WEBVTT NOTE The Price is Right 1 00:00:00.000 --> 00:00:12.000 Two years ago, to sort of back up what Jeff was saying about money, some of you might remember the money game that we played with the students, 2 00:00:12.000 --> 00:00:20.000 where the older students sat in the chairs and got to choose the coins that they wanted, and then they passed the coins, the remaining coins, 3 00:00:20.000 --> 00:00:38.000 The Silver Coins back to the small children behind them and they took the phony money and gave the silver coins back to the younger children and it turns out that the younger children who didn't have the choice ended up with the most value and they got the prizes. 4 00:00:38.000 --> 00:00:53.000 And we were basically trying to point out the difference between honest money, which is gold and silver, and deceitful money, which is basically just paper and metal coins that have no market or intrinsic value. 5 00:00:53.000 --> 00:01:02.000 And then all of the things that result from that and the importance of having honest money in our economy. 6 00:01:02.000 --> 00:01:32.000 and then last year we played the property game and we were downstairs up on the stage and had a big jar of coins and we had we brought up nine students up onto the stage and I spread the coins all over the stage and let them go at it and what we saw was chaos and violence some minor injuries take place not too bad when I do this in college classes 7 00:01:32.000 --> 00:01:51.000 And then I brought the game to a halt and told them that I forgot to tell them the rules, and the rules were that you could only pick up coins within your little square, and that if you tried to pick up coins out of somebody else's square, you'd lose all your money. 8 00:01:51.000 --> 00:02:04.000 And then we played the game again and the result was that the students picked up the coins at a leisurely, non-violent, non-harmful sort of way. 9 00:02:04.000 --> 00:02:18.000 And this game was used to show the difference between a society where it's a free-for-all and a society where there's property rights which everybody recognizes and which are enforced. 10 00:02:18.000 --> 00:02:23.000 And so you see the difference between a chaotic society where it's a free-for-all 11 00:02:23.000 --> 00:02:31.000 and one where resources are conserved and used peacefully where you have property rights. 12 00:02:31.000 --> 00:02:42.000 And those two games, first, honest money, and the second, private property rights, are foundations of society. 13 00:02:42.000 --> 00:02:52.000 Without those things, society slowly but inevitably breaks down, becoming more chaotic, less prosperous. 14 00:02:52.000 --> 00:02:57.000 And today we're going to build on those two games. 15 00:02:57.000 --> 00:03:06.000 And to look at the price system, which can result when you have honest money and private property, 16 00:03:06.000 --> 00:03:12.000 and the private property where people can trade their goods and their property for honest money 17 00:03:12.000 --> 00:03:20.000 and the mechanism that is used is the price system. 18 00:03:20.000 --> 00:03:29.000 And so on your schedule you see the title of my talk is The Price is Right 19 00:03:29.000 --> 00:03:32.280 That's what we're going to play the price is right game. 20 00:03:32.280 --> 00:03:47.920 I couldn't resist. 21 00:03:47.920 --> 00:03:48.920 Now this is a quiz. 22 00:03:48.920 --> 00:03:53.360 You're only going to get about a minute to fill this out and you're just going to supposed 23 00:03:53.360 --> 00:04:00.360 This is supposed to put the price that you associate with each of these goods. 24 00:04:00.360 --> 00:04:04.360 Now you may not know, but you can always guess. 25 00:04:04.360 --> 00:04:25.840 So I want you to put down the price of a gallon of milk, the price of a plain t-shirt or 26 00:04:25.840 --> 00:04:32.280 white undershirt, then the price of a sheet of plywood. 27 00:04:32.280 --> 00:04:37.880 This plywood is about 8 feet long and about 4 feet wide. It's about that thick. 28 00:04:37.880 --> 00:04:40.680 And it's used to build houses. 29 00:04:40.680 --> 00:04:43.980 And then there's a gallon of gasoline. 30 00:04:43.980 --> 00:04:49.580 And the tiebreaker today is going to be an ounce of gold, the price of an ounce of gold. 31 00:04:49.580 --> 00:04:56.580 okay time is time is running out 32 00:05:08.580 --> 00:05:15.580 it doesn't look like you're going to be the winner anyways so 33 00:05:19.580 --> 00:05:46.700 okay okay let's see ah Hannah Kate has been paying attention to the markets 34 00:05:49.580 --> 00:06:12.580 Jennifer is two. Oh, well, you did well on the price of gold. Scott, yeah. Yeah, very good. It turns out everyone got a perfect score. 