lose weight, cutting back on eating will help but I am still excited when Thanksgiving gives me an excuse to eat all I want.

Kendall Ponder
Jan 9 2016 at 2:05pm

I would be interested to read an explanation of why the “cash on the table” idea doesn’t apply to the argument NCAA athletes are underpaid. Why don’t all of the economists who say they are underpaid pool their resources and start their own league. They could steal all of the exploited athletes from the NCAA and make a profit to boot.

Jan 9 2016 at 4:16pm

This may seem pedantic, but the first puzzle as phrased strikes me as an odd example. To be clear, I agree absolutely that comparing the return on aged wine to other investments is a pretty good approach to exploring the price of wine. I’ve no argument with the answer. It’s a great answer to the question, “what’s the minimum increase in cost you’d expect to see for aged wine.”

But, it doesn’t really address the question “why is old wine more expensive?” At least not if by “why” we mean something fundamental and causative.

Consider, for example, that every instance of “wine” could have been replaced by “vodka” in the transcript. The answer given would still make sense: producers and traders would have to charge more for aged vodka to make up for the costs (both real and opportunity costs) associated with storing it. It’s just as complete an answer to the question, “why is old vodka more expensive?” Except, of course, that old vodka isn’t more expensive, and more or less doesn’t exist.

Following the whys backwards, the answer to the question “why does old wine cost more?” is “because there’s a market for old wine, and aging wine comes at a cost.” Which immediately leads to the followup question, “why is there a market for old wine?” It’s hard to find an answer more compelling than “old wine’s better than new wine.” (Where better means that enough people value more, and by enough more, that it’s competitive with other investments.) Which, of course, is the non-economists’ answer pointed out in the discussion. But it’s also the ultimate answer to what’s fundamentally not an economic question but a question for fashion and chemistry.

Using cash-on-the-table as an indication that one should be careful is a great idea. Assuming there can never be cash on the table is question begging. “If everyone is rational and values the things we’ve accounted for and all markets are robust, then a cash-on-the-table explanation is probably wrong” may be an accurate statement, but it hasn’t got much to do with the world we live in. There are distorted markets, collusion and behavior enforced by social norms, and unanticipated values everywhere. Both wedding dresses, and the orders of magnitude difference in the price of wine with nearly identical production and storage costs seem like compelling counter-examples to the economic approach to understanding human behavior.

Jan 10 2016 at 6:55am

So, in general, I am going to slaughter a pig […] when its net return is roughly equal to the rate of interest

In Europe, we grow pigs in very specialized buildings (pig houses) which cannot easily be used for something else. When you are computing the “net return”, do you take into account the cost of the building?

If not, I hope your net return is way higher than interest rate (even taking into account a risk premium), otherwise, your business will be soon bankrupt.

If you take the building cost into account, you fall into the trap of the “sunk cost fallacy”. Your past decisions (you have build a pig house) should not change your future decisions.

So in my view, you should compare the net revenu (meat – food and all variable costs) with the revenu you might get if you replace the slaugthered pigs with young ones.

And, as Paul Farmer commented above, all produced meat is not the same. Some people like more fat, other less so.

Jan 10 2016 at 5:49pm

Russ said:

Because if costs of providing a service are low, the price will be low even if consumers are willing to pay a high price, as long as there is sufficient competition.

Thanks for that, it helps to clarify what you were trying to draw out. Like you said, it takes supply and demand, and while I see the demand as a more inherent part of the equation here, the above quoted is a good reminder on the supply side of what’s going on.

Been listening for about 7 years, first time in the comments section. What a pleasant, productive, informative place!

John T.
Jan 11 2016 at 12:40pm

Here is a puzzle that you have peripherally answered via the Mike M and Uber podcasts: Why doesn’t the free market produce better utilization? My assumption is that things that are utilized more cost less, so you would expect we would live where things are utilized at a higher rate. However, churches during the week are empty, our houses during the week are empty for most of the day, cars sit in parking spaces most of the day, our houses have rooms that are hardly used, etc…

Robert Swan
Jan 11 2016 at 7:43pm

Enjoyed the discussion; add my voice to the others asking for more like this.

I’ve also enjoyed the comments though some still seem to have the wrong end of the stick. The discussion was entirely thought experiments. A physicist will cheerfully brush aside friction if he wants to focus on (say) the effect of gravity. Similarly, which breed of pig or variety of wine isn’t relevant to the main point — that it doesn’t make sense to continue to hold a good when there is more to be made by selling it now and investing the proceeds.

Mind you, like several others, I found the references to “interest rate” a bit implausible. That was until I realised that this is also in the “frictionless” world of perfect signalling. This interest rate would balance supply and demand for money across all its possible uses.

It’s good to abstract away the world’s complexities for a thought experiment. Then again, you have to remember you did that before applying any of its lessons.

Michael Byrnes
Jan 11 2016 at 9:47pm

KT wrote:

Like you said, it takes supply and demand, and while I see the demand as a more inherent part of the equation here, the above quoted is a good reminder on the supply side of what’s going on.

One thing to consider is that the level of demand for a particular vintage of wine does not exist in isolation. If you don’t buy that wine, you buy a different wine, or you buy beer, or whiskey, or even coffee. All depending on 1) your personal taste and 2) on what else is available to purchase.

In other words, your willingness to pay (ie, demand) for your favorite bottle of wine will depend, to some extent, on what else is avaialble and at what price. Let’s say it costs $100, and there there is nothing else like it for under $500. Then maybe you are going to be willing to shell out the $100 because it is your favorite. On the other hand, what if there are several other wines that you consider to be nearly as good, and their prices range from $25 to $50? Now, your willingness to pay may fall. If you were a core part of that market for that $100 wine, then the producer will be forced to lower his price to remain competitive.

Jan 12 2016 at 8:13am

Great episode!

I think the given explanations about wedding dresses are sufficient, but I thought of one other factor. Tuxedos are typically black, wedding dresses are typically white. It should be much easier to successfully clean the former to look like new than the latter.

On the wine, I remember a great similar example Russ pointed out a long time ago I hadn’t thought of: why are green peppers always more expensive than red peppers? Before I heard that I never knew they were the same plant at different ripeness.

Šimon Trlifaj
Jan 12 2016 at 5:44pm

Great episode indeed!

I also have an additional factor to consider for the “why aren’t dresses being rented” puzzle. I think that there might be a high risk of damaging the dress on a wedding. While you save money for not buying your own dress, you also risk paying more if you damage it: so statistically speaking, the expected saving might not be as high (and maybe, dresses are easier to damage then tuxedos?). Additionally, people might be more risk-averse during the wedding, meaning they want to avoid stressing about the possibility of damaging the dress.