35 00:06:19.580 --> 00:06:49.580 and so everyone's going to take home some take home some of the prize package and I'll explain that after we're done but I just want to talk about prices and the price of right that the price is right game now in the price of right the price is right they want you to try to guess the price that they have purchased the products for 36 00:06:49.580 --> 00:06:52.580 for the Day of the Show. 37 00:06:52.580 --> 00:06:58.580 But in reality, the most important thing we need to know about prices is that they change all the time. 38 00:06:58.580 --> 00:07:01.580 That the price of milk changes all the time. 39 00:07:01.580 --> 00:07:04.580 That the price of gasoline changes all the time. 40 00:07:04.580 --> 00:07:09.580 Even t-shirts and plywood changes all the time. 41 00:07:09.580 --> 00:07:13.580 And of course, the price of gold changes all the time. 42 00:07:13.580 --> 00:07:19.980 That's a very important feature in the price system itself. 43 00:07:19.980 --> 00:07:25.180 That's really the quintessential feature is that prices change and that's one thing that 44 00:07:25.180 --> 00:07:32.620 Henry Hazlitt points out in Economics in One Lesson is that we have to understand that 45 00:07:32.620 --> 00:07:36.020 prices change and that's the job that they do. 46 00:07:36.020 --> 00:07:45.080 They change to reflect underlying resources in the economy and underlying desire or demand 47 00:07:45.080 --> 00:07:50.980 for the various basic products, goods and services in the economy. 48 00:07:50.980 --> 00:08:04.860 So that's really the global lesson in terms of the economics of one lesson as portrayed 49 00:08:04.860 --> 00:08:11.300 by Henry Hazlitt and many of the other Austrians. So all prices can be valid, they can be possible 50 00:08:11.300 --> 00:08:20.660 and indeed do and have existed. Just a side point on relating money and inflation to the 51 00:08:20.660 --> 00:08:26.820 prices of goods. In Zimbabwe, which is in Africa, it's something you can go look up 52 00:08:26.820 --> 00:08:50.820 In the United States, if I gave each of us a million Zimbabwe dollars, each one of us a million Zimbabwe dollars, we wouldn't have enough money to buy lunch today. 53 00:08:50.820 --> 00:09:00.820 Okay, so we have to realize that the price system simply reflects reality. 54 00:09:00.820 --> 00:09:07.820 It reflects the goods that we want, that we desire, that we wish to consume, and the resources in the economy, 55 00:09:07.820 --> 00:09:13.820 and of course the adverse role that inflation can play. 56 00:09:13.820 --> 00:09:22.820 So it tells us about scarcity in society, and it does so completely on a voluntary basis. 57 00:09:22.820 --> 00:09:30.820 There's no coercion, and as a result, the prices that emerge on the market, even though we don't like them necessarily, 58 00:09:30.820 --> 00:09:38.820 are one that tends to bring about harmony between each and every one of us. 59 00:09:38.820 --> 00:09:45.140 Now we may be envious of the prices that some people are getting you know if you see somebody 60 00:09:45.140 --> 00:09:50.420 who owns an oil well you may be envious of the fact that the price of oil is so high 61 00:09:50.420 --> 00:09:57.460 and they're making so much money and you may be angry at certain prices if you go to the store 62 00:09:58.340 --> 00:10:06.980 and you find that your favorite steak is now 16 dollars a pound when it used to be eight dollars 63 00:10:06.980 --> 00:10:14.980 It may make you angry, but it's simply a reflection of reality. 64 00:10:14.980 --> 00:10:29.980 And envy and anger and a lot of the other issues with the price system are brought about or were brought face to face with them in emergency situations. 65 00:10:29.980 --> 00:10:47.980 Emergencies like hurricanes that we've seen over the last several years, or droughts or war, these sorts of emergency situations bring the idea that prices adjust to reality right into your face, right into your pocketbook. 66 00:10:47.980 --> 00:11:09.980 And so when we look at an emergency situation like a hurricane and we see what happens and things like milk, things like water, things like gasoline and plywood, ice, all of those things go up tremendously in price. 67 00:11:09.980 --> 00:11:16.980 The price of hotel rooms just outside of the affected area will tend to skyrocket. 68 00:11:16.980 --> 00:11:24.980 And so what government response to this is typically that they're going to control the price of these things. 69 00:11:24.980 --> 00:11:36.980 That they're going to force gas stations, stores, lumber yards, hotels to keep their prices constant. 70 00:11:36.980 --> 00:11:45.980 not change their prices, even though reality, as we know it, has changed dramatically. 71 00:11:45.980 --> 00:11:50.980 And again, this is something that may make you angry if you were to walk into the store 72 00:11:50.980 --> 00:11:55.980 and your favorite beverage had just increased by 300%. 73 00:11:55.980 --> 00:11:58.980 You're going to be disappointed. You may be angry. 74 00:11:58.980 --> 00:12:03.980 But those prices are a reflection of reality. 75 00:12:03.980 --> 00:12:11.980 And so what happens when the government tries to control prices? 76 00:12:11.980 --> 00:12:17.980 Well, say for example that a hurricane is coming to your hometown 77 00:12:17.980 --> 00:12:26.980 and you're preparing to leave in order to seek a safer place, to seek shelter. 78 00:12:26.980 --> 00:12:30.980 And you get in your car, you get your family in the car, 79 00:12:30.980 --> 00:12:59.980 and you take off in the opposite direction of the hurricane, but you need some gasoline in order to get far enough away, so you pull into the gas station and the government says either prices are free to adjust in a free market economy or they're not free to adjust because the government is controlling them. 80 00:12:59.980 --> 00:13:12.220 Well, if you pull into a gas station with hurricane conditions and the price is controlled, 81 00:13:12.220 --> 00:13:14.380 you're going to pay the normal price. 82 00:13:14.380 --> 00:13:20.860 And so what your normal reaction would be is to fill up the tank. 83 00:13:20.860 --> 00:13:23.260 But what happens if it's not just you? 84 00:13:23.260 --> 00:13:27.500 You're not the only smart person in your town, but everybody's smart, everybody wants to 85 00:13:27.500 --> 00:13:29.420 get out of the way of this hurricane. 86 00:13:29.420 --> 00:13:33.660 And so everybody's leaving town and everybody's gassing up. 87 00:13:33.660 --> 00:13:40.140 Well, if the price is the same and everybody is filling up their tank, the gas stations 88 00:13:40.140 --> 00:13:42.340 are going to run out of gas. 89 00:13:42.340 --> 00:13:46.980 And some of those people who are trying to get out of town are going to be stuck. 90 00:13:46.980 --> 00:13:52.100 They're going to be stuck somewhere along the way without any gasoline. 91 00:13:52.100 --> 00:13:55.220 And this actually happens. 92 00:13:55.220 --> 00:14:02.060 People who are fleeing a hurricane area, many of them incapacitated, have health problems, 93 00:14:02.060 --> 00:14:07.520 need oxygen, and they get stuck out on the interstate or at a gas station that's run 94 00:14:07.520 --> 00:14:12.700 out of gasoline because the price remains the same. 95 00:14:12.700 --> 00:14:19.580 Now what happens if that dastardly gas station owner decides that this is a great opportunity 96 00:14:19.580 --> 00:14:21.700 to make some money? 97 00:14:21.700 --> 00:14:27.700 Gas stations typically only make a couple of pennies per gallon of the gasoline that they're selling. 98 00:14:27.700 --> 00:14:32.700 They make more money off of the Coca Colas and sodas and potato chips. 99 00:14:32.700 --> 00:14:37.700 They make very little money off of gasoline, but if it's a hurricane and everybody's desperate for gasoline 100 00:14:37.700 --> 00:14:45.700 and all the gas stations are running low, instead of charging $3 a gallon, why not charge $10 a gallon? 101 00:14:45.700 --> 00:14:49.700 Then you can finally make some money. 102 00:14:49.700 --> 00:14:55.740 Well, if the gas station is charging $10 a gallon for gasoline, chances are you're going 103 00:14:55.740 --> 00:14:59.700 to think twice about how much gasoline you're going to put into your car. 104 00:14:59.700 --> 00:15:03.580 You're not going to necessarily fill it up all the way because you don't need a full 105 00:15:03.580 --> 00:15:10.920 tank to get to Atlanta or Nashville or whatever. 106 00:15:10.920 --> 00:15:19.540 And so that price mechanism, by being a reflection of reality and trying to allocate resources 107 00:15:19.540 --> 00:15:23.260 in the emergency situation 108 00:15:23.260 --> 00:15:26.160 actually means that more gasoline 109 00:15:26.160 --> 00:15:29.080 is going to be available to more of those 110 00:15:29.080 --> 00:15:36.080 people fleeing the hurricane area. 111 00:15:49.540 --> 00:15:57.540 The next morning the crisis is covered up and we've got everything run out of gas, it was a disaster, it was going to happen. 