Brad Preston
Jan 13 2016 at 4:19am

Just after listening to this episode I saw that the pig-corn thought experiment is currently happening in South Africa, just as discussed.

Mass culling as drought worsens

“As drought reduces the quality of pasture, livestock farmers would be forced to cull their herds of cows and sheep, resulting in a temporary oversupply of red meat and lower prices in shops.”

Tom Burnett
Jan 13 2016 at 1:57pm

Here’s my “response” to a Kenyan scammer:

Brad p
Jan 13 2016 at 2:47pm

I live in Park City, Utah though I work in the vacation rental business I have noticed some interesting things with the bike rental market (ski rentals are also similar) up here during the summer.
Here are some reasons I believe the per day prices on bikes are higher Than cars.

1. Non seasoned customer base, each customer has to get a walk through on how to work the bike. Whereas a car rental almost everyone is an expert, when they jump in the car.
2. Lower number of available days to rent (seasonality & weather) In most rental car markets they have the potential of Renting a car everyday of the year. Whereas in my market of Park City, the bike rental season is roughly 90 days. Within that 90 days if there is rain, people will likely not rent bikes and also some weeks are much slower than others making it even harder to generate income.
The rental car market has the daily revenue potential in one year that is equal to four or five years in the bike rental market.
3.Maintenance cost on bikes are roughly the same regardless of age ( little benefit to new). Bike tires, chains, brake pads etc need to be changed at least every 1000 miles. As well the whole bike needing to receive a labor intensive tune up, somewhat regularly.
4. Limited ability for ancillary charges like insurance (this could be the biggest reason). In the podcast you all discuss how fees back up the rental car industry, if they were not making revenue off of insurance and fuel charges I’m sure that the per day costs would be much higher.
5. Each model is different, which limits the available market to rent to. Cars are not bound by what gender, size and Terrain the car can travel on, to the extent bikes are.

Jan 14 2016 at 8:10pm

A comment to the wedding gown discussion from a Japanese man.
Renting wedding dresses is a common practice in Japan.
It is also common in Japan that a bride changes the wedding dress a few times through a wedding reception party.
Renting wedding dresses in Japan is not cheap. My wife rented a dress from a rental shop introduced by the wedding house we used, and it cost about $2,000 – $3,000.

John Trainor
Jan 21 2016 at 2:31pm

Thanks to Russ and Bob for the topic. As an aspiring Econ teacher inspired by Dierdre McCloskey in person, through problem sets, and the Applied Theory of Price, I’ve concluded problems and puzzles are the most productive and engaging way to learn Economics.

This is my first EconTalk podcast and first comment. Slow off the line, I see that emerich, Steve, KT, Michael Byrnes, and Lorand have addressed price differences between old and new wine similarly. John N. made exactly the same point as I and Russ added the importance of competition which underlies my point. Which is, the explanation that by selling wine now money could earn interest is true but incomplete.

Interest rates affect all wines approximately equally. So if interest rates were the only factor, wine prices would move in parallel over time–all wines would increase, say, at about 5% per year.

While I would prefer evidence for this empirical question (like puzzles, an approach I’d like to see used more), it seems obvious that prices for different wines do not move in parallel as they age. So there must be a perceived quality difference.

Perceived by others, that is. I don’t think I can discern wine quality, but perhaps Frenchmen, Californians, and oenologists can.

Douglas Coate
Jan 31 2016 at 5:59pm

Here is what I teach in introductory economics when discussing whether resource allocation should be through the market or dictated by a central authority. Or, here is why capitalism produces prosperity and socialism does not.

1. Incentives. Resources will be supplied more fully to the market if their owners can keep what they earn.

2. Trade and specialization and comparative advantage.

3. The coordination of knowledge held by market participants on the demand and supply sides through the price system. This knowledge is diffuse and there is no other way to organize it. Think of what would happen to our living standards if for some reason we could not use language. This is the rough equivalent to what would happen to our living standards if we did not have a market price system.

4. The lack of discrimination against productive resources (and firm outputs). Firms try to get the best inputs they can at the lowest possible price (and consumers buy the “best” goods they can at the lowest possible price.)

5. The profit and loss system. As Milton Friedman and Russ emphasize, the loss part of it may be the most important. In the public sector, for example, poorly run programs may actually get more resources in the next period, whereas in the private sector poor entrepreneurs or poor managers lose control of resources, as new entrepreneurs and managers gain control and put the resources to better use. On the profit side, more successful firms can get capital at lower costs. Successful entrepreneurs can expand and unsuccessful entrepreneurs are put to pasture.

6. The lack of shortages and surpluses; thank you market price system. Something is always there if you demand it and you don’t have to wait in line. If the apple crop is twice as big as usual, apples don’t rot in the orchard but apple prices fall and more apple pies are consumed. The apples don’t go to waste. Everyone should stop and think about the differences between an economy with no surpluses and shortages versus one without a market price system where surpluses and shortages are ubiquitous.

7. The long-term time horizon of resource owners in the private sector. Farmers fix their fences and rotate their crops to preserve farm value even if the farm may not be sold for many years. Homeowners repair their roofs and paint their houses to preserve value for that day in the future when the house will be put on the market. Public sector actors, however, often have a short-term time horizon, often just until the next election. Maybe some funds should be diverted from bridge maintenance to gain the support of an influential group.

8. The invisible hand. To quote Robert Frank from the transcript of their first Econ talk:

:“There’s a cost-saving innovation, somebody introduces it and does
really well; then others begin to copy it and it spreads throughout
the marketplace and the competition then drives the price down to the
new lower cost made possible by the innovation; and the consumer
benefits from that once the dust settles. Ultimately. You get Smith’s
story in broad stretches of market activity. I
think anybody who
doesn’t understand the beauty of that narrative and the power of it to
explain why there has been so much material progress in the last 200
years just is missing a huge component of human history. That’s a
hugely important story. As a sidenote, I think it’s about 2/3 of what
economics has to contribute to humankind and it’s striking to me how
little we convey that mystery and power to our students. Students just
get out of our courses; they don’t know that markets have that
unbelievably powerful capacity to get things like that done”

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Podcast Episode Highlights
0:33Intro. [Recording date: December 8, 2015.] Russ: Now, if all goes as planned, this episode will be released on January 4th, 2016. And as we have in the past, we are surveying EconTalk listeners to find out more about you and to let you vote for your favorite episodes of 2015. So, head over to, and in the upper left-hand corner you'll find a link to the survey. Now, for today's episode. With Bob's cooperation, we're trying to do something a little different. We're going to reprise, revisit, and we hope extend an episode we did very, very long ago, back in 2007, which was based on his book, The Economic Naturalist, a book I really enjoyed. And both of us like puzzles for teaching economics. And we are going to take some of our favorite puzzles today, with the idea that if we talk about these on occasion, or have episodes like this that are puzzle-oriented, you, the listeners will get some insights into the economic way of thinking that you might not otherwise get from just our usual style of interview. We're going to try to go into more depth, as I said, than the first time. But I've forgotten most of that 2007 episode, Bob: I had literally forgotten any of the details. I certainly knew we had talked about your book once. But this is a general problem in economic education, correct? Guest: That's right; it's a problem for us as we get older. We may have talked about it a few years ago, but it's as if we are starting all over again. Russ: And I assume--we have some listeners who--I know we have listeners who weren't around in 2007 and didn't know about the episode. Some of you will go back; that's fine. And some of you heard it the first time. But I suspect after 8 years all of you have forgotten some of it. What you've argued is that the standard economics class is forgotten very quickly. Guest: It's an astonishing thing, really, Russ. The studies that have been done after this show that 6 months after our students take the introductory course, they can't answer questions that probe their understanding of basic principles any better than students who never took the course at all. Zero value added, as far as we can measure. That's a really shockingly low level of performance, I think you have to admit. Russ: Yeah. Assuming it's true. Which, let's take it as true for now. Obviously it depends on the kind of course. I don't think that's true of every course, but it's certainly true I would think of certain kinds of courses that emphasize memorizing, definitions, multiple choice exams, certain equations and their relationship with economic variables. I'm not surprised that knowledge of those doesn't persist. Although I am surprised that people who have never taken the course [?] could have any chance of getting any of those. Guest: Well, actually, there is a former student of mine who gave economists a question--a simple question, really it seemed to me--about opportunity cost of attending a concert-- Russ: Oh, yeah; we've talked about that problem-- Guest: The economists got it wrong just as frequently as students got it wrong. The students who had never taken any economics were more likely to get it right than the students who had. So I think it's really--probably your course, they do better. I'm going to claim in my course they do better. But, you know, these are thousands of courses being offered around the world, and the overwhelming finding is that students really done acquire or retain much in the way of basic knowledge about our discipline. And I think that's partly, as you say, what we choose to throw at them. But it's how much we throw at them. I think the typical instructor walks into the classroom asking how much can I cover today. And then when he's flashed a hundred slides on the screen in the course of 50 minutes, he feels really productive. But that's not the right question to be asking. Russ: Yeah. I always got in trouble because it would be close to the midterm and students would come into my office panicking because we'd only covered 2 or 3 chapters of a 27-chapter book; and they figured that the second half of the class would be 24 chapters. And I assured them: 'We're only going to cover about 4 or 5, because those are the ones I find interesting. Those are the ones I think will change the way you maybe look at the world, that will help you understand the world.' But I was not a very good surveyor of economic theory when I taught micro [microeconomics], because I didn't find a lot of interesting-- Guest: Well, you shouldn't be, though. I mean, there are really only a half a dozen ideas that do the serious lifting in our discipline. And you can't learn those except by doing them over and over again in different settings. And seeing a thousand little ideas doesn't help you learn the 6 big ones. Russ: Yeah. My favorite course evaluation was, I got a 1 out of 5 from an angry student who said, 'Professor Roberts is a horrible teacher. He expected us to be able to apply the material to things we'd never seen before.' Guest: [laugh] Russ: Yeah, I know; it's funny. Tragicomic. And I warned them. I told them that was the goal of this class. But I think it's very hard. Economics is difficult; the economic way of thinking, not so much economic theory; it's difficult in a different way. My other favorite quote from a student is a student who told me that she wanted me to make the class really hard; and to her that meant lots of calculus. But to me it meant lots of thinking, of a different kind. Guest: Right. Russ: And, if you want to learn the economic way of thinking and apply it to areas that you haven't seen before, to see the similarities in a problem, to know which concept of those 6 or 8 you should be thinking about, you have to drill a little bit--not in what the facts are, not in the definitions, not about the ratio of the prices and the marginal rate of substitution, but rather in thinking like as economist; which, as you say, doesn't even come naturally to some economists.
7:23Guest: There is a question that grows out of the ineffectiveness of a Principles course, which is: Why don't parents sue the universities for taking $40,000 a year of their money and then teaching students economics in a way that doesn't really add any value? I think a reasonable guess at an answer to that one is, since none of the people that we've turned out over the decades knows any economics, either, the fact that our students go out into the world not knowing any isn't really evident to people. So, if they realized that we were charging them $40,000 and not adding any value, then I think we would see some lawsuits. A lawyer does a bad job, he gets sued. A doctor does a bad job, she is dragged into court, first thing she knows. Why not an economist? Russ: Yeah. I think--well, I guess there's two ways to approach this problem. One--I want to think about students, first. The parents don't have the best idea of what's going on in the classroom. But the students usually, if they show up--of course they don't always show up--but assuming they are there, they get some perception of what they are learning. They may not have a good idea of what they could be learning. That remains to be seen. But I can't tell you how many economics students have told me when I meet them casually at a party or at a friend's and I find out they are studying economics; and I say, 'What do you think of your professor?' And they--sometimes, tragically about someone in my department; if I meet this student who is not in my class but taking another class, I'll say, 'What do you think of that professor?' And they'll say, 'Well, you know, he really knows his stuff but he has trouble communicating it.' And that's always, to me, a red flag that the person either doesn't know their stuff, or they are trying to dumb down their graduate-level theoretical training to an undergraduate level that just isn't very effective. So I think that a lot of people come to hate their economics classes because--either because they are really hard, because they weren't prepared for the math, or because they are really easy: they are good at math and it's a breeze for them. It's low-level math. So for them, for math students, technical STEM-type [Science, Technology, Engineering, Mathematics-type] students, engineering majors, it's