112 00:15:57.540 --> 00:16:00.540 What actually was the bad news back then in a few days? 113 00:16:00.540 --> 00:16:07.540 There's a law in Alabama that says you cannot make the price higher by more than 25% per day. 114 00:16:07.540 --> 00:16:11.540 And it's because of this law that all the gas stations are running out of gas. 115 00:16:11.540 --> 00:16:17.540 Yeah, it is a law in most states that the government is controlling the gas. 116 00:16:17.540 --> 00:16:19.940 and they also control hotel rooms. 117 00:16:19.940 --> 00:16:23.300 And you can imagine the same sort of thing goes on there. 118 00:16:23.300 --> 00:16:26.020 If you show up at a hotel 119 00:16:26.020 --> 00:16:28.420 outside of the hurricane threatened area 120 00:16:30.260 --> 00:16:32.840 and it's $49 a night, 121 00:16:32.840 --> 00:16:37.500 well, you've got your spouse and you've got several kids, 122 00:16:37.500 --> 00:16:39.580 maybe a couple of dogs, 123 00:16:39.580 --> 00:16:43.740 why not rent two rooms instead of just one? 124 00:16:44.620 --> 00:16:47.220 But if you show up and instead of $69, 125 00:16:47.220 --> 00:16:59.220 It's $189. Guess what? Everybody's going to camp in that same room. So it means that more families are going to have access to hotel rooms under those conditions. 126 00:16:59.220 --> 00:17:10.220 And this is true for water. This is true for plywood. This is true for ice. And guess what? If you allow the prices to skyrocket during emergency, what's going to happen? 127 00:17:10.220 --> 00:17:22.220 Well, people are going to have an incentive to bring resources, to bring chainsaws, to bring ice, to bring all of that material because they can make so much more money. 128 00:17:22.220 --> 00:17:34.220 You know, if I deliver gasoline for a living and I can only get the same amount of money if I drive a gasoline truck into a hurricane zone, 129 00:17:34.220 --> 00:17:41.220 I'll think twice about doing that and just stay home and wait for, you know, everything to blow over. 130 00:17:41.220 --> 00:17:55.220 But if I can make an extra $5 a gallon on 10,000 gallons, guess what? Thornton is going into that hurricane zone with a truckload of gasoline. 131 00:17:55.220 --> 00:18:09.220 So the price system works well not just during regular times, not just in inflationary times, but in all times, including and most especially during emergency times. 132 00:18:09.220 --> 00:18:21.220 And so while people can be envious and people can be angry as a response to skyrocketing prices, we have to remember that there's a reason for it. 133 00:18:21.220 --> 00:18:28.580 and that that reason can end up saving lives and then that's important and I 134 00:18:28.580 --> 00:18:35.860 think this is also related a little bit to the financial crisis because what's 135 00:18:35.860 --> 00:18:42.020 been happening slowly but surely until the last week or so is that firms have 136 00:18:42.020 --> 00:18:47.140 been adjusting their behavior to these new conditions they're trying to find 137 00:18:47.140 --> 00:19:07.140 They've been trying the prices to these financial assets that are related to the housing bubble, they've been trying to adjust their books, they've been trying to get new credit, they've been trying to get bankruptcy protection, they've been trying to sell off assets and so forth. 138 00:19:07.140 --> 00:19:12.140 And then when the government comes in and says, no, we're just going to bail people out. 139 00:19:12.140 --> 00:19:17.140 We're not going to force you to try to find the real prices to these assets. 140 00:19:17.140 --> 00:19:20.140 We're just going to have the government buy it all up. 141 00:19:20.140 --> 00:19:26.140 And so the market has been working with respect to this financial crisis. 142 00:19:26.140 --> 00:19:34.140 The first thing it did is it forced all of those subprime mortgage lenders out of business. 143 00:19:34.140 --> 00:19:43.900 This was in a couple of years ago, okay, so the market was on top of this issue before it ever made the headlines. 144 00:19:43.900 --> 00:19:53.540 It was already driving bad companies out of business, and it's been working, but now that we have this bailout in place, 145 00:19:53.540 --> 00:20:01.340 that puts a stop on the whole thing, which means the problem is not going to be resolved in an effective, efficient manner. 146 00:20:01.340 --> 00:20:31.340 It's going to be one that festers a lot longer, and as Mr. Tucker said, is going to be a much greater burden to the American taxpayer, many of whom were not responsible, were not involved, didn't make any money off the housing bubble, didn't take out a risky loan, didn't buy too much of a house, and so forth, and so it's the wrong thing to do ethically, 147 00:20:31.340 --> 00:20:40.340 But it's also the wrong thing to do economically. So, the price system works, the price system is right. Thank you very much.