relatively easy. And they don't get much out of it. And I think that's a tragedy. You know, my classes, I never use calculus, when I taught undergraduates. It just, I think, misses what we are capable of delivering, which is how the world works. So, to go back to your question, I think my answer would be that a lot of students aren't paying for the knowledge. They are paying for the piece of paper. This is what Bryan Caplan's answer would be: Bryan, we've had Bryan on to talk about education as signaling. And he makes the very, to me, very telling point: that when class is canceled--the professor has an emergency, can't make the class--in college you just cancel it. They don't send a substitute. You just get one less class. Sometimes you make it up. But if you don't make it up, no one gets--often, people don't get mad. They don't say, like, 'Well, wait a minute.' Guest: They are going to get the same diploma in four years. Russ: Yeah. I paid for-- Guest: [?] than not-- Russ: The best situation would be you just cancel all the classes and you get nay. And a lot of people, given that choice if nobody knew that actually happened, might be happy about that. But that's--that's not proof that it's signaling. It's a suggestive. It's not--it's an interesting hypothesis. But that would be my answer in general for why college education is so poorly performed relative to the price. Which is: education is only part of what you are paying for. You are paying for the chance to mingle with other people. You are paying for a signal that you are smart; that you have proof of that; that you have a credible piece of paper to prove that. But you could argue that if you are going to get that, you could just learn something along the way. Couldn't you? Guest: Why not? You are there. Russ: So, part of it, I think, is your answer is correct: I don't think people know, either the parents or the students, what a great class in many disciplines might be. I used to say, when I taught economics, that it should change the way you look at the world. It should give you a lens. So that's what we want to try to do today. Any other preliminaries before we get started? Guest: No. Let's go.
12:07Russ: Okay. So I want to start with a simple question. Again, some of these questions we may have talked about last time but I want to go a little bit deeper. And along the way we'll try to come up with some other examples that are analogous. So, I want to start with an easy one. A seemingly easy one. And just as one more piece of introduction to the listening audience: If you try to answer these, you might want to put the episode on pause and think about them as we mention them. And one piece of advice, for those who are out there trying to answer these problems: If your first thought is something you could have come up with without taking an economics class, it's probably not the answer we are looking for. It may be right. There may be some fact about the world that is central that you know and that you think is descriptive of the answer, helps find the answer. But usually there requires some knowledge of economics. So, my first question is: Why is old wine, wine that's been aged--it's an older vintage--why is it more expensive in the store than immature, new wine that hasn't been aged much? What is the answer to that, Bob? Guest: Yeah. I'd say that one in general is straightforward. Whether or not the magnitude of the difference is well-accounted for by this explanation would be another question to discuss. But, if you have an asset, namely a bottle of wine that you can sell now, then by selling it now, you could put the money in the bank and earn interest every year. If you wait 5 years before selling it, it's just sitting there in your cellar or wherever it's stored; and if it weren't for the increase in price during those 5 years that it was just sitting there, you'd be much better off selling it today. And so that's the clear prediction of economic theory: That if you have an asset and you can sell it now or you can hold it, the only way it would be rational to continue holding it for the time being is that its price is going up as least as rapidly as, say, interest you sold it now and put the money in the bank. So that's our theory. Now, sometimes, old wines just become scarce; they all get drunk, and so there's an additional factor to throw in, to come up with, the size of the price difference. But that's the basic explanation I'd offer. Russ: And I think that's right. And I want to try to give a few different applications of that. In fact, it might be our entire episode might be focused on that. That's a pretty simple idea, what you just said. But what I want you to think about there, as you think about these kind of problems, is: Your answer, when you first thought about it might have been, 'Old wine's better than new wine. Wine has been aged; wine of an older vintage is better. And so people are willing to pay more for it.' And that's true. That is also true. And we're going to be applying here are what Alfred Marshall called the two blades of the scissor--at least that's what we're often going to be applying--with supply and demand. Even in cases where perhaps there is not perfect competition--because there's no such thing, really. But one of the things I want to push as we talk about these examples is the role of cost. So, a lot of times when we see differences in prices like in wine, we tend to assume that we are being, you know, exploited, say. Because we like old wine, they can charge us more. But if the cost of old wine and new wine were the same--if the inventory effect that you were talking about, Bob, weren't there--the price of old wine and new wine would be identical. And if old wine tasted better-- Guest: Merchants would sell the wine when it came into their possession. Russ: And if they liked old wine better--if people liked old wine better than new wine, and the costs were the same there would be no new wine on the market. Nobody would buy it. There wouldn't be this differential. The fact that the differential is there is a combination of the fact that people prefer old wine to new wine--they are willing to pay more, because cost alone is not sufficient. Neither side of the cost/demand, supply/demand is sufficient. I used to give my students the following question. Guest: You need both. Russ: Yeah. I'm going to give this to you, Bob. Easy one, okay? It's a layup[?]. And you can challenge me any time along the way. We did not prepare this in great detail. So it makes it a little more fun. So, you come into my shoe store; I'm in the mall. And you come in to buy a pair of shoes, and they are $250. And you'd been in another store recently where they were $60. And you say--and they are really great shoes. They are fantastic. You'd pay $250. They are worth, say, $400 to you--they last long and they are really hip right now and they are really in vogue, really cool pair of some things. And you come into my store and you are a little shocked that they are $250. And I say, 'Well, they are $250 because I have higher costs this week. My daughter is getting married and it's a really nice wedding and I need to raise a little more money, so I'm just raising the price, just this week.' And what would your answer to me be? What would you say? Guest: Well, if I know I can get them somewhere else for $60, I would say your daughter's wedding is your problem, not my problem. Russ: Right. So, costs--or if I'd said, 'Oh, but we had a flood in the store this week and my insurance went up a lot, so I've got to charge more'; or, 'I've got this employee I really like and he's fantastic, and I'm paying him, one of my salesmen, $200,000 a year so I've got to make it back on the shoes. Can you blame me?' What would you do? Guest: It's not going to work. Yeah. I think the customer really wants to buy the product at the most favorable price he can find. And if it's on offer elsewhere for less, the fact that you need money is not really an issue.
18:35Russ: So, the simple way to think about this, is--and I don't know if you think about it this way--is, competition tends to drive prices down towards costs. But it's the costs that are out there for lots of suppliers. Your own personal costs are irrelevant. And in some industries and some situations, you can really think about the cost of providing the item. In this case, old wine versus new wine, the cost is the foregone investment opportunity you can make. That number might be a high number because you could want to take more risk. But if you think about that as risk-adjusted, we all pretty much have the same opportunities to invest. And so you'd expect old wine to be more expensive than new wine because there's just no way for merchants to compete and drive the price down more than they already do. They try. They'd like to. Because they'd like to attract the business. They are going to make a profit above and beyond their cost. In this case, the key cost to pay attention to is the fact that you tie up your item, if it's an older item. Guest: Yep. That works [?]. Do you know the expression, 'The low-hanging fruit principle?' Russ: No. Guest: Always pick the low-hanging fruit first. Russ: Nope, it's the same idea, right? Guest: This is an embodiment of that same idea. Why should you pick the low-hanging fruit first? Well, it's easier to pick. That means you can pick more of it on Day 1. Pick it on Day 1, sell it. Put the proceeds in the bank and you'll earn interest for the duration of the season. If you wait to pick the low-hanging fruit last, then you'll have a smaller deposit on Day 1; you'll earn less interest. So it's the exact same principle.
20:22Russ: Okay, so here's a hard one. You ready? Guest: Go for it. Russ: This is a really hard one. Okay? And for those of you listening at home, your first answer is wrong. And that's my warning to you, Bob, too. Okay? Guest: All right. I'm on guard. Russ: And what's beautiful about this is it's an application of this principle. So, what happens to the price of pork when the price of corn goes up? What happens to the price of pork of when the price of corn goes up? And we will assume--a student raises his hand, 'Do pigs eat corn?'--Yes, they do. We are going to assume that's true even if it's not. Otherwise, it's a very tough question. So, what happens to the price of pork when one of its inputs gets more expensive? Guest: Yeah. I think you could probably find or construct an example where the answer could go in either direction. The price of pork could go up or down. But I'm going to say that when the price of corn goes up, that means the cost of bringing hogs to market goes up, and with it the price of pork goes up. Russ: That's correct. And the--again the logic is just what you've said, and it's just what we've been applying, which is: If costs are higher for everybody, the price of pork, which uses corn, is going to have to go up. Otherwise people will leave that industry, and the price would readjust, and that would pull people back in, etc. But actually, that's only true in the long run. So, in the short run--and this is why it's such an interesting question--in the short run, you would you expect the price of pork to go down, not up. And the reason--so, Bob, the answer you gave is, for those of you drawing this at home: the supply curve shifts up and to the left; you get a new higher price; and that's the end of the story. But in the short run you could argue that the supply of pork shifts down and to the right. And the reason is, is that, to produce a pig takes corn; but the other thing it takes--it takes space and other nutritional elements, medicine and who knows what else--but it also takes time. So, there is some optimal amount of time that I'm going to let pass before I harvest my pig. And--here's a side note, just a wonderful application of economics: When should I harvest my pig? What's the key economic variable that I need to look at when I am trying to decide whether to let my pig live for another year versus slaughter it and take the money now? And the answer is? Guest: This is the same as the old wine question. Russ: Yep. Guest: If the pig is growing in that value faster than the investment yield would be if you sold him now, then you should keep him at the trough for a little while longer. Otherwise, now is the time to sell it. Russ: So, in general, I am going to slaughter a pig, chop down a tree, drain my oil reserve--this is a very general problem--when its net return is roughly equal to the rate of interest. The rate of interest I can earn on a relatively similar investment. So I'm going to cheat and call it the rate of interest--as if there were one. The reason being that if the rate is growing faster than the rate of interest, I should the pig in the ground--I should leave it alive. If it's growing slower than the rate of interest, I should chop it down. I should slaughter it, take the money and put it in the bank where it grows faster than it's been growing as a pig. So, when the price of corn goes up, there are going to be pigs that are too big at the current rate of the price of corn to make it economically worthwhile for them to be left alone for another period of time. It's too late. I can't chop them down yesterday, slaughter them yesterday. But I should slaughter them now. And of course, as farmers try to do that, they will find that the price of pork goes down. I want to thank my old friend, Dan, for that. I think Dan understood that better than I did when we studied that in graduate school. Guest: That's a nice example, and very well articulated. Students are sometimes are surprised when they hear this reasoning and realize that the best time to chop down a lumber tree, a tree that's not valued for any other reason than they are going to make pulp out of it or cheap wood products: the best time to chop that tree down is not when it's reached its maximum size, but when its rate of growth slows to the real rate of interest. Russ: And that presumes that--which I think is biologically true--trees grow at a decreasing rate after a while. They start of growing a lot in their first years, but then as they start to slow down there comes a point where you should chop it down rather than get a little more growth out of it, at its current rate. Yeah, so that's a great point. You don't want it to grow to the maximum. And a tree is a great example--because I don't think there's much maintenance of a tree. It's unlike a pig. Guest: Right. Russ: So, there I think you really want to look at the growth rate relative to the rate of interest, of the tree. With the pig you want to look at the net profit relative to the rate of interest. It's a little trickier. It's not just the weight that it adds. Guest: Right. The net return.
26:29Russ: So now let's move on to a problem that you raised, that I think is related, in your book. We talked about it last time but now I think we have maybe some more artillery to tackle it. Which is--it's a beautiful problem: Why is it that wedding dresses are typically bought rather than rented, relative to tuxedoes, which are typically rented rather than bought? The puzzle being that a wedding dress is usually worn once--that's [?] the modal number. There are probably wedding dresses that are worn more than once. But in general, the woman who buys the dress wears it once. The man who buys the tuxedo--if you bought a tuxedo you could probably wear it many times, in theory. You could wear it to the next wedding even though it's not his; whereas the bride can't wear the dress to the next wedding. So, you'd think, on the surface, that people would rent wedding dresses but buy tuxedos. But that isn't what we see. So, what explains that? Guest: Yeah. That question was submitted by a former student. I tell them to pose and then try to answer an interesting question, one based on something you've either experienced personally observed at close hand. And this one came from a young woman named Jennifer Dulski. And she had gotten married 6 months before she enrolled in my course, so this was very much on her mind. She had bought a wedding dress for several thousand dollars. She knew already that it would sit in her closet for the next 20 or 30 years. Maybe she was hoping to have a daughter who might wear it; but that almost never happens. And then here's her husband, who rents a cheap tuxedo, even though for sure he'll have 20 occasions in the next 2 decades to wear a tuxedo. So, why didn't we do it in reverse, was her question? Why didn't I rent the gown and he buy the tuxedo? And her answer-- Russ: I want to give the wrong answer first. Can I give the wrong answer first? Guest: All right. Go. Yeah, sure. Russ: So, the wrong answer, I think--again, I want to alert listeners to try to fight this impulse. I think a lot of people think, well, women care a lot about their wedding dress so they get taken advantage of. They just get sold this thing for $5000 or $3000 dollars, whatever it is. And they pay it anyway because it's so important to them. Whenever you make an answer like that, you want to ask, 'Well, why isn't there somebody out there who is going to try to make a profit selling it for less, or renting it?' And if that's not happening, maybe there's a huge profit opportunity out there; but it's often the case that there's a cost there you haven't thought of. So, take it away. Guest: Right. I tell students who offer explanations like that to hear alarm bells going off in their head when they realize that they've just offered a cash-on-the-table explanation. By which I mean one that assumes that merchants are out there sitting idly by even though they could, with a very simple offer, increase their profits substantially. So if somebody is paying $5000 for a wedding down that costs the merchant only $1000 dollars, why doesn't some other merchant offer that wedding gown for $4000 and then make a quick $3000 extra profit by taking the business away from the one who was charging her $5000? Russ: Or rent it at a low, at a relatively low price but still enough to make a lot of money and then rent it again? Make more money? Guest: So, Jennifer's explanation did start with a pretty strong assumption, but it's not one that too many people seem inclined to quarrel with: and that was that it's more important for women than it is for men to make a fashion statement on big social occasions. Now, why that is, would be an interesting discussion that we could have in addition to this one. But, set that to one side. No one seems to quarrel with that assumption. Russ: No, they don't. Guest: I've described this example in lots of different countries and it seems to be pretty much that way everywhere. If you take that assumption as given then it has very clear implications for the economics of trying to organize a rental market in gowns. So, you want to make a fashion statement. That means that for a rental company to serve your needs it would have to have, what, 30, 40 gowns in each size, or else you'd risk--different styles of gowns in each size--or you'd risk showing up at your wedding in a gown just like someone else had worn at a wedding weeks earlier. Russ: Or worse--one that wasn't flattering to your particular body. Which is also another aspect to this; we don't have to go into the details, but it's easier to tailor, I think, a tuxedo to a man's-- Guest: Yes, the second factor is the tailoring issue-- Russ: Or less complicated. But say we're less complicated physically. It's relevant. Guest: Yeah. There's a lot more custom tailoring involved in a wedding dress than in a tuxedo fitting. But if you are trying to make a statement, then the huge inventory that a rental company would have to carry, those gowns, most of them, would get rented out only once or twice a year. Maybe once every two or three years. The carrying costs of that inventory would be so large that you'd have to charge a rental fee so high to cover those costs that it would be maybe 110% of the purchase price of the gown. And who would pay more than the purchase price of the gown to rent the gown when you could buy the gown for just the straight purchase price? So, that was her explanation. The groom, he doesn't care, apparently. And this seems like a fairly reasonable assumption, too: Men don't seem to mind that they are wearing a suit just like the suits some other guy wore to big occasions a few weeks earlier. If you don't mind that, then a rental company can satisfy your needs by having 2 or 3 suits in every size; and those suits are going to rent out probably 7 or 8 or 10 times during the year. And that means you can rent them for a quarter or a third of the purchase price. And if you try to save a few bucks at a time when money is tight, that's the route to go. Russ: It's not only just like the tuxedo somebody wore recently: it is the tuxedo. Which is another part of it. It's fascinating to me, because it's not that pleasant. Guest: And we just don't care. Russ: No. I think it gets cleaned in between. Pretty sure. And to make it more interesting, of course, typically, I suspect--not for every tuxedo, but often, people might buy parts of the tuxedo outfit-combo and rent other parts. So they might buy a tuxedo shirt. They might buy a pair of shoes that could go with a tuxedo even though they might not be the super-shiny kind. You can get away with--I found--with a pair of black shoes that have been shined a great deal. You don't have to rent the tux shoes, also. Same with the cufflinks--you might have--or bowtie. You might have some of those items or chose to buy them because you may be able to wear them in other parts of your life. But the tux itself--it's a few times a year, maybe once a year; and when you are younger maybe it's zero after a year or two, for a while, and that's why it's not a very good idea to buy one when you are younger to buy one unless you get invited to a lot of galas. Which most of us don't when we are in our 20s. Guest: Do you own a tux, Russ, can I ask? Russ: I do. Yeah. I rented one for my wedding. And then at some point when I realized I was getting invited to other weddings and to dinners where I had to dress in a tux, I bought one. And I'm ashamed to say, it may not fit me right now, which is [?]. How about you? Guest: I own one also. In fact, it's the one I wore on my wedding. And I'm embarrassed to report to you that I have on at least 2 occasions I can think of accepted invitations to go to a formal event simply because I owned a tux. These are events I would have chosen not to attend if I could have gone in a business suit. I wanted to get my money's worth out of that tux that was sitting in my closet now. Russ: Slightly irrational. Guest: [?] and mine know that that's completely irrational. It's a sunk cost. We should wear it to an event only if we want to go to the event. If the pleasure we'll get from the event is greater than the costs that we'll actually incur going to the event. But somehow humans seem to have built into them a hardwired desire to save money; and if you think you are saving money by wearing a tux that you own, that's [?] an extra push to attend an event like that.
36:39Russ: I'm going to give you the benefit of the doubt. Despite your self-assessment. I'm going to try the following, okay? Maybe, it's not that you want to get your money's worth out of the tux. It's not that you want to bring down the per-unit cost--which is the same mistake people make when they order business cards: 'Let's see: If I order 100 they are a dime. But if I order 5000, they are 7 cents. Well, that's cheaper. I'll get 5000.' If you don't need 5000, it doesn't matter that they are 7 cents. You are actually losing money. So, you do need to take that into account. But here's my explanation. I'm going to argue that you didn't think sunk costs were sunk; you didn't think, 'Well, I can lower the per-use cost of my tux if I go out and have a miserable time.' Maybe you wanted the thrill of preening and prancing around and being the object of great admiration in your tux. So, it's true that if it had been a business suit you wouldn't have gone because it wouldn't have been that interesting an event. And of course all listeners who know Bob out there are thinking, 'I wonder, was that my wedding?' No. But maybe you just liked the way you looked in the tux and it just gave you a lift. Guest: I think I'm going to be more eager to cop to being irrational than I am to embrace that alternative explanation. Russ: Creative, nevertheless. Guest: Yeah. It's very good. But I'm not going to own that one. Russ: Okay. So, the other question I have for the listeners out there, and I'll ask it of you, too, but I think I know the answer: Does anybody own more than one tux? How many suits do you own? Guest: Me personally? I own about 3 suits, I think, currently. I've owned many over the years. But I think I've still got three in my closet. Russ: And I have two. I have a charcoal gray and a navy blue. I have a lot of sport coats, many of which I don't wear any more, I'm ashamed to say. That's another separate issue. But I think a lot of men--I think we are on the low end: we are academics. I assume we have lots of listeners out there who have--lots of different men--male listeners who have lots of suits. But I wonder if any of them have multiple tuxedos. And I mean tuxedos that they wear with any regularity. If they like to mix it up, sometimes they'll like the one with this lapel and that lapel. There's powder blue ones that might not be appropriate you bought for some special occasion that might be different. But I think most men who own a tux, own one. I'd be surprised--anyone out there wants to let us know, we'd love to hear. Okay, so any other comments on the wedding dress or the tux? I'm going to move on to a different application. Guest: Go.
38:30Russ: So, I raised this question I think in my blog some time in the past. It's, to me, a fascinating application of this; and there's another variation related to tuxedos, but we'll start with this one first. If I go on vacation, and I rent a car at the airport, if on vacationing in Miami or California that gets a lot of tourist traffic, where a lot of people there are going to be on vacation for a week or two and going to be renting a car, first thing is, is that the rental rate is often lower in those places than it is in a place like Duluth, Minnesota that doesn't get as much tourist traffic. And you might think, well, it should go the other way: the more visited places, the bigger tourist destinations, have a higher demand and therefore that should push up the price of the rental car. But again, you might want to think about what the cost side of that is before you come to that conclusion. And then the second point, though, is that if I'm on a vacation and I want to rent a bicycle--I'm in California and I want to rent a bike to ride along the ocean or I'm in a beautiful city and I want to cruise around on a bike, it's often more expensive to rent a bicycle than it is to rent a car on a per-day basis. And that's surprising. So what are your thoughts on those two puzzles? Guest: Yeah, that's a great question. The price of renting a car--I don't know if you've had experience in that market, going back over decades, they've gotten enormously more efficient at renting cars to people, over the time spent, I've had a chance to witness. It used to be much, much more expensive. And until recently in Europe and elsewhere it was much, much more expensive to rent a car than it is now. And I think the reason car rental prices have come down so much is they've just really honed their act to a fine edge in every stage of the supply chain. They buy cars at an incredible discount. When they liquidate their fleet after a year--they auction off the rental cars they've got 15- or 20,000 miles on them--they fetch prices at an auction that are not all that different from the prices they paid for the cars when new. Ford gives huge discounts to rental car companies like Avis and Hertz because they use those sales to say, 'We sold more sedans than any other company,' blah, blah, blah. Russ: And they buy in bulk, which helps a little bit. Guest: They buy in bulk. They make a lot of extra money by selling you insurance; you should know that if you already have insurance on your car, which most car renters do, you are getting charged an exorbitant fee for the insurance, so if you take out the insurance premiums that they charge, and the money they charge you for gasoline--if you don't put gas in the car yourself when you return it--that's the whole source of the rental car industry's profits. They make all their money off insurance and gasoline. Everything else is more or less barely covering the direct cost of operation. Now, it's the scale that makes those efficiencies possible--the volume discounts: when they have the cars turned in there's a whole queue of people, they can be transported to the airport on a bus; you don't have to do custom rides for the people. They hustle them through a car wash. It's all very mechanized. Bike rentals is a much more custom thing. The scale is much, much smaller. They rent many fewer bikes per day than a car rental place would in a day. And they've got to tune the bike; they've got to adjust the seat and the handlebars to fit users. It takes about 30 minutes worth of custom adjustment to get the forms filled out. Contrast that with a rental car operation: you're out of there in literally 7 minutes. So I think it's the fact that they've really learned how to do this efficiently that's the main reason for the surprising price comparison. Russ: So, I want to raise two parts to that and see what your thoughts are. One is, I know this seems hard to believe, but when we rent bikes as a family, inevitably one of them breaks--often more than one, while we're out riding around. And I'm hesitant to suggest that the reliability of the bike is a big part of the cost relative to a car. Because cars break in really expensive ways. But the fact is that in the first year of a car's life, they don't break very much. So, part of the decline in the--and they are under warranty, of course. But I am wondering how often a car rental at a major American airport from a major brand has to be repaired. They don't have a mechanic. Guest: That's of course one reason that they liquidate their fleet after two years at the outside. Yeah. They just don't want to be in the business of attending to motorists broken down on the highway. Russ: But in a bike shop, there's always somebody tinkering--as you say, trying to get the chain back on, reinflate the tire, patch the tire. I just suspect that the frequency of repair is higher for a bike. Having said that, you'd think that the time cost of the person repairing it would be a lot lower than the time costs of the person repairing a car. So you'd think that that would be a relatively small difference. So, I don't know. But the other point I want to mention which you just mentioned in passing, that I want to hammer on, is what we think of as the turnover. So, any one bike, I don't think it's rented out very much. You walk into the bike shop and there's--it's interesting. It's more like a tuxedo shop than a wedding dress shop. Most of them. There's variation, right? Some bike shops there's lots of choices; there's different kinds, styles: you can get a racing bike or a mountain bike or a tandem bike, etc. But a lot of times it's just--they only have really a few kinds. Typically for example [?] it's a cruiser--it's a bike with a large seat and wide handlebars. And I don't know how often it gets rented. I don't know how large the variation is in demand, so that, is one day radically different from another? Because I suspect-- Guest: Well, the other thing is that those demand variations, I think, are much easier to address by moving the fleet of cars around than by moving the fleet of bikes around. People are driving cars from one city to the next all the time. If there's a peak demand in Miami in January, then people who drive to Miami, well, those cars stay there and they rent them out in Miami. If they came from a place where demand is low, they don't send more cars back there; they don't need them. I don't think there are national bike rental chains. At least I'm not aware of any. And given that you would have to transport the bikes yourself by putting them on a truck and paying for it rather than have your customer just drive it there for you is part of the rental arrangement. It wouldn't really make sense to try to even out supply and demand across different geographic regions in a bike rental business. Whereas that's a big part of the trade with car rental. Russ: But I suspect, again, there's a predictability aspect of it. If you are Avis or Hertz in Miami, or Enterprise, and it's a Wednesday in January, you have a pretty good idea that you are going to be renting a lot of cars. And I just wonder how much erratic is the demand for bike rental at a particular shop. Because if that is the case, you are going to have to carry--often, you want to carry a lot more bikes than you'd prefer just to make sure that you don't send a customer without a bike. Because then they are not very likely to come back. Of course for tourists it's not so important. Separate issue. That's another part of this that we didn't mention.
47:23Russ: But on the surface, given that a bike might rent for $30-$40 or $50 a day, which is similar to what a car rents for even if--as you are in my case, I never get the insurance--it would imply that the bike person is making a ton of money. And that there's an enormous profit opportunity in bike rental, in running a bike shop. And I don't think that's the case. Guest: No. That would again be a cash-on-the-table explanation. And we just know enough by now to be skeptical of those. Russ: Yeah. So, there may be some costs there that we're not aware of. There's one other one that's important, by the way, that we didn't talk about--and what I love about these kinds of problems is you think about them. I've talked about this problem with--I don't know. I've talked about it with my family. I've talked about it with other economists. But I just realized the other aspect, which is the real estate where these places are located are very different. So, the bike rental shop is usually in a very high-rent area that's a nice part of town where the tourists like to go. Whereas the car rental place by the airport is usually very low land costs. Of course it takes up a lot more space, though. So that would go the other direction. It's--I don't know. It's a bit of a puzzle. Somebody out there I know has worked in a bike shop and knows more than I do about the maintenance costs and the profitability. So I encourage them to write in. Any other comments on this, Bob? Guest: No. My wife and I rented bikes in Boulder [Colorado] in the Fall. They were at least 30 minutes attending one thing or another before we were out of the shop with our bikes. So there's a lot of custom attention you get. Maybe there's some way to cut down on that. They could have bigger scale, but the scale is just not there to allow it. Russ: And I guess part of it is also--actually, you usually don't rent the bike for a day. You rent it for a couple of hours. And a good chunk of that is often just getting the seat right. Getting the height of the seat adjusted. Right? If it took that long to get you into your car--like you say. You walk around the car to look for damage. That takes about a minute and half. There usually isn't any. I don't know if I've ever seen much of any significance in a rental car. You throw your bag in the back; you jump in; you back out; and you're out of there. The bike shop takes a lot longer. So that's got to be part--that exposure to the staff and the fact that the bike can't be rented for that half hour, either on the out or the return, the exit or the return, has got to be part of the cost, too.
50:05Russ: So, let's close with a really fun one from not in this frame of costs and competition, but it's just such a fun one: The Nigerian Scam. The email scam. What's the question? Guest: Yeah. The former student who wrote about this said that she lived in Nigeria long ago, and there were the Nigerian Prince scams being run, two-, three decades ago. But now back in the States she gets the very same emails. There's a prince who has got hundreds of millions of dollars, and if you'll just pay a fee of a thousand dollars you can be certified as the transfer-recipient of this money, and you'll get a ten million dollar commission for helping us get the money from Nigeria to wherever the prince is coming in the United States. And it's such a preposterous story. Her question is: Why on earth can't they come up with a bit better cover story after all these years? Russ: Right. So, even if you are naturally suspicious of a free lunch, right--you've probably seen an article about this somewhere. Right? So even if you thought 'Maybe it's true,' you see an article that says it's a scam. And so, why don't they try something different? Guest: Her answer was that the scammers actually have an interest in the floating and implausible cover story. That's not a bug; it's a feature from their point of view. They don't want people like you and me responding to their overtures. We're skeptical. We're going to critically stumble onto the fact that it's a scam and bail out in a hurry. What they want is the most gullible 1% of the population. And anybody who would respond to a clumsy cover story like the one they offer is almost for sure in that slice of the population. It's a feature of their pitch. Russ: And they don't read that article, that I mentioned that talks about it being a scam. They don't see it. Right? Guest: Right. Russ: I will say, two things come to mind. There's a remarkable Siri ad right now, where--let me just see if I got this right--yeah, it's Bill Hader--the actor is eating lunch and Siri asks him on his iPhone if he wants to respond to his email; and Siri reads him the email, which is that he has a chance to make a huge amount of money from some--I don't think it's Nigerian, but it's some similar type of scam. And Siri says, 'Shall I respond?' And he says, 'Yeeeah.' It's a very strange ad. That's the way it ends. Because the humor of it is that we all know it's a fake and that he's been somehow fooled into--he's missed it, somehow. He's missed that this is always a fake. The other thing I want to mention is that, while it's true that this there oldie-but-goodie out there, I don't get it much any more. I used to get those. In the early days of email, I would get them. I don't get them any more. They probably--maybe they do still try them with some people who they think might be more [less?--Econlib Ed.] skeptical. Guest: Oh, I definitely get them. Russ: You still get them. Guest: Yeah. I get them with about the same frequency as ever. Russ: But there is innovation in this field. I just want to make it clear. I'm laughing, but it's tragic. Or at least potentially tragic. My parents, who are in their 80s, were almost scammed by someone who called them. And represented themselves as a friend of my oldest son, saying that my son had--they had gone on a vacation or on a trip; they had gone into Mexico; they had gotten arrested falsely; and they needed money to get out of jail. And my father-- Guest: That's a good one. Russ: My father heard my son crying on the phone. And was told--of course--don't call the parents because it's so embarrassing. He doesn't want the parents--he doesn't want me to know. But if you could just help him out as a grandparent? And my Dad was suspicious. But not terribly suspicious. Because he was pretty sure he'd talked to my son who was sobbing. And I took--he asked with trepidation because he felt he might be betraying his grandson's trust--he said, 'Do you know where he is?' And I said, 'I do.' He actually was out of town, which was somewhat ominous for me, but I said, 'I'm pretty sure he's not in Mexico.' I'm pretty sure that trip, which was to go to western Maryland, didn't end up in Mexico. But it could have. I guess. But the key was: I said, I thought about it for a minute. I did two things while I was talking. One is I tried to see whether they had said my son's name or whether he had. And of course, he had. They had said, 'We have your grandson.' And he started sobbing; and my father blurted out his name, rather than hearing it from the scammers. The other thing I did, is I quickly started googling 'Mexico bail scam grandson'. And I found it. And so, you know, my Dad--I told my Dad, in the future, although I understood why he was so scared--it was very well done. He saved himself $10,000 by calling me and taking a chance. But he can always--you know, it's amazing how many of these scams are available on Google as some kind of story. Guest: Well, that's an important point to make. When you study basic economics. I mean, all the power of the invisible hand, the profit motive that lures producers to introduce quality improvements and cost-saving innovations, that same motive all but guarantees that if there is any way to cheat somebody out of some money, there will be somebody there willing and eager to do it. Russ: So, caveat emptor. Grandparent emptor. I mean, caveat grandparents. Sorry. My Latin let me down there. When you think there's either--it's fascinating. When you think there's a free lunch, be wary. But also when you think that you have this opportunity to save someone, even if they are not Nigerian you might want to google it to see if you are about to be taken to the cleaner's instead of to Nigeria. Guest: Yep